UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
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)
Indicated by check mark whether the registrant: (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (ii) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the issuer's Common Stock as of August 8,
2002, was 28,337,953 shares.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHOTOMEDEX, INC. AND SUBSIDIARIES
---------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
June 30, December 31,
ASSETS 2002 2001
------------- -------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 6,442,314 $ 4,066,820
Accounts receivable, net 1,620,650 1,694,493
Inventories 2,275,184 2,558,846
Prepaid expenses and other current assets 160,724 100,681
------------- -------------
Total current assets 10,498,872 8,420,840
PROPERTY AND EQUIPMENT 2,520,611 3,298,154
GOODWILL 2,944,423 2,944,423
DEVELOPED TECHNOLOGY, net of accumulated
amortization of $175,606 and $111,600 661,394 725,400
PATENT COSTS, net of accumulated
amortization of $61,553 and $57,377 23,245 27,421
OTHER ASSETS 167,453 168,753
------------- -------------
$ 16,815,998 $ 15,584,991
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable $ 13,045 $ 65,017
Accounts payable 1,387,715 1,862,499
Accrued compensation and related expenses 444,029 350,429
Other accrued liabilities 748,416 427,266
Deferred revenues 153,000 170,100
------------- -------------
Total current liabilities 2,746,205 2,875,311
------------- -------------
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value, 50,000,000 shares
authorized, 28,337,953 and 24,179,953 shares issued
and outstanding, respectively 283,380 241,800
Additional paid-in capital 72,990,435 67,245,367
Accumulated deficit (59,178,945) (54,747,204)
Deferred compensation (25,077) (30,283)
------------- -------------
Total stockholders' equity 14,069,793 12,709,680
------------- -------------
$ 16,815,998 $ 15,584,991
============= =============
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 Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
REVENUES $ 842,699 $ 2,090,752 $ 1,795,072 $ 3,311,354
COSTS AND EXPENSES:
Cost of revenues, excluding depreciation 174,772 557,600 426,270 892,160
Selling, general and administrative 2,188,786 3,705,794 4,415,400 7,549,408
Research and development 360,906 800,209 533,236 1,363,884
Depreciation and amortization 426,528 502,313 850,904 932,441
------------- ------------- ------------- -------------
Loss before interest and other income
(expense), net (2,308,293) (3,475,164) (4,430,738) (7,426,539)
INTEREST INCOME, NET 4,436 85,187 3,368 197,336
OTHER INCOME (EXPENSE), NET 590 32,052 (4,371) 30,305
------------- ------------- ------------- -------------
NET LOSS $ (2,303,267) $ (3,357,925) $ (4,431,741) $ (7,198,898)
============= ============= ============= =============
BASIC AND DILUTED NET LOSS PER SHARE $ (0.09) $ (0.18) $ (0.18) $ (0.39)
============= ============= ============= =============
SHARES USED IN COMPUTING BASIC AND
DILUTED NET LOSS PER SHARE 25,010,953 19,130,062 24,597,749 18,519,594
============= ============= ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
3
PHOTOMEDEX, INC. AND SUBSIDIARIES
---------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
-----------
Six Months Ended June 30,
---------------------------
2002 2001
------------ ------------
OPERATING ACTIVITIES:
Net loss $(4,431,741) $(7,198,898)
Adjustments to reconcile net loss to net cash used
In operating activities -
Depreciation and amortization 850,904 932,441
Stock options and warrants issued to consultants for services 34,295 143,804
Amortization of deferred compensation 4,512 4,644
Changes in operating assets and liabilities -
Accounts receivable 73,843 (2,875,272)
Inventories 283,662 (641,536)
Prepaid expenses and other assets (58,743) 168,167
Accounts payable (474,784) 1,813,098
Accrued compensation and related expenses 93,600 76,342
Other accrued liabilities 321,150 212,822
Deferred revenue (17,100) 94,588
------------ ------------
Net cash used in operating activities (3,320,402) (7,269,800)
------------ ------------
INVESTING ACTIVITIES:
Sale of short-term investments -- 2,000,000
Purchases of property and equipment (45,761) (117,410)
Lasers placed into or retired from service 40,582 (2,531,080)
------------ ------------
Net cash used in investing activities (5,179) (648,490)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 5,706,047 5,506,442
Proceeds from issuance of note payable 4,000 156,978
Proceeds from exercise of options 18,000 --
Proceeds from exercise of warrants 29,000 --
Payments on notes payable (55,972) (125,396)
------------ ------------
Net cash provided by financing activities 5,701,075 5,538,024
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
2,375,494 (2,380,266)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
4,066,820 7,561,040
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,442,314 $ 5,180,774
============ ============
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, atopic dermatitis and leukoderma. The
Company is also developing 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 2001, the Company received FDA approval to
market its XTRAC system for the treatment of vitiligo. In August 2001, the
Company received FDA approval to market its XTRAC system for the treatment of
atopic dermatitis and approval for the treatment of leukoderma was received in
May 2002.
Liquidity
- ---------
The Company has incurred significant losses and has had negative cash
flows from operations since emerging from bankruptcy in May 1995. To date, the
Company has dedicated most of its financial resources to research and
development and general and administrative expenses and in the fourth quarter of
2000 began to market the XTRAC system for commercial sale. The Company has
historically financed its activities from borrowings and the private placement
of debt and equity securities. As of June 30, 2002, the Company had an
accumulated deficit of $59,178,945.
The Company expects to incur operating losses for at least the next
twelve months because it plans to spend substantial amounts on the marketing of
its psoriasis, vitiligo, atopic dermatitis and leukoderma treatment products and
expansion of its operations. The Company cannot assure that it will market any
products successfully, operate profitably in the future, or that it will not
require significant additional financing in order to accomplish its business
plan.
The Company's future revenues and success depends upon its excimer
laser systems for the treatment of a variety of skin disorders. The Company's
excimer laser system for the treatment of psoriasis, vitiligo, atopic dermatitis
and leukoderma is currently generating revenues in both the United States and 19
countries around the world. The Company's ability to successfully introduce new
products based on its new business focus and the expected benefits to be
obtained from these products may be adversely affected by a number of factors,
such as unforeseen costs and expenses, technological change, economic downturns,
competitive factors or other events beyond the Company's control. Consequently,
the Company's historical operating results cannot be relied upon as indicators
of future performance, and management cannot predict whether the Company will
obtain or sustain positive operating cash flow or generate net income in the
future.
Cash and cash equivalents were $6,442,314 as of June 30, 2002.
Management believes that the existing cash balance together with existing
financial resources and any revenues from its sales, distribution, licensing and
manufacturing relationships, will be sufficient to meet the Company's operating
and capital requirements through the end of 2003. Management has decided to
limit its domestic placement of lasers until it obtains broader approval for
reimbursement for treatments using its laser system. However, depending upon the
Company's rate of growth and other operating factors, the
5
Company may require additional equity or debt financing to meet its working
capital requirements or capital expenditure needs. There can be no assurance
that additional financing, if needed, will be available when required or, if
available, on terms satisfactory to the Company.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Quarterly Financial Information and Results of Operations
- ---------------------------------------------------------
The financial statements as of June 30, 2002 and for the three and six
months ended June 30, 2002 and 2001, 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 June 30, 2002, and the
results of operations and cash flows for the three and six months ended June 30,
2002 and 2001. The results for the three and six months ended June 30, 2002 are
not necessarily indicative of the results to be expected for the entire year.
While management 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, 2001.
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 the 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. The critical estimates and judgments made by management in the
preparation of the financial statements relate to revenue recognition,
impairments of long-lived assets and adequacy of the accounts receivable
reserve.
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 June 30, 2002, cash
equivalents are primarily comprised of an investment in a money market fund and
certificate of deposit with a bank.
Inventories
- -----------
Inventories are stated at the lower of cost or market, determined by
the first-in, first-out method and consist of the following:
6
June 30, December 31,
2002 2001
----------- -----------
Raw materials $1,933,677 $2,074,174
Work-in-process 341,507 484,672
----------- -----------
$2,275,184 $2,558,846
=========== ===========
The Company's psoriasis treatment equipment will either be (i) placed
in a physician's office and remain the property of the Company or (ii) 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 laser 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. Lasers that are completed and not placed
in a physician's office are 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:
June 30, December 31,
2002 2001
------------ ------------
Lasers in service $ 4,121,760 $ 4,229,280
Computer hardware and software 249,391 213,619
Furniture and fixtures 151,637 151,637
Machinery and equipment 58,714 58,714
Leasehold improvements 88,705 78,716
------------ ------------
4,670,207 4,731,966
Accumulated depreciation and amortization (2,149,596) (1,433,812)
------------ ------------
$ 2,520,611 $ 3,298,154
============ ============
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 June 30, 2002, no such write-down was required.
Intangible Assets
- -----------------
Intangible assets consist of goodwill, developed technology and
patents, which are carried at cost less accumulated amortization. Patents are
amortized on a straight-line basis over the estimated useful lives of eight to
12 years. Developed technology relates to the purchase of the minority interest
of Acculase, Inc. (see Note 2) and is being amortized on a straight-line basis
over seven years. Prior to December 31, 2001, goodwill relating to the purchase
of the minority interest of Acculase was amortized on a straight-line basis over
10 years.
7
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 June 30, 2002, no such write-down was required (see Note
6).
Accrued Warranty Costs
- ----------------------
The Company offers a warranty on products sold for a period of
one-year. The Company provides for estimated future warranty claims on the date
the product is sold.
Revenue Recognition
- -------------------
The Company has two distribution channels for its phototherapy
treatment equipment. The Company will either (i) sell the laser through a
distributor or directly to a physician or (ii) place the laser in a physician's
office (at no charge to the physician) and charge the physician a fee for each
time the laser is used for a patient treatment. When the Company sells a laser
to a distributor or directly to a physician, revenue is recognized upon shipment
of the product. The Company does not allow products to be returned by its
distributors. When the Company places the laser in a physician's office, service
revenues are recognized based on an estimate of patient treatments. The
physician purchases a treatment card that allows performance of a specified
number of treatments. This amount is included in deferred revenues on the
accompanying consolidated balance sheets until the treatment occurs.
Research & Development
- ----------------------
Research and development expenses are charged to operations in the
period incurred.
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.
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 since the result would be
anti-dilutive.
Fair Value of Financial Instruments
- -----------------------------------
The estimated fair values for financial instruments under SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments", are determined at
discrete points in time based on relevant market information. These estimates
involve uncertainties and cannot be determined with precision. The fair value of
cash is based on its demand value, which is equal to its carrying value. The
fair values of notes payable are based on borrowing rates that are available to
the Company for loans with similar terms, collateral and maturity. The estimated
fair values of notes payable approximate the carrying values. Additionally, the
carrying value of all other monetary assets and liabilities is equal to the fair
value due to the short-term nature of these instruments.
8
Income Taxes
- ------------
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, the liability method is used
to account for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and the tax basis of assets and liabilities and are measured using enacted tax
rates and laws that are expected to be in effect when the differences reverse.
New Accounting Pronouncements
- -----------------------------
In June 2001, the Financial Accounting Standards Board ("FASB")
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 required companies to cease amortizing goodwill on December
31, 2001. Any goodwill resulting from acquisitions completed after June 30, 2001
is not 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 has resulted in the Company's
discontinuation of amortization of its goodwill; however, the Company is
required to test goodwill for impairment under the new standard beginning in
2002 and management performed an analysis of the recoverability of goodwill and
concluded that there has been no impairment of the carrying value. The net book
value of intangible assets at June 30, 2002 was $3,629,062.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires that the fair value of a
liability associated with an asset retirement be recognized in the period in
which it is incurred, with the associated retirement costs capitalized as part
of the carrying amount of the long-lived asset and subsequently depreciated over
its useful life. The adoption of SFAS No. 143 did not have any impact on the
Company's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which establishes a single
accounting model, based on the framework established in SFAS No. 121, for
long-lived assets to be disposed of and clarifies certain issues related to SFAS
No. 121. SFAS No. 144 supercedes SFAS No. 121 and APB Opinion No. 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." The Company was required to adopt SFAS No. 144 for fiscal year
2002. The adoption of SFAS No. 144 did not have a material impact on the results
of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities." SFAS 146 addresses the recognition, measurement and
reporting of costs associated with exit and disposal activities, including
restructuring activities. SFAS 146 also addresses recognition of certain costs
related to terminating a contract that is not a capital lease, costs to
consolidate facilities or relocate employees and termination of benefits
provided to employees that are involuntarily terminated under the terms of a
one-time benefit arrangement that is not an ongoing benefit arrangement or an
individual deferred compensation contract. SFAS 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. Adoption of SFAS
146 is not expected to have an impact on the financial position or results of
operations of the Company.
2. ACQUISITION:
------------
Effective August 31, 2000, the Company issued 300,000 shares of common
stock for the remaining 23.9% of Acculase which the Company did not already own.
The Company granted certain registration rights with respect to the shares
issued. The transaction was accounted for as a purchase. The Company has
9
historically consolidated the results of Acculase in its financial statements
and has recognized all of Acculase's losses as the Company has historically
funded the operations. In addition, due to the significant historical losses of
Acculase, the Company did not have any investment recorded for its 76.1%
ownership of Acculase. Accordingly, the total purchase price of $4,234,415,
including transaction costs of $409,415, was allocated to Acculase's net
tangible and intangible assets based on the estimated fair values as of the date
of the transaction. Based upon an analysis of the acquired assets, $837,000 of
the purchase price has been allocated to developed technology and the remaining
$3,397,415 has been allocated to goodwill. Beginning January 1, 2002, the
developed technology is being amortized over seven years on a straight-line
basis. For the years ended December 31, 2001 and 2000, developed technology was
being amortized over 10 years on a straight-line basis. For the three months
ended June 30, 2002 and 2001, amortization of developed technology was $32,003
and $20,925, respectively, and $64,006 and $41,850 for the six months ended June
30, 2002 and 2001, respectively. For the years ended December 31, 2001 and 2000,
goodwill was being amortized over 10 years on a straight-line basis. As of
January 1, 2002, consistent with SFAS No. 142 (see Note 1), goodwill is no
longer amortized; rather, it is subject to certain impairment tests.
Amortization of goodwill for the three and six months ended June 30, 2001, was
$84,936 and $169,872, respectively. Excluding amortization of goodwill, the net
loss for the three and six months ended June 30, 2001 would have been $3,272,989
and $7,029,026, respectively, and basic and diluted net loss per share would
have been $0.17 and $0.38 for these periods.
3. OTHER ACCRUED LIABILITIES:
--------------------------
Other accrued liabilities consist of the following:
June 30, December 31,
2002 2001
--------- ---------
Accrued professional and consulting fees $100,000 $128,000
Accrued warranty 554,167 267,714
Other accrued expenses 94,249 31,552
--------- ---------
$748,416 $427,266
========= =========
10
4. NOTES PAYABLE:
--------------
Notes payable consists of the following:
June 30, December 31,
2002 2001
--------------- ---------------
Note payable - lessor, interest at 10%, payable in
monthly principal and interest installments of $1,775
through 2002, unsecured. $ 10,349 $ 20,195
Note payable - unsecured creditor, interest at 9.0%,
payable in monthly principal and interest installments
of $461 through 2002. 2,696 --
Note payable - unsecured creditor, interest at 6.7%,
payable in monthly principal and interest installments
of $9,065 through 2002. -- 44,822
--------------- ---------------
13,045 65,017
Less-current maturities (13,045) (65,017)
--------------- ---------------
$ -- $ --
=============== ===============
5. PRIVATE STOCK OFFERING:
-----------------------
On June 13, 2002, the Company completed a private offering of 4,115,000
shares of common stock at $1.50 per share resulting in gross proceeds of
$6,172,500. The closing price of the Company's common stock on June 13, 2002 was
$1.68 per share. In connection with this offering, the Company paid a commission
and other costs of $466,453, thereby providing the Company with net proceeds of
$5,706,047. In addition, the investors received warrants to purchase 1,028,750
shares of common stock at an exercise price of $1.90 per share. The warrants
have a five-year term and may not be exercised until the day immediately
following six (6) months after the closing date of this private offering.
6. SIGNIFICANT ALLIANCES/AGREEMENTS:
---------------------------------
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, 2001 for further information on the agreements.
There were no revenues recognized under this agreement for the three
and six months ended June 30, 2002 or 2001.
In January 2001, Edwards stopped performance under the agreement and
began to commercialize a TMR product with an unrelated third party. Management
believes that Edwards has breached this agreement, and has notified Edwards of
its position regarding the agreement. The Company has reserved all of its rights
under the agreement and is evaluating what legal action should be taken in this
regard. 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.
On September 23, 1997, Edwards purchased from a third party rights to
related patents for the use of an excimer laser to ablate 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
11
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.
Due to the non-performance of Edwards under the Edwards Agreement
described above, the Company evaluated various alternatives for exploiting the
license. During the fourth quarter of 2001, the Company completed its evaluation
and concluded that the projected undiscounted cash flows expected to be derived
from this license are less than the carrying value of the license. Management of
the Company also believes that any operations relating to this license will
generate negative cash flows over the next several years due to the additional
costs that would need to be incurred to further develop and market products
based on this technology. Accordingly, the Company recorded an impairment charge
in the fourth quarter of 2001 of approximately $2,000,000 associated with the
write down of the license agreement with Edwards.
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 US INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER
FACTORS WHICH COULD CAUSE OUR ACTUAL RESULTS, PERFORMANCE (FINANCIAL OR
OPERATING) OR ACHIEVEMENTS TO DIFFER FROM THE FUTURE RESULTS, PERFORMANCE
(FINANCIAL OR OPERATING) OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. SUCH FUTURE RESULTS ARE BASED UPON MANAGEMENT'S BEST
ESTIMATES BASED UPON CURRENT CONDITIONS AND THE MOST RECENT RESULTS OF
OPERATIONS. 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
toward the treatment of inflammatory and cosmetic skin disorders. In connection
with our current business plan, the initial medical applications for our excimer
laser technology are intended to be used in the treatment of psoriasis,
vitiligo, atopic dermatitis and leukoderma. We are also developing our
technology for the treatment of other skin disorders. In January 2000, we
received the first Food and Drug Administration, or FDA, approval to market an
excimer laser system, our XTRAC system, for the treatment of psoriasis. We
received approval of our 510(k) submission from the FDA relating to the use of
our XTRAC system for the treatment of psoriasis. The 510(k) establishes that our
XTRAC system has been determined to be substantially equivalent to currently
marketed devices for purposes of treating psoriasis. XTRAC(TM), PhotoMedex, Inc.
and our logo are our registered trademarks. We commercially launched the XTRAC
system in the United States in August 2000. In March 2001, we received FDA
approval to market our XTRAC system for the treatment of vitiligo. In August
2001, we received FDA approval to market our XTRAC system for the treatment of
atopic dermatitis and approval for the treatment of leukoderma in May 2002.
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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. In 1997, we paid Edwards $4,000,000 to acquire a
license related to this technology from Edwards. Our strategic relationship with
Edwards has terminated, and we have no current business plan to commercialize
our excimer laser system for TMR. We have evaluated the various alternatives for
exploiting the license. During the fourth quarter of 2001, we completed our
evaluation and concluded that the projected undiscounted cash flows expected to
be derived from this license are less than the carrying value of the license. We
also believe that any operations relating to this license will generate negative
cash flows over the next several years due to the additional costs that would
need to be incurred to further develop and market products based on this
technology. Accordingly, we recorded an impairment charge in the fourth quarter
of 2001 of approximately $2,000,000 associated with the write down of the
license agreement with Edwards.
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. During fiscal 2001, we continued in our
concerted effort to commercialize the XTRAC phototherapy system by refining the
laser design and enhancing reliability. These efforts allowed us to obtain
certain levels of acceptance by the insurance reimbursement community. To date,
we have received approval from approximately 50 health plans in 30 states to
reimburse for claims submitted by patients or their doctors for treatment of
psoriasis utilizing our XTRAC system. We have also received approval from 8
insurers for reimbursement for treatment of vitiligo utilizing our XTRAC system.
In February 2002, the Current Procedural Terminology Editorial Board of
the American Medical Association, or AMA, approved the request by the American
Academy of Dermatology to issue reimbursement codes for laser therapies in the
treatment of psoriasis and other inflammatory diseases, which would include
laser therapy using our XTRAC system to treat such conditions. Theses new codes
will become effective on January 1, 2003, and are anticipated to facilitate
tracking and billing for treatment services using our XTRAC system. We
anticipate that the AMA's Relative Value Update Committee will ascribe economic
values for each of these codes by the end of 2002.
As a part of our commercialization strategy in the United States, we
are providing our XTRAC system to targeted dermatologists at no capital cost to
them. We believe that this strategy will create substantial incentives for these
dermatologists to adopt our XTRAC system and will accelerate further market
penetration. We expect to receive a recurring stream of revenue from
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per-treatment charges to dermatologists for use of our XTRAC system. However, we
have decided to limit our domestic placement of lasers until we obtain broader
approvals for reimbursement for treatment utilizing our XTRAC system.
Outside of the United States, our strategy includes selling XTRAC systems
directly to dermatologists through our distributors and placing XTRAC systems
with dermatologists to provide us with a usage-based revenue stream. As of June
30, 2002, we have generated cumulative revenues of $1,382,030 from the
phototherapy treatment system usage and $5,483,000 from sales of XTRAC systems.
RESULTS OF OPERATIONS
We generated revenues of $842,699 and $1,795,072 during the three and
six months ended June 30, 2002, respectively. Of these amounts, $597,500 and
$1,309,500 relate to the sale of our excimer lasers and spare parts to
distributors outside of the United States for the three and six months ended
June 30, 2002, respectively. Additionally, for the three and six months ended
June 30, 2002 we generated $245,199 and $485,572, respectively, in revenues from
treatments performed with our excimer laser in the United States. We generated
revenues of $2,090,752 and $3,311,354 during the three and six months ended June
30, 2001, respectively. Of these amounts, $1,769,500 and $2,924,500 related to
the sale of our excimer lasers to distributors outside of the United States.
Additionally, for the three and six months ended June 30, 2001, we generated
$321,252 and $386,854, respectively, in revenues from treatments performed with
our excimer laser in the United States.
Cost of revenues during the three and six months ended June 30, 2002
was $174,772 and $426,270, respectively. Cost of revenues during these periods
related primarily to the production costs of the XTRAC laser equipment and spare
parts sold outside of the United States. Cost of revenues during the three and
six months ended June 30, 2001 was $557,600 and $892,160, respectively. Cost of
revenues during these periods also related primarily to the production costs of
the XTRAC laser equipment sold outside of the United States.
Selling, general and administrative expenses for the three and six
months ended June 30, 2002 were $2,188,786 and $4,415,400 compared to $3,705,794
and $7,549,408 in 2001, respectively. Included in selling, general and
administrative expenses during the three and six months ended June 30, 2002 were
approximately $320,000 of warranty expenses accrued for chamber modifications
for international lasers sold. These overall period to period decreases relate
to reductions in consulting and professional fees related to marketing expenses
for our XTRAC systems and reductions in personnel and overhead expenses with
respect to the infrastructure to maximize the use of operating cash while we
continue to implement our business plan to commercialize our XTRAC system.
Research and development expenses during the three months ended June
30, 2002 decreased to $360,906 from $800,209 for the three months ended June 30,
2001. During the six months ended June 30, 2002, research and development
expenses decreased to $533,236 from $1,363,884 for the six months ended June 30,
2001. These decreases relate primarily to our focus on refining the operability
of our phototherapy laser products.
Depreciation and amortization during the three months ended June 30,
2002 decreased to $426,528 from $502,313 during the three months ended June 30,
2001. Depreciation and amortization during the six months ended June 30, 2002
decreased to $850,904 from $932,441 during the six months ended June 30, 2001.
These decreases relate primarily to the elimination of the amortization of
goodwill associated with our purchase of the remaining 23.9% of Acculase and the
elimination of the amortization of the license fee which was written off through
an impairment charge in the fourth quarter of 2001. This decrease was offset by
additional depreciation associated with higher property and equipment balances.
Net interest income during the three months ended June 30, 2002
decreased to $4,436, as compared to $85,187 for the three months ended June 30,
2001. Net interest income during the six months ended June 30, 2002 decreased to
$3,368, as compared to $197,336 for the six months ended June 30, 2001. The
14
decrease relates primarily to our smaller average balance of cash and
investments during the three and six months ended June 30, 2002 as significant
investments have been made in infrastructure development and capital investment
in lasers in service.
Other income during the three months ended June 30, 2002 was $590 as
compared to other income of $32,052 during the three months ended June 30, 2001.
Other expense during the six months ended June 30, 2002 was $4,371 as compared
to other income of $30,305 during the six months ended June 30, 2002. .
The aforementioned factors resulted in a net loss of $2,303,267 and
$4,431,741 during the three and six months ended June 30, 2002, as compared to a
net loss of $3,357,925 and $7,198,898 during the three and six months ended June
30, 2001.
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 our efforts 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.
On March 27, 2001, we completed a private placement of 1,230,000 shares
of our common stock at $5.00 per share and received gross proceeds of
$6,150,000. The closing price of the common stock on the date that the
transaction was negotiated was $5.75 per share and on March 27, 2001, the
closing date of the transaction, the closing 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 and additional financing costs of
approximately $244,000 were also incurred. We have used 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, we completed a private placement 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. We have filed a registration
statement for the securities issued in the private placement. We based the per
share purchase price of the shares on the closing sale price of our common stock
on October 12, 2001, or $1.05. We received gross proceeds of $5,292,750. We paid
Investec PMG Capital and Emerging Growth Equities Limited a commission of
approximately $322,000. We have used the proceeds of this financing to pay for
working capital and other general corporate purposes.
On June 13, 2002, the Company completed a private offering of 4,115,000
shares of common stock at a price of $1.50 per share providing gross proceeds of
$6,172,500. The closing price of the Company's common stock on June 13, 2002 was
$1.68 per share. In connection with this offering, the Company paid a commission
and other costs of $466,453, resulting in net proceeds of $5,706,047. In
addition, the investors received warrants to purchase 1,028,750 shares of common
stock at an exercise price of $1.90 per share. The warrants have a five-year
term and may not be exercised until the day immediately following six (6) months
after the closing date of this private offering. We have filed a registration
statement for the securities issued in the private offering. We have used and
will continue to use the proceeds of this financing to pay for working capital
and other general corporate purposes.
At June 30, 2002, the ratio of current assets to current liabilities
was 3.82 to 1.00 compared to 2.93 to 1.00 at December 31, 2001. As of June 30,
2002, we had $7,752,667 of working capital.
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Cash and cash equivalents were $6,442,314 as of June 30, 2002, as
compared to $4,066,820 as of December 31, 2001. This increase was primarily
attributable to the receipt of $5,706,047 in net cash proceeds from the June 13,
2002 financing, net of funding for the net loss incurred during the six months
ended June 30, 2002.
We believe that our existing cash balance, 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 through the end of 2003. We have decided to limit domestic
placement of lasers until we obtain broader approvals for reimbursement for
treatments using the laser system. 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.
As of June 30, 2002, we had borrowings in the aggregate amount of
$13,045. As of December 31, 2001, we had borrowings in the aggregate amount of
$65,017. The decrease in borrowings relates to the normal scheduled repayment of
the obligations.
Net cash used in operating activities was $3,320,402 and $7,269,800 for
the six months ended June 30, 2002 and 2001, respectively. Net cash used in
operating activities during the six months ended June 30, 2002 and 2001
primarily consisted of net losses, increases in current assets (2001 only) and
decreases in current liabilities (2002 only). These uses were offset by
depreciation and amortization, decreases in current assets (2002 only) and
increases in current liabilities (2001 only).
Net cash used in investing activities was $5,179 and $648,490 for the
six months ended June 30, 2002 and 2001, respectively. In the six months ended
June 30, 2002, we utilized $45,761 to purchase computer software and leasehold
improvements to support our excimer laser operations. In the six months ended
June 30, 2001, we utilized $117,410 to acquire equipment for our excimer laser
business operations and $2,531,080 associated with the construction of our
psoriasis treatment lasers.
Net cash provided by financing activities was $5,701,075 and $5,538,024
during the six months ended June 30, 2002 and 2001, respectively. In the six
months ended June 30, 2002, we received $5,706,047 from the net proceeds of the
sale of 4,115,000 shares of common stock in connection with the June 13, 2002
financing, $18,000 from the exercise of options, $29,000 from the exercise of
warrants and $4,000 from the issuance of notes payable, which was offset by the
utilization of $55,972 for the payment of certain debts. In the six months ended
June 30, 2001, we received $5,506,442 from the net proceeds of the sale of
1,230,000 shares of common stock in connection with the March 27, 2001 financing
and $156,978 of proceeds from the issuance of notes payable, which was offset by
the utilization of $125,396 for the payment of principal on the aforementioned
notes payable.
Our ability to expand our business operations is currently dependent on
financing from external sources. There can be no assurance that changes in our
manufacturing and 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.
16
We expect to incur operating losses for at least the next twelve months
because we plan to spend substantial amounts on the marketing of our psoriasis,
vitiligo, atopic dermatitis and leukoderma treatment products and expansion of
our operations. We cannot assure that we will market any products successfully,
operate profitably in the future, or that we will not require significant
additional financing in order to accomplish our business plan.
Our future revenues and success depends upon our XTRAC system for the
treatment of a variety of skin disorders. Our XTRAC system for the treatment of
psoriasis, vitiligo, atopic dermatitis and leukoderma is currently generating
revenues in both the United States and 19 countries around the world. Our
ability to successfully introduce new products based on our new business focus
and the expected benefits to be obtained from these products may be adversely
affected by a number of factors, such as unforeseen costs and expenses,
technological change, economic downturns, competitive factors or other events
beyond our control. Consequently, our historical operating results cannot be
relied upon as indicators of future performance, and management cannot predict
whether we will obtain or sustain positive operating cash flow or generate net
income in the future.
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 ("FASB")
approved Statement of Financial Accounting Standard ("SFAS"). 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 required
companies to cease amortizing goodwill on December 31, 2001. Any goodwill
resulting from acquisitions completed after June 30, 2001 is not amortized. SFAS
No. 142 also establishes a new method of testing goodwill for impairment on an
annual basis or 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 2002 and management
performed an analysis of the recoverability of goodwill and concluded that there
has been no impairment of the carrying value. The net book value of intangibles
at June 30, 2002 was $3,629,062.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires that the fair value of a
liability associated with an asset retirement be recognized in the period in
which it is incurred, with the associated retirement costs capitalized as part
of the carrying amount of the long-lived asset and subsequently depreciated over
its useful life. The adoption of SFAS No. 143 did not have any impact on the
Company's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which establishes a single
accounting model, based on the framework established in SFAS No. 121, for
long-lived assets to be disposed of and clarifies certain issues related to SFAS
No. 121. SFAS No. 144 supercedes SFAS No. 121 and APB Opinion No. 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." The Company was required to adopt SFAS No. 144 for fiscal year
2002. The adoption of SFAS No. 144 did not have a material impact on the results
of operations.
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In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities." SFAS 146 addresses the recognition, measurement and
reporting of costs associated with exit and disposal activities, including
restructuring activities. SFAS 146 also addresses recognition of certain costs
related to terminating a contract that is not a capital lease, costs to
consolidate facilities or relocate employees and termination of benefits
provided to employees that are involuntarily terminated under the terms of a
one-time benefit arrangement that is not an ongoing benefit arrangement or an
individual deferred compensation contract. SFAS 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. Adoption of SFAS
146 is not expected to have an impact on the financial position or results of
operations of the Company.
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, 2001 for descriptions of our
legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
During the three months ended June 30, 2002, we granted options to
purchase up to an aggregate of 113,000 shares of Common Stock to various of our
directors, employees and consultants, as follows: (i) options to purchase up to
110,000 shares of common stock under our 2000 Stock Option Plan at a weighted
average exercise price of $1.49 per share; (ii) options to purchase up to 3,000
shares of common stock to members of our Scientific Advisory Board at a weighted
average exercise price of $1.77 per share.
On June 13, 2002, the Company completed a private offering of 4,115,000
shares of common stock at a price of $1.50 per share providing gross proceeds of
$6,172,500. The closing price of the Company's common stock on June 13, 2002 was
$1.68 per share. In connection with this offering, the Company paid a commission
and other costs of $466,453, resulting in net proceeds of $5,706,047. In
addition, the investors received warrants to purchase 1,028,750 shares of common
stock at an exercise price of $1.90 per share. The warrants have a five-year
term and may not be exercised until the day immediately following six (6) months
after the closing date of this private offering. We have filed a registration
statement for the securities issued in the private offering. We have used and
will continue to use the proceeds of this financing to pay for working capital
and other general corporate purposes.
We believe that all of the foregoing issuances of securities were made
in transactions exempt from registration under Section 4(2) of the Securities
Act of 1933, as amended.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
On June 10, 2002 a meeting of the shareholders of PhotoMedex, Inc. was
held at our corporate offices in Radnor, Pennsylvania. The following proposals
were approved:
1. Six directors were elected to serve until the next Annual
Meeting of Stockholders
a. Warwick Alex Charlton
b. Jeffrey F. O'Donnell
c. John J. McAtee, Jr.
d. Alan R. Novak
e. Samuel E. Navaro
f. Richard De Piano
2. An amendment to increase the number of shares required for
issuance under the Company's 2000 stock option plan from
1,000,000 to 2,000,000 shares.
3. An amendment to increase the number of shares reserved for
issuance under the Company's directors stock option plan from
250,000 to 650,000 shares and to increase the annual grants to
directors under the plan from 20,000 to 35,000.
ITEM 5. OTHER INFORMATION
Changes in Our Certifying Accountant
On July 31, 2002, upon the recommendation and approval of our Audit
Committee, we dismissed Arthur Andersen LLP ("Andersen") as our principal
independent public accountants, and engaged KPMG LLP ("KPMG") as our principal
independent public accountants.
In connection with the audits for the two (2) most recent years ended
December 31, 2001 and 2000, and the subsequent interim period through the filing
date of the Current Report on Form 8-K, there were no disagreements with
Andersen on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures, which, if not resolved to
the satisfaction of Andersen, would have caused Andersen to make reference to
the subject matter of such disagreements in connection with its reports on our
consolidated financial statements for such years; and there were no reportable
events as defined in Item 304(a)(1)(v) of Regulation S-K.
The reports of Andersen on our consolidated financial statements, as
of and for the years ended December 31, 2001 and 2000, did not contain any
adverse opinion or disclaimer of opinion, nor were they qualified or modified as
to uncertainty, audit scope, or accounting principles.
We provided Andersen with the foregoing disclosures and requested
Andersen to furnish a letter addressed to the Securities and Exchange
Commission, stating whether it agreed with the above statements. Although we
have received no information from Andersen that Andersen has a basis for
disagreement with such statements, we have been unable to obtain such a letter
from Andersen principally due to the fact that the personnel at Andersen
(including the engagement partner and manager) primarily responsible for
auditing our financial statements have left Andersen.
During the years ended December 31, 2001 and 2000 and through the
filing date of the Current Report on Form 8-K, neither we nor anyone on our
behalf consulted KPMG regarding the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on our financial statements, or any other matters
or reportable events, as set forth in Items 304(a)(2)(i) and (ii) of Regulation
S-K.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
On June 24, 2002, we filed a Report on Form 8-K with respect to the
closing of the private placement of our securities on June 13, 2002.
On July 31, 2002, we filed a Report on Form 8-K with respect to the
dismissal of Arthur Andersen as our principal independent public accountants and
the engagement of KPMG as our principal independent public accountants.
DOCUMENTS INCORPORATED BY REFERENCE
We are a reporting company and file annual, quarterly and special
reports, proxy statements and other information with the Commission. You may
inspect and copy these materials at the Public Reference Room maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the Commission at 1-800-SEC-0330 for more information on the Public
Reference Room. You can also find our Commission filings at the Commission's
website at www.sec.gov. You may also inspect reports and other information
concerning us at the offices of the Nasdaq Stock Market at 1735 K Street, N.W.,
Washington, D.C. 20006. 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: August 14, 2002 By: /s/ Jeffrey F. O'Donnell
-------------------------------------
Jeffrey F. O'Donnell
President and Chief Executive Officer
Date: August 14, 2002 By: /s/ Dennis M. McGrath
-------------------------------------
Dennis M. McGrath
Chief Financial Officer
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