Gadsden Properties, Inc. - Annual Report: 2007 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the fiscal year ended December 31, 2007
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OR
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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| For the transition period from ______________ to _____________ | |
Commission
file number: 0-11635
PHOTOMEDEX,
INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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59-2058100
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(State
or other jurisdiction
of incorporation or organization) |
(I.R.S.
Employer
Identification No.) |
147
Keystone Drive, Montgomeryville, Pennsylvania 18936
(Address
of principal executive offices, including zip code)
(215)
619-3600
(Issuer’s
telephone number, including area code)
Securities
registered under Section 12(b) of the Exchange Act:
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Title
of each class
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Name
of each exchange
on which registered |
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None
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None
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Securities
registered under Section 12(g) of the Exchange Act:
Common
Stock, $0.01 par value per share
(Title
of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes o
No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.
Yes o
No x
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 o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the best
of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of "large accelerated filer," "accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer o
Accelerated
filer o
Non-accelerated
filer o
Smaller
reporting company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes o
No x
The
number of shares outstanding of our common stock as of March 14, 2008, was
63,032,207 shares. The aggregate market value of the common stock held by
non-affiliates (61,482,362 shares), based on the closing market price ($0.99)
of
the common stock as of March 14, 2008 was $60,867,538.
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Certain
statements in this Annual Report on Form 10-K, or the Report, are
"forward-looking statements." These forward-looking statements include, but
are
not limited to, statements about the plans, objectives, expectations and
intentions of PhotoMedex, Inc., a Delaware corporation, (referred to in this
Report as “we,” “us,” “our” or “registrant”) and other statements contained in
this Report that are not historical facts. Forward-looking statements in this
Report or hereafter included in other publicly available documents filed with
the Securities and Exchange Commission, or the Commission, reports to our
stockholders and other publicly available statements issued or released by
us
involve known and unknown risks, uncertainties and other factors which could
cause our actual results, performance (financial or operating) or achievements
to differ from the future results, performance (financial or operating) or
achievements expressed or implied by such forward-looking statements. Such
future results are based upon management's best estimates based upon current
conditions and the most recent results of operations. When used in this Report,
the words "expect," "anticipate," "intend," "plan," "believe," "seek,"
"estimate" and similar expressions are generally intended to identify
forward-looking statements, because these forward-looking statements involve
risks and uncertainties. There are important factors that could cause actual
results to differ materially from those expressed or implied by these
forward-looking statements, including our plans, objectives, expectations and
intentions and other factors discussed under "Risk Factors." We undertake no
obligation to update such forward-looking statements.
We
are a
medical device and specialty pharmaceutical company focused on facilitating
the
cost-effective use of technologies for doctors, hospitals and surgery centers
to
enable their patients to achieve a higher quality of life.
Our
business operates in five distinct business units: three in Dermatology and
two
in Surgical. Business units, or segments, are distinguished by our management
structure, products and services offered, markets served or types of customers.
The
Domestic XTRAC® segment derives revenues principally from procedures performed
by dermatologists in the United States. Our XTRAC system is generally placed
in
a dermatologist’s office without any initial capital cost and then we charge a
fee-per-use to treat skin disease. On occasion, however, we sell XTRAC lasers
to
customers, due generally to customer circumstances and preferences. Our
International Dermatology Equipment segment, in contrast, generates revenues
from the sale of equipment to dermatologists outside the United States through
a
network of distributors. The Skin Care segment generates revenues primarily
by
selling physician-dispensed skincare products worldwide.
The
Surgical Services segment generates revenues by providing fee-based procedures
typically using our mobile surgical laser equipment delivered and operated
by a
technician at hospitals and surgery centers in the United States. The Surgical
Products segment generates revenues by selling laser products and disposables
to
hospitals, surgery centers and doctors both domestically and internationally.
The
XTRAC
laser system is designed and manufactured by us to phototherapeutically treat
psoriasis, vitiligo, atopic dermatitis and leukoderma. We have secured specific
510(k) clearances from the United States Food and Drug Administration to market
the XTRAC laser system for treatment of these conditions. The XTRAC is approved
by Underwriters’ Laboratories; it is also CE-marked, and accordingly a third
party regularly audits our quality system and manufacturing facility. Our
manufacturing facility for the XTRAC is located in Carlsbad,
California.
Our
Skin
Care business markets products for skin health, hair care and wound care
generally distributed by dermatologists and plastic surgeons. Most of these
products incorporate proprietary copper and manganese peptide technologies.
The
Skin Care business has a dedicated national sales force and marketing
department. Our primary facility for the skincare business is located in
Redmond, Washington.
Our
Surgical businesses are located in Montgomeryville, Pennsylvania. In the
surgical businesses, we also develop, manufacture and market proprietary lasers
and delivery systems for both contact and non-contact surgery and provide
surgical services utilizing these and other manufacturers’ products. The
Montgomeryville facility also serves as our corporate headquarters.
Our
Business Strategy: The Dermatology Businesses
Our
short-term goal is to establish the XTRAC system as a preferred treatment
modality for psoriasis and other inflammatory skin disorders through persuasive
clinical evidence and widespread private healthcare reimbursement. Our
longer-term goal is to be a world-class provider of the highest-quality,
cost-effective, medical technologies. The following are the key elements of
our
strategy:
Establish
Our XTRAC System as a Preferred Treatment Modality for Psoriasis and Other
Inflammatory Skin Disorders.
Several
opinion leaders in the dermatological community have endorsed our XTRAC system
as a preferred treatment modality for the majority of psoriasis and vitiligo
patients. We are using these endorsements to attempt to accelerate the
acceptance of our XTRAC system among dermatologists. We have also developed
a
set of medical practice tools, such as patient education videos, patient
letters, sample press releases, point-of-sale displays and other advertising
literature, to assist dermatologists in marketing our XTRAC system. As a result
of improved health insurance reimbursement covering the XTRAC procedure we
have
expanded our sales force, clinical specialists and marketing
initiatives.
Achieve
Widespread Private Healthcare Reimbursement.
The
Centers for Medicare and Medicaid Services (CMS) published national Medicare
rates, effective March 1, 2003, for the newly established laser reimbursement
codes for inflammatory skin disorders such as psoriasis. For most of the last
five years, we have sought to obtain widespread private reimbursement for the
XTRAC procedure. Presently more than 90% of the U.S. population covered by
private-health insurance has plans that reimburse for the excimer treatment
of
psoriasis.
Build
Broad Consumer Awareness Program to Attract Those Not Currently Seeking
Treatment.
Of the
7 million people in the United States who have been diagnosed with psoriasis,
only about 1.5 million seek regular care. We believe that many do not seek
care
largely due to the frustration caused by the limited effectiveness,
inconvenience and negative side effects of treatment alternatives other than
treatment with the XTRAC system. We have expended funds in print, radio and
internet advertising to educate this frustrated segment of the population about
how our XTRAC system enables more convenient and effective psoriasis treatment.
Increase
Installed Base of Our XTRAC Systems by Minimizing Economic Risk to the
Dermatologists.
In the
United States, we generally place our XTRAC system in dermatologists' offices
on
a fee-per-use basis to the physician. This creates an opportunity for
dermatologists to utilize our system without any up-front capital costs, thereby
eliminating the economic risk to them. Occasionally, favorable economic
circumstances influence our decision to sell the laser system directly to
dermatologists.
Sell
the XTRAC System in Foreign Countries to be Utilized to Treat Patients on a
Wider Basis.
We have
entered into a number of distribution relationships with respect to the sale
of
our XTRAC system internationally. We have chosen this marketing approach over
a
direct marketing approach because of the varying economic, regulatory, insurance
reimbursement and selling channel environments outside of the United States.
We
intend to enter into additional relationships in the future. However, we cannot
be certain that our international distributors will be successful in marketing
the XTRAC system outside of the United States or that our distributors will
purchase more than the minimum contractual requirements or expected purchase
levels under these relationships. To date, no units have been placed in
international markets that provide a usage-based revenue stream. In addition,
we
have added a non-laser based product line to our international offering, called
the VTRAC™. This product line is a result of licensed technologies from Stern
Laser srl (“Stern”), our distributor in Italy. The purpose of this product
offering is to provide a best-in-class non-laser purchase option to compete
against lower-priced lamp-based international competitors.
Our
Solution for Psoriasis
The
XTRAC
308-nanometer (nm) excimer laser is an effective treatment option for patients
with stable localized mild-to-moderate plaque psoriasis (about 80% of psoriasis
cases), especially for patients whose plaques are recalcitrant to topical
therapy. We believe our XTRAC system will become a preferred treatment modality
for patients suffering from psoriasis. The XTRAC excimer laser offers numerous
benefits to the patient, the physician, and the third-party insurance payer,
including:
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At
308 nanometers, the excimer laser utilizes an ultra-narrow wavelength
in
the narrowband UVB spectrum with a proven anti-psoriatic action.
In
addition, by focusing the energy exclusively to the psoriasis plaques,
the
laser avoids exposing normal skin to potentially detrimental UVB
energy,
all with fewer side effects than other treatment
methods.
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Unlike
most other lasers, our XTRAC system emits a pulsating beam of light
that
is neither hot nor cold to the touch, resulting in no pain or discomfort
to virtually all patients. Clinical studies have demonstrated the
XTRAC
system to have equal or greater efficacy than the most effective
treatment
alternatives presently available for psoriasis with fewer treatment
visits
than conventional phototherapy.
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Our
XTRAC system enables a physician to deliver concentrated doses of
ultraviolet light to the psoriasis-affected skin at a higher intensity
than is possible with traditional ultraviolet light therapy. As a
result,
physicians can use the XTRAC system to treat all degrees of psoriasis
from
mild to moderate cases and even some severe cases. The XTRAC system
has
also proven effective to treat hinged body areas (elbows and knees),
which
previously have been the most difficult areas of the body to effectively
treat with topical treatments and other ultraviolet light
therapy.
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Most
patients (84%) will obtain significant improvement (>75%) with 6 to 10
treatments (2 treatments per week for 3 to 5 weeks). These results
have
been demonstrated to be long-lasting as well, with mean remission
rates
reported from 3.5 to 6 months.
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The
excimer laser also has an established cost-effectiveness profile.
A
clinical economic analysis has demonstrated that the addition of
excimer
laser treatment results in no expected cost increase to the payer.
The
annual cost of excimer laser treatment is comparable to or less than
other
standard “Step 2” psoriasis treatment modalities, such as phototherapy
treatment alternatives or alternative topical therapies. In addition,
the
cost-effectiveness of the excimer laser is superior due to the increased
number of expected clear days.
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The
acceptance of this procedure has been established by the American
Medical
Association through the establishment of three specific CPT codes
describing this procedure (96920, 96921 and 96922), as well as the
establishment of Relative Value Units adopted by CMS. Since 2003,
rates
set by CMS have trended upward.
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Numerous
private payers and CMS carriers have recognized the clinical and
economic
merits of excimer laser treatment and have adopted medical coverage
policies endorsing its use. In addition, approximately 113,000 excimer
laser psoriasis procedures have been performed in the United States
in
2007, approximately 89,000 in 2006, 60,000 in 2005 and 53,000 in
2004.
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Our
Solution for Vitiligo
In
March
2001, the FDA granted 501(k) clearance to market our XTRAC system for the
treatment of vitiligo. In 2006, we secured exclusive rights to U.S. Patent
No.
6,979,327 from the Mount Sinai School of Medicine. The patent covers, among
other things, treatment of vitiligo by means of an excimer laser system.
Vitiligo is a disease in which the skin loses pigment due to destruction of
the
pigment cells, causing areas of the skin to become lighter in color than
adjacent healthy skin. This condition can be distressing to patients. Between
1%
and 2% of the population suffers from the condition, and there is no known
cure.
The principal conventional treatments for symptoms are PUVA radiation and,
to a
lesser extent, topical steroids and combination therapies. According to the
National Vitiligo Foundation, or NVF, the cost of PUVA treatments, over a 12
to
18 month period, can run $6,000 or more and involve 120 clinic visits. Moreover,
according to the NVF, current conventional treatment methods are unsatisfactory
and many patients tend to lose the pigment they were successful in gaining
through PUVA therapy. Our XTRAC system can effectively re-pigment a patient's
skin, allowing treated areas to become homogeneous in pigment to healthy
surrounding skin and restore the patient's skin to its original condition.
As
treatment levels of psoriasis increase, we intend to promote use of the XTRAC
for treatment of vitiligo. As part of that promotion, we intend to explore
whether CPT codes specific to vitiligo can be established as well as whether
CMS
and/or private insurance plans will establish reimbursement rates for the
treatment of vitiligo.
Our
Solution for Atopic Dermatitis
In
August
2001, the FDA granted 510(k) clearance to market our XTRAC system for the
treatment of atopic dermatitis. Atopic dermatitis is a common, potentially
debilitating condition that can compromise the quality of life for those it
affects. The condition appears as chronic inflammation of the skin that occurs
in persons of all ages, but is reported to be more common in children. Skin
lesions observed in atopic dermatitis vary greatly, depending on the severity
of
inflammation, different stages of healing, chronic scratching and frequent
secondary infections. It is reported that atopic dermatitis affects some 10%
of
children in the United States alone, and more than $364 million is spent
annually in the treatment of this disease. Treatment options include
corticosteroids, which can have negative side effects, and UVB phototherapy.
The
use of UVB phototherapy in the treatment of atopic dermatitis has been shown
effective in published studies. Because of the controlled and targeted
application provided by our XTRAC system, large areas of healthy skin are not
exposed to UVB light from the XTRAC system and the corresponding potentially
carcinogenic effect of other phototherapy treatments. We believe that the XTRAC
system could be an alternative protocol for treating atopic dermatitis
effectively. However, we do not intend to undertake clinical research that
would
clarify such an alternative protocol until we have made further progress in
our
main business initiatives.
Our
Solution for Leukoderma
In
May
2002, the FDA granted 510(k) clearance to market our XTRAC system for the
treatment of leukoderma, commonly known as white spots, and skin discoloration
from surgical scars, stretch marks, burns or injury from trauma. The XTRAC
system utilizes UVB light to stimulate melanocytes, or pigment cells, deep
in
the skin. As these cells move closer to the outer layer of skin, re-pigmentation
occurs. As with atopic dermatitis, we do not intend to undertake further
clinical research for leukoderma that would clarify such an alternative protocol
until we have made further progress in our main business
initiatives.
Our
XTRAC System
Our
XTRAC
system combines the technology of an excimer laser, or "cold" laser system
(already in use for a variety of medical and cosmetic treatments), with the
use
of ultraviolet light therapy. The XTRAC system applies a concentrated dose
of
UVB radiation directly to diseased skin at a higher intensity than traditional
ultraviolet light therapy. Our XTRAC system utilizes a 308-nm light wavelength,
which studies have shown to be the optimal wavelength to treat psoriasis
effectively. Our XTRAC system consists of the laser, which is mobile, and a
hand
piece attached to the laser by a liquid light guide or by a fiber optic cable,
which are designed to permit direct application of the ultraviolet light and
an
aiming beam to psoriasis-affected skin. The XTRAC comes optionally with an
adjustable hand-piece that can decrease the spot size of the operating beam
to
permit precise, operator-controlled irradiation of tissue.
Between
March 1998 and November 1999, we initiated five seminal clinical
trials of our XTRAC system at Massachusetts General Hospital. Our objective
in
these clinical trials was to compare our XTRAC laser technology with standard
ultraviolet light therapy in the treatment of psoriasis. In January 2000, we
received a 510(k) clearance to market the XTRAC system from the FDA based on
the
clinical results from these trials. The Massachusetts General Hospital clinical
trial, which involved 13 patients, concluded that our XTRAC laser made it
possible to treat psoriasis effectively in one session with moderately long
remission. The study also concluded that the number of treatments to remission
depended largely on the intensity of the ultraviolet light used, finding that
medium intensities seemed to provide the best results with a superior balance
between quick clearing and patient comfort. We supported the clinical trials
with research grants of approximately $954,000, between 1998 –
1999.
To
support our commercialization strategy, we completed an additional clinical
trial in 2000. The trial was designed to validate the results obtained in
the Massachusetts General Hospital clinical study in mainstream dermatologists'
offices. We established five Beta sites throughout the United States using
our
XTRAC system in a clinical trial of 124 persons. This study examined various
aspects of excimer laser therapy, including the number of treatments necessary
for clearing, the ultraviolet light intensity necessary for clearing and overall
patient satisfaction. Our Beta-Site Clinical Study indicated that:
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approximately
72% of the subjects treated were 75% improved in slightly more than
six
sessions, with minimal and well-tolerated side
effects;
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some
subjects were cleared in as little as one session;
and
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subjects
were successfully treated who had psoriasis in the hinged body areas
(knees and elbows), which have proven the most difficult for other
alternative therapies to demonstrate any significant remedial
impact.
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In
the
following years, we received clearance to market our XTRAC system for the
treatment of vitiligo, atopic dermatitis leukoderma. Overall, more than 45
clinical publications have validated the clinical efficacy of our phototherapy
treatments for the cleared indications of use and have advanced our insurance
reimbursement process.
Background
on Psoriasis
Psoriasis
is believed to be a non-contagious, autoimmune medical disorder and a chronic
inflammatory skin disease diagnosed in more than 7 million Americans and between
1% and 3% of the world's population. There is no known cure for psoriasis.
Although clinical symptoms and severity vary greatly between individuals over
periods of time, psoriasis appears most commonly as inflamed swollen lesions
covered with silvery white scales. Psoriasis patients often suffer from
debilitating and painful swelling, itching, bleeding, cracking and burning,
resulting in decreased mobility, depression and low self-esteem. The National
Psoriasis Foundation, or NPF, estimates that, in the United States,
dermatologists treat over 1.5 million psoriasis patients each year.
While
the
exact cause of the disease remains unknown, the emerging consensus among
scientists and physicians characterizes psoriasis as an autoimmune medical
disorder in which excessive "T" cell stimulation in skin cells activates an
inflammatory response and excessive skin cell production. The disease causes
the
rate at which skin cells are produced and pushed to the outer skin layer to
increase seven-fold, from every 28 days to every two to four days. The body
cannot shed the skin cells fast enough and this process results in patches,
or
"lesions," forming on the skin's surface.
Psoriasis cases are classified as mild (less than 2% of the body's surface
area
affected and usually localized on the knees, elbows, scalp, hands and feet),
moderate (between 2% and 10% of the body's surface area affected and usually
appearing on the arms, legs, torso and head) and severe (greater than 10% of
the
body's surface area affected and potentially involving all areas of the skin).
Our initial target market is patients with mild to moderate psoriasis that
represent 80% of all psoriasis cases.
Domestic
Commercialization of Our XTRAC System
For
the
past six years, we have sought to clear the path of obstacles and barriers
to a
smooth and orderly roll-out of the XTRAC system in dermatology. In 2000, the
technology, which was originally designed for cardiology applications, was
found
to have significant therapeutic advantages for psoriasis patients who were
treated with the UVB light emitted from the excimer-based laser system. For
the
first two years, following such discovery, we invested in establishing the
clinical efficacy of the product and mechanical reliability of the equipment.
Starting in 2002, under the technical leadership of Jeffrey Levatter, Ph.D.,
our
chief technical officer, we made numerous improvements and corrections to the
design of the XTRAC laser system. Over the last four years we have pursued
- and in most regions, have substantially achieved - widespread health insurance
reimbursement.
We
believe, based on our analysis, that the XTRAC system should become a preferred
treatment modality for patients afflicted with psoriasis. Although existing
treatments provide some relief to psoriasis sufferers, they are inconvenient
and
may involve negative side effects. We believe that our proprietary XTRAC system
will enable more effective and convenient treatment with minimal side effects.
Treatment
of psoriasis commonly follows a step approach with topical therapy as a
first-step, phototherapy as second-step, and systemic medications reserved
for
when all other treatments fail. The clinical body of evidence developed by
us
and others supports the use of the 308-nm excimer laser as safe and effective
for localized plaque-type psoriasis recalcitrant to other first-step therapies,
such as topical creams and ointments. In addition, an economic analysis
completed in December 2003 has demonstrated that the addition of excimer laser
treatment results in no expected cost increase to the payer. Further, this
analysis demonstrates the cost-effectiveness of the excimer laser is superior
due to the increased number of expected disease-free days and remission
days.
In
the
United States, we are commercializing our XTRAC system in a manner designed
to
provide a recurring revenue stream not only to us, but also to the attending
dermatologist, who would otherwise refer the patient for alternative treatment
and thereby forego associated revenues for their practice. Although on occasion
we may sell the laser outright to a dermatologist, typically we place units
in
the offices of dermatologists with high-volume psoriasis practices at no
up-front capital cost to the dermatologists. We own the equipment and charge
the
dermatologist on a fee-per-treatment basis for the use of the XTRAC
system.
A
dermatologist generally takes delivery of our XTRAC system under the terms
of
our standard usage agreement. Our agreements generally provide the dermatologist
with a purchase option. Under the terms of the usage agreement, title to the
lasers remains in our name. There is generally no fixed amount that is to be
paid over pre-set intervals of time by a dermatologist. We reserve the right
to
remove the laser unit from a dermatologist’s office if the parties’ economic
expectations from the onset of the placement are not borne out.
Our
agreements do not require the purchase of disposable products or similar items
from us. We make available various accessory products (e.g. canisters of xenon
chloride gas, subject to a special, proprietary formula tied to the
specifications of the XTRAC system), but do not require the purchase of set
amounts of such items. However, we require that only our qualified technicians
maintain the lasers and that the physicians observe the instructions for use
for
the laser.
The
dermatologist has the right to purchase pre-paid treatments, which are generally
ordered telephonically and added to the laser’s computer by way of a random
access code obtained from us and input by the dermatologist. These purchased
treatments may be used for multiple treatments for the same or different
patients, for psoriasis, vitiligo, atopic dermatitis or leukoderma. A single
treatment is then deducted from the laser’s computer upon patient treatment.
Payment for access codes is usually set for 30 days. The agreement does not
provide for delay in payment based on third-party reimbursement. The
dermatologists retain any revenue received from patients or their medical
insurance providers.
Generally,
dermatologists who treat psoriasis patients refer their patients to independent
treatment centers for ultraviolet light or write prescriptions for topical
creams or systemic drugs. In such cases, the physician does not ordinarily
share
in any of the revenue generated from providing treatments to the patient.
However, physicians using our XTRAC system will treat the patient in their
own
office and, therefore, will retain revenue that would otherwise be lost to
outside providers. In addition, in most states, a trained technician, rather
than the physician, may apply the treatment under the physician’s supervision,
thus allowing the dermatologist to continue treating other patients, while
at
the same time increasing revenue from treatments using our XTRAC system. We
believe that this will create an attractive incentive for dermatologists to
use
our XTRAC system.
We
promote our XTRAC system through trade shows, advertising in scientific
journals, industry magazines, radio, TV and newsprint, as well as direct mail
programs. Our marketing campaign has been designed to accelerate market
acceptance of our XTRAC system by increasing physician and patient awareness
for
our new technology, at times with direct-to-consumer advertising
initiatives.
International
Commercialization of Our Dermatology Equipment
Our
international dermatology equipment marketing plan is based on the sale of
our
XTRAC system and the newly developed VTRAC system through independent, exclusive
distributors. We have relationships with distributors and end users in more
than
30 countries in Europe, the Middle East, the Far East and Southeast Asia, and
in
Australia, South Africa and parts of Central and South America.
Skin
Care
General
Our
Skin
Care division, ProCyte, generates revenues primarily from the sale of skin
health, hair care and wound care products; the sale of copper peptide compound
in bulk and from royalties on licenses for the patented copper peptide compound.
ProCyte’s focus since 1996 had been to bring unique products to selected
markets, primarily based on patented technologies such as GHK and AHK copper
peptide. We currently sell products directly to the dermatology, plastic and
cosmetic surgery, and spa markets. We have also expanded the use of our novel
copper peptide technologies into the mass retail market for skin and hair care
through specifically targeted technology licensing and supply agreements.
Products
Our
products address the growing demand for skin health and hair care products,
including products designed to mitigate the effects aging has on the skin and
hair and to enhance appearance. Our products are formulated, branded and
targeted for specific markets. Our initial products were developed to be
dispensed by physicians in the dermatology, plastic and cosmetic surgery markets
for use following various medical procedures. Anti-aging skin care products
were
added to form a comprehensive approach for a patient’s skincare regimen. Certain
of these products incorporate our proprietary technologies, while others
complement the product line such as our advanced sunscreen products that reduce
the effects of sun damage and aging on the skin or our eyelash conditioning
product which promotes the appearance of thicker, longer eyelashes.
Our
products are well-suited for use in the medical specialties of dermatology,
plastic and cosmetic surgery. Several recent studies presented at the American
Academy of Dermatology and other medical symposia have confirmed the advantages
of products containing copper peptide formulations versus such other
formulations as tretinoin, vitamin C, and other popular anti-aging and skin
rejuvenation products. The actions of wound care gels and creams containing
copper peptide have been documented in the scientific literature for their
ability to stimulate collagen synthesis, new blood vessel growth and tissue
repair. This has led to the development of a variety of products designed to
treat the skin following certain cosmetic procedures such as microdermabrasion,
laser resurfacing and hair transplantation. We have a series of products
tailored to the needs of these types of procedures, including the
GraftCyte®
System
and the Complex Cu3®System,
and have developed a series of daily use products that contain our proprietary
copper peptide compounds to aid in maintaining the quality of the skin and
hair
following these procedures.
Skin
Care.
Our
GraftCyte System was created to address the special tissue repair needs of
patients following hair transplant surgery. This system continues to be the
only
complete solution addressing post-procedure care in the hair restoration market.
We have continued to emphasize our Complex Cu3®
Post
Laser Lotion, Intensive Repair Crème, Cleanser and Hydrating Gel products used
to treat patients following chemical peels, microdermabrasion and laser
treatments. The Complex Cu3
products
provide a comprehensive approach to post-procedure care and allow us to
differentiate our line of skincare products on the basis of our proprietary
copper and manganese peptide technologies. Studies have indicated that the
skin
heals quicker with the use of copper peptide compounds.
We
launched the successful Neova®
Therapy
line of anti-aging products in response to demand from physician customers
for a
comprehensive approach to medically directed skincare. The Neova Therapy line
of
GHK Copper Peptide Complex®
products
showcase elegant moisturizers and serums complemented by supporting cleansers,
toners, and masks for an integrated approach to anti-aging skincare. We have
sought to add new products to the product line each year. In 2007, we expanded
our manganese peptide offerings with an anti-aging product that provides the
benefits of hydroquinone without the risks. Also added to our products were
MD
Lash Factor™ eyelash conditioner and a line of facial peel products.
Our
line
of advanced sun protection products, marketed under the brand names of
Ti-Silc®
and
Z-Silc®,
are
recommended by dermatologists and plastic surgeons to assist in the prevention
of sun exposure that can lead to a number of problems including age spots,
hyperpigmentation, premature aging and melanoma.
Hair
Care.
Since
1998, we have marketed our Tricomin®
line of
hair care products (Tricomin Shampoos, Conditioners and Follicle Therapy
Solution) as a program for the maintenance of thinning hair in men and women.
Hair follicles require high concentrations of biological copper and the Tricomin
products deliver copper along with amino acids for nourishing and stimulating
the hair and scalp for improved health, strength and appearance. We call this
the Triamino Nutritional Copper Complex™. These products provide physicians with
a non-drug alternative to the problem of thinning hair care for their patients.
We also sell Tricomin products directly via the website, www.tricomin.com.
We
are currently working on the next generation of products to increase the
effectiveness of the Triamino Copper Nutritional Complex™ delivery.
Markets
and Distribution
The
markets for skincare, hair care and wound care products are global. There are
numerous distinct markets where we have a presence through our own direct sales
efforts or through agreements with others. These include dermatology, plastic
and cosmetic surgery, catalog, and direct mail. In December 2007, we engaged
a
distributor to handle our spa products. We also generate minor revenues from
technology licensing.
We
emphasize high-quality products and services, technical knowledge, and
responsiveness to customer needs in our marketing activities. We educate our
distributors, customers and prospective customers about our products through
a
series of detailed marketing brochures, technical bulletins and pamphlets,
presentations, news releases and direct mail pieces. We also conduct a series
of
one-day educational symposia around the country to provide product updates
and
marketing ideas to current and potential physician customers. These activities
are supplemented by advertising in industry publications, technical
presentations, and exhibitions at over 30 local, national and international
trade shows. We adopted an internet sales policy whereby our physician-customers
are to maintain the prestige of our brands to their own
patient-customers.
Technology
In-Licensing and Out-Licensing
We
are
continuously seeking partners in the prestige, direct-to-consumer, specialty
retail and home shopping categories. Our skincare business strategy is to
identify skincare markets that would be best served by more established
companies and then target a significant partner in each market to license our
technology.
We
have
operated under a worldwide license agreement with Neutrogena Corporation, a
Johnson & Johnson company (“Neutrogena”), for worldwide use of our patented
copper peptide technology
in products for skin health in the mass retail market. Our current license
agreement continues until April 2010. Neutrogena develops, manufactures and
markets skin and hair care products domestically and internationally. Neutrogena
launched its two initial products using our technology under the brand name
of
Visibly Firm™ with Active Copper™ in April 2001. Since that time, it has
continued to add new products using ProCyte’s patented copper peptide
technology. We receive royalty payments, based on product sales by Neutrogena
and revenue from the sale of the copper peptide compound used in Neutrogena’s
products.
In
July
2007, we obtained a marketing license for MD Lash Factor eyelash conditioner.
The license is for 5 years and gives us, among other things, exclusive rights
to
market this cosmetic conditioner to physicians in the United States and other
countries. A US patent is pending on the key ingredient in the product, which
is
a unique prostaglandin analogue.
Our
Business Strategy: Surgical Products and Services
We
market
lasers used in surgery in hospitals, surgi-centers and doctors offices under
the
trademark of SLT and, to a lesser degree, the trade name of Surgical Innovations
& Services. We market many of our surgical laser products using a similar
business model to the marketing of our excimer laser products by charging a
per-procedure fee, thereby limiting the initial outlay to the customer for
capital expenditure, while promoting continued revenue flow to us. We offer
a
wide range of laser services in various specialties, including urology,
gynecology, orthopedics and general surgery. We are currently marketing such
services under the trade name PhotoMedex Surgical Services. We also provide
products that we manufacture for use in our surgical services business.
We
also
engage in the development, manufacture and sale of surgical products, including
proprietary free-beam and Contact Laser™ Systems for surgery and in the
provision of surgical services on a turnkey procedural basis. We introduced
Contact Laser surgery by combining proprietary Contact Laser Delivery Systems
with an Nd:YAG laser unit to create a multi-specialty surgical instrument that
can cut, coagulate or vaporize tissue. Our Contact Laser Delivery Systems can
be
used effectively with any wavelength of laser between 532nm and 1064nm,
including the KTP laser (532nm), diode laser (various wavelengths) and Nd:YAG
laser (1064nm). We are currently marketing such products under the trade name
PhotoMedex Surgical Products.
Our
proprietary Contact Laser probe and scalpel surface treatments provide the
ability to alter selectively the temperature profile of tissue, replicating
the
clinical effect of many different types of lasers. Through our patented Contact
Laser Delivery Systems, we are able to produce a wide range of temperature
gradients, which address a broad range of surgical procedures within multiple
specialties. Our multiple-specialty capability reduces a hospital’s need to
purchase several lasers to meet its specialists’ varied requirements. These
factors, coupled with the precision, hemostasis, tactile feedback and control
that our Contact Laser Delivery Systems provide, are our primary competitive
strengths in surgical products.
Our
LaserPro® CTH holmium laser is a versatile and compact holmium laser for
lithotripsy, or fragmentation of calculi of the genito-urinary tract, as well
as
a broad range of other surgical applications. We also introduced a line of
fiber-optic laser delivery systems to be used with the holmium laser. This
laser
has been used in the provision of surgical services and has also been offered
for sale. The sales have become a very minor component of revenue, approximately
$55,000 in 2007. Our LaserPro® Diode laser system has replaced the Nd:YAG laser.
Our LaserPro® CO2 laser system is used with PhotoMedex surgical services and is
sold through our surgical products business.
We
believe our surgical revenues will continue to be generated primarily
from:
| · |
the
sale of Contact Laser Delivery Systems and related accessories;
|
| · |
the
sale of Diode laser units;
|
| · |
the
sale of CTH holmium and CO2 units, and related service;
and
|
| · |
providing
surgical services.
|
Our
Contact Laser Delivery Systems consist of proprietary fiberoptic delivery
systems which deliver the laser beam from our Diode (or Nd:YAG) laser unit
via
an optical fiber to the tissue, either directly or through a proprietary Laser
Probe or Laser Scalpel. These delivery systems can also be used with the laser
systems of certain other manufacturers. Our holmium laser delivery systems
consist of fiber-optic delivery systems, which deliver the laser beam from
our
CTH holmium laser unit to the surgical site. The CO2 laser system does not
use a
fiberoptic and therefore will have less of a recurrent revenue steam. Our
CO2-related Unimax® accessories enjoy wide acceptance and can be used on other
CO2 laser systems than our own.
Surgical
Services
We
provide our customers with the ability to utilize our laser systems, as well
as
those of other companies, on a per-procedure basis. We provide these services
through field technicians, called clinical support specialists, for a variety
of
surgical procedures utilizing various laser technologies. The per-procedure
prices we charge for surgical services vary based on the surgical procedure
performed.
Our
primary competitive strengths in surgical services are in the training we
provide to our clinical service specialists, our adherence to quality standards
and our ability to integrate products that we manufacture into the range of
services we provide. These strengths allow us to provide multiple-specialty
capability on a cost-effective basis, which in turn reduces or eliminates a
hospital’s need to purchase laser systems, associated delivery systems and
clinical support to meet its professionals’ requirements. To the extent,
however, that we must satisfy customer demand through products not manufactured
by us, we realize reduced margins.
Most
of
our operations in surgical services are in the southeastern states of the United
States. We also have operations in the Milwaukee, Wisconsin,
Baltimore-Washington DC and Philadelphia, Pennsylvania areas.
Surgical
Products
The
following is a summary of our major surgical products:
Fiberoptic
Delivery Systems.
We have
designed disposable optical quartz fibers to
channel the laser beam from our laser unit to the fiber end, the Laser Probe
or
the Laser Scalpel or to one of 24 interchangeable, application-specific
handpieces that hold the Laser Scalpel or Laser Probe. Many of these proprietary
optical fibers and handpieces are intended for single use, while others are
designed to be reusable.
Laser
Probes and Laser Scalpels.
Our
proprietary Laser Probes and Laser Scalpels are made of either synthetic
sapphire or fused silica and have high mechanical strength, high melting
temperature and appropriate thermal conductivity. Most of these Laser Probes
and
Laser Scalpels use our proprietary Wavelength Conversion Effect treatments.
We
offer more than 60 interchangeable Laser Probes and Laser Scalpels that provide
different power densities through various geometric configurations appropriate
for cutting, coagulation or vaporization. Our Laser Probes and Laser Scalpels
are made with varying distal tip diameters and surface treatments, each with
a
different balance between cutting and coagulation, so that the instrument can
be
suited to the particular tissue effect desired. Additionally, but at much lesser
volumes, we market side-firing and direct-firing free-beam laser probes. Instead
of changing laser units, surgeons may choose a different Laser Probe or Laser
Scalpel to perform a different procedure. The Laser Probes and Laser Scalpels
can be re-sterilized and reused.
Disposable
Gas or Fluid Cartridge Systems.
Our
proprietary cartridge system provides gas or fluid to cool the junction between
the optical fiber and the Laser Scalpel or the Laser Probe. These cartridges
are
sterile and used in one set of procedures.
Reusable
Laser Aspiration Handpieces.
Our
reusable stainless-steel handpieces are all used with interchangeable laser
aspiration wands and flexible endoscopic fibers. These
proprietary handpieces are intended for intra-nasal/endoscopic sinus and
oropharyngeal procedures requiring smoke and/or fluid evacuation.
Laser
Units.
Our
LaserPro Diode Laser System has replaced our CLMD line of Nd:YAG laser system.
The CLMD line has been largely phased out, although we continue to handle
maintenance and refurbishment of the existing base of Nd:YAG lasers. Like the
Nd:YAG laser, the Diode lasers are designed for use with our Contact Laser
Delivery Systems. The Diode laser unit can provide up to 25 watts of power
to
tissue. The laser has three versions, depending on which wavelength the user
desires to be installed in the laser. The wavelengths are 810-nm, 940-nm and
980-nm. The laser unit is small and portable, but also is designed to be rugged
and dependable. Acting as an original equipment manufacturer (OEM), we have
provided the Diode laser to third parties (e.g. AngioDynamics) to market in
specialties lying outside our area of focus. We expect to cultivate additional
relationships in the future.
We
market
the LaserPro CTH holmium laser unit for use with fiber-optic laser delivery
systems. The laser unit delivers 20 watts to tissue, and includes a
variable-speed foot pedal for improved control of energy. It has a superior
duty
cycle. The delivery systems are re-useable.
The
LaserPro CO2 laser unit can provide up to 40 watts of power to tissue at a
wavelength of 10,600-nm. Like the Diode, the CO2 laser is readily transportable
and has been designed for dependable use. This laser was also designed to work
seamlessly with a line of premiere CO2 accessories, including the Unimax®
micromanipulator, which we acquired from Reliant Technologies. As in the case
of
the Diode laser, we have in the case of the CO2 laser undertaken discussions
to
supply the laser on an OEM basis to third parties.
We
manufacture virtually all of our laser systems and laser delivery systems (other
than those manufactured by other companies that are utilized in the provision
of
surgical services) at our Montgomeryville, Pennsylvania facility. The raw
materials we use are generally available in adequate supply from multiple
suppliers. We obtain all of our partially finished Laser Probes and Laser
Scalpels from three suppliers in the United States. We perform materials
processing and final assembly on the Laser Probes and Laser Scalpels using
proprietary treatment processes. We also manufacture the fiberoptic delivery
systems, with and without handpieces. A domestic supplier manufactures our
sterile gas and fluid cartridge systems on an exclusive basis in accordance
with
our specifications.
Irrigation
and Suction System.
We
manufacture ClearESS®, which provides convenient and effective irrigation and
suction to remove blood and debris for enhanced visualization during endoscopic
sinus surgery. We previously used to supply this product to Linvatec
Corporation, but have now brought the line back for us to market.
Our
Operating Strategies:
Sales
and Marketing
As
of
March 14, 2008, our sales and marketing organization consists of 74 full-time
positions. Of the 74 direct sales personnel, they are directed to sales in
the
Dermatology and Surgical divisions by business segment as follows: Dermatology:
33 in Domestic XTRAC; 32 in Skin Care; 3 in International Dermatology Equipment
and Surgical Products and 6 in Surgical Services.
Our
sales
organization provides consultation and assistance to customers on the effective
use of our products, whether in phototherapy or surgery. The consultative sales
effort varies depending on many factors, including the nature of the specialty
involved and complexity of the procedures. We believe that maintaining this
consultative effort allows us to develop a long-term relationship with our
customers.
The
time
between identifying a U.S. customer for the XTRAC system and placing a unit
with
the customer can be a long process. We have implemented a program to accelerate
this placement process. The length of the sales cycle for a laser unit, whether
an excimer unit sold internationally or one of our surgical lasers, varies
from
one month to one year, with the average sale requiring approximately six months.
Our
sale
and post-sale support personnel includes regional managers and clinical support
specialists and marketing and technical personnel. We train the regional
managers and clinical support specialists in the utilization of our products
and
services, which allows them to provide clinical consultation regarding safety,
efficacy and clinical protocols. Our marketing and technology personnel provide
our link to the customer to create innovative solutions and identify new
applications and product opportunities. In some areas of the United States,
we
use independent distributors to provide this support for surgical products.
We
sell
our surgical products and services to hospitals and surgery centers as well
as
to individual practitioners. We design our products to be cost-effective and,
where applicable, to be accessible and easy to use with various other
technologies or products. Our marketing efforts include activities designed
to
educate physicians, nurses and other professional staff in the use of our
products and services.
Manufacturing
We
manufacture our phototherapy products at our 8,000 sq. ft. facility in Carlsbad,
California and our
surgical products at our 42,000 sq. ft. facility in Montgomeryville,
Pennsylvania.
Our
California and Pennsylvania facilities are ISO 13485 certified. We believe
that
our present manufacturing capacity at these facilities is sufficient to meet
foreseeable demand for our products. We substantially outsource the
manufacturing of our Skin Care products to OEM contract manufactures. Our
facility in Redmond, Washington is the final assembly center and primary
warehouse for our skincare products, and likewise is operated in conformance
with a quality system.
We
manufacture most of our own components and utilize certain suppliers for the
manufacture of selected standard components and subassemblies, which are
manufactured to our specifications. Most major components and raw materials,
including optics and electro-optic devices, are available from a variety of
sources. We conduct all final testing and inspection of our products. We have
established a quality control program, including a set of standard manufacturing
and documentation procedures intended to ensure that, where required, our
instruments are manufactured in accordance with FDA Quality System Requirements
and the comparable requirements of the European Community.
Research
and Development
As
of
March 14, 2008, our research and development team included four full-time
research employees and ten engineers. We conduct research and development
activities at all three of our facilities. Our research and development
expenditures were approximately $0.8 million in 2007, $1.0 million in 2006
and
$1.1 million in 2005.
Our
research and development activities are focused on:
|
·
|
the
application of our XTRAC system to the treatment of other inflammatory
skin disorders;
|
|
·
|
the
development of additional devices to further improve the phototherapy
treatments performed with our XTRAC system;
|
|
·
|
the
development of new lines of phototherapy products for medical
treatments;
|
|
·
|
the
development of new skin health and hair care
products;
|
|
·
|
the
improvement of surgical products through tissue-effect technologies
that
include laser and non-laser based technologies focused on improving
our
product and service offerings;
|
|
·
|
the
development of new lines of surgical lasers and related delivery
systems
for medical treatments; and
|
|
·
|
the
development of additional products and applications, whether in
phototherapy or surgery, by working closely with medical centers,
universities and other companies
worldwide.
|
Patents
and Proprietary Technologies
We
intend
to protect our proprietary rights from unauthorized use by third parties to
the
extent that our proprietary rights are covered by valid and enforceable patents
or are effectively maintained as trade secrets.
Patents
and other proprietary rights are an element of our business. Our policy is
to
file patent applications and to protect technology, inventions and improvements
to inventions that are commercially important to the development of our
business. As patents expire and expose our inventions to public use, we seek
to
mitigate the impact of such expirations by improvements on the inventions
embodied in the expiring patents. The patents in our Skin Care segment relate
to
use of our copper and manganese peptide-based technology for a variety of
healthcare applications, and to the composition of certain biologically active,
synthesized compounds. Our strategy has been to apply for patent protection
for
certain compounds and their discovered uses that are believed to have potential
commercial value in countries that offer significant market potential. As of
March 14, 2008, we have more than 85 domestic and foreign issued patents,
which serve to help protect the technology of our businesses in phototherapy,
skin health and hair care, and surgical products and services. To the same
purpose, we have 24 patent applications pending in the United States and
abroad.
As
a
minor part of our business, we have from time to time licensed certain of our
proprietary technology to third parties. Conversely, from time to time, we
seek
licenses from third parties for technology that can broaden our product and
service offerings, as for example a license which we secured from the Mount
Sinai School of Medicine and which granted us exclusive rights to a patent
covering the use of excimer lasers in the treatment of vitiligo. In July 2007,
we secured a license to market MD Lash Factor® eyelash conditioner.
We
also
rely on trade secrets, employee and third-party nondisclosure agreements and
other protective measures to protect our intellectual property rights pertaining
to our products and technology.
Many
of
our products and services are offered under trademarks and service marks, both
registered and unregistered. We believe our trademarks encourage customer
loyalty and aid in the differentiation of our products from competitors’
products, especially in our skin care products. Accordingly, we have registered
more than 40 of our trademarks in the United States. We have other
registrations for our skincare products in foreign jurisdictions.
Government
Regulation
Our
products and research and development activities are regulated by numerous
governmental authorities, principally the United States Food and Drug
Administration, “FDA”, and corresponding state and foreign regulatory agencies.
Any device manufactured or distributed by us will be subject to pervasive and
continuing regulation by the FDA. The Federal Food, Drug and Cosmetics Act
and
other federal and state laws and regulations govern the pre-clinical and
clinical testing, design, manufacture, use and promotion of medical devices
and
drugs, including our XTRAC system, surgical lasers and other products currently
under development by us. Product development and approval within this regulatory
framework takes a number of years and involves the expenditure of substantial
resources.
In
the
United States, medical devices are classified into three different classes,
Class I, II and III, on the basis of controls deemed reasonably necessary
to ensure the safety and effectiveness of the device. Class I devices are
subject to general controls, such as labeling, pre-market notification and
adherence to the FDA's good manufacturing practices, and quality system
regulations. Class II devices are subject to general as well as special
controls, such as performance standards, post-market surveillance, patient
registries and FDA guidelines. Class III devices are those which must
receive pre-market approval by the FDA to ensure their safety and effectiveness,
such as life-sustaining, life-supporting and implantable devices, or new devices
which have been found not to be substantially equivalent to legally marketed
devices.
Before
a
new medical device can be marketed, marketing clearance must be obtained through
a pre-market notification under Section 510(k) of the Food and Drug
Modernization Act of 1997, or the FDA Act, or through a pre-market approval
application under Section 515 of such FDA Act. The FDA will typically grant
a 510(k) clearance if it can be established that the device is substantially
equivalent to a predicate device that is a legally marketed Class I or II
device or certain Class III devices. We have received FDA 510(k) clearance
to market our XTRAC system for the treatment of psoriasis, vitiligo, atopic
dermatitis and leukoderma. Additionally, the FDA has issued clearances to
commercially market our Contact Laser System, including the laser unit, Laser
Probes and Laser Scalpels and Fiberoptic Delivery Systems, in a variety of
surgical specialties and procedures in gynecology, gastroenterology, urology,
pulmonology, general and plastic surgery, cardio-thoracic surgery, ENT surgery,
ophthalmology, neurosurgery and head and neck surgery. The FDA granted these
clearances under Section 510(k) on the basis of substantial equivalence to
other
laser or electrosurgical cutting devices that had received prior clearances
or
were otherwise permitted to be used in such areas. The range of clearances
for
our Diode laser system is similar to the range of clearances for the CLMD Nd:YAG
laser systems. We have also received FDA clearance under Section 510(k) to
market our holmium laser system, including the laser unit and fiberoptic
delivery systems, in a variety of surgical specialties and procedures in
urology, otorhinolaryngology, discectomy and percutaneous laser disc
decompression.
For
any
devices that are cleared through the 510(k) process, modifications or
enhancements that could significantly affect the safety or effectiveness, or
that constitute a major change in the intended use of the device, will require
new 510(k) submissions. In August 2003, the FDA granted 510(k) clearance for
modifications that had been made to the XTRAC laser, which we have marketed
as
the XTRAC XL Plus excimer laser system. In October 2004, the FDA granted
clearance for the Ultra™ (AL 8000) excimer laser system. We also received in
2004 510(k) marketing clearance for our Diode and CO2 surgical laser
systems.
A
pre-market approval application may be required if a proposed device is not
substantially equivalent to a legally marketed Class I or II device, or for
certain Class III devices. A pre-market approval application must be
supported by valid scientific evidence to demonstrate the safety and
effectiveness of the device, typically including the results of clinical trials,
bench tests and laboratory and animal studies. In addition, the submission
must
include the proposed labeling, advertising literature and any training
materials. The pre-market approval process can be expensive, uncertain and
lengthy, and a number of devices for which FDA approval has been sought by
other
companies have never been approved for marketing.
We
are
subject to routine inspection by the FDA and have to comply with a number of
regulatory requirements that usually apply to medical devices marketed in the
United States, including labeling regulation, good manufacturing process and
quality system requirements, medical device reporting regulation (which requires
a manufacturer to report to the FDA certain types of adverse events involving
its products), and the FDA's prohibitions against promoting products for
unapproved or off-label uses.
We
are
also subject to the Radiation Control for Health and Safety Act with laser
radiation safety regulations administered by the Center for Devices and
Radiological Health, or CDRH, of the FDA. These regulations require laser
manufacturers to file new product reports and annual reports, to maintain
quality control, product testing and sales records, to incorporate certain
design and operating features in lasers sold to end users and to certify and
label each laser sold, except those sold to private-label customers, as
belonging to one of four classes, based on the level of radiation from the
laser
that is accessible to users. Various warning labels must be affixed and certain
protective devices installed, depending on the class of product. The CDRH is
empowered to seek fines and other remedies for violations of the regulatory
requirements. To date, we have filed the documentation with the CDRH for our
laser products requiring such filing, and have not experienced any difficulties
or incurred significant costs in complying with such regulations.
We
have
received ISO 13485/EN46001 certification for our XTRAC system and our Diode,
holmium, CO2 and Nd:YAG laser systems. This certification authorizes us to
affix
a CE Mark to our products as evidence that they meet all European Community,
“EC”, quality assurance standards and compliance with applicable European
medical device directives for the production of medical devices. This will
enable us to market our approved products in all of the member countries of
the
European Union, “EU” and in other countries that accept the “CE” mark. We also
will be required to comply with additional individual national requirements
that
are outside the scope of those required by the EU. Our products have also met
the discrete requirements for marketing in various other countries. Failure
to
comply with applicable regulatory requirements can result in fines, injunctions,
civil penalties, recalls or seizures of products, total or partial suspensions
of production, refusals by foreign governments to permit product sales and
criminal prosecution.
As
to our
products in the Skin Care business segment, the Federal Food, Drug and Cosmetic
Act, and the regulations promulgated thereunder, and other federal and state
statutes govern the testing, manufacture, safety, labeling, storage,
record-keeping, advertising and promotion of cosmetic products as well. Our
products and product candidates in the Skin Care segment may be regulated by
any
of a number of divisions of the FDA and in other countries by similar health
and
regulatory authorities. The process of obtaining and maintaining regulatory
approvals for the manufacturing or marketing of our existing and potential
skin
care products is costly and time-consuming and is subject to unanticipated
delays. Regulatory requirements ultimately imposed could also adversely affect
our ability to clinically test, manufacture or market products.
In
the
United States, products that do not seek to make effectiveness claims based
on
human clinical evaluation may be subject to review and regulation under the
FDA’s cosmetic, drug or 510(k) medical device guidelines. Similar guidelines
exist for such products in other countries. Such 510(k) products, which include
wound care dressings and certain ointments and gels, must show safety and
substantial equivalency with predicate products already cleared by the FDA
to be
marketed. There can be no assurance that product applications submitted to
the
FDA or similar agencies in other countries will receive clearance to be
marketed, or that the labeling claims sought will be approved, or that, if
cleared, such products will be commercially successful or free from third-party
claims relating to the effectiveness or safety of such products.
We
are or
may become subject to various other federal, state, local and foreign laws,
regulations and policies relating to, among other things, safe working
conditions, good laboratory practices, and the use and disposal of hazardous
or
potentially hazardous substances used in connection with research and
development. Failure to obtain regulatory approvals where appropriate for our
product candidates or to attain or maintain compliance with quality system
regulations or other manufacturing requirements would have a material adverse
effect on our business, financial condition and results of
operations.
Third-Party
Reimbursement
Our
ability to market our phototherapy products successfully depends in large part
on the extent to which various third parties are willing to reimburse patients
or providers for the cost of medical procedures utilizing our treatment
products. These third parties include government authorities, private health
insurers and other organizations, such as health maintenance organizations.
Third-party payers are systematically challenging the prices charged for medical
products and services. They may deny reimbursement if they determine that a
prescribed device is not used in accordance with cost-effective treatment
methods as determined by the payer, or is experimental, unnecessary or
inappropriate. Accordingly, if less costly drugs or other treatments are
available, third-party payers may not authorize or may limit reimbursement
for
the use of our products, even if our products are safer or more effective than
the alternatives. Additionally, they may require changes to our pricing
structure and revenue model before authorizing reimbursement.
Reimbursement
systems in international markets vary significantly by country and by region
within some countries, and reimbursement approvals must be obtained on a
country-by-country basis. Many international markets have government-managed
healthcare systems that control reimbursement for new devices and procedures.
In
most markets, there are private insurance systems, as well as government-managed
systems. Our XTRAC products remain substantially without approval for
reimbursement in any international markets under either government or private
reimbursement systems. Reimbursement for the products and services provided
by
our Surgical Services and Surgical Products segments has been generally
well-established and is not viewed as an obstacle to growth in those segments.
Since the skincare products are primarily for cosmetic applications,
reimbursement is not a critical factor in growing revenues for this product
segment.
In
2007,
we continued our efforts to secure private, third-party reimbursement in our
domestic XTRAC business segment. Many private plans key their reimbursement
rates to rates set by the Centers for Medicare and Medical Services under three
distinct CPT codes based on the total skin surface area being treated. The
national rates are presently:
| · |
96920 –
designated for: the total area less than 250 square centimeters.
CMS
assigned a 2008 national payment of approximately $155.78 per
treatment;
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| · |
96921
– designated for: the total area 250 to 500 square centimeters. CMS
assigned a 2008 national payment of approximately $153.49 per treatment;
and
|
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96922
– designated for: the total area over 500 square centimeters. CMS assigned
a 2008 national payment of approximately $226.62 per
treatment.
|
The
national rates are adjusted over the states by overhead factors applicable
to
each state.
In
addition to Medicare and Medicaid, consistent domestic private healthcare
reimbursement is critical for significant growth in XTRAC system procedures.
There were more than 113,000 XTRAC procedures in 2007, 89,000 XTRAC procedures
in 2006, 60,000 XTRAC procedures in 2005 and more than 50,000 XTRAC procedures
in 2004 with the majority being covered by third-party reimbursement.
Historically, it has been our belief that a rapid increase in widespread
adoption of private healthcare reimbursement was being thwarted by a perception
that the XTRAC therapy, although widely publicized as clinically safe and
efficacious, was not economically cost-effective compared to other existing
therapies. We sponsored the completion of an economic and clinical study to
review the clinical and economic effectiveness of the XTRAC laser as a
second-step therapy for the treatment of psoriasis. The conclusions of the
study
were: there is no additional cost of adding XTRAC as second-line therapy in
a
managed care plan; XTRAC is a cost-effective second-line treatment for
mild-to-moderate plaque psoriasis; XTRAC provides the greatest number of
treatment-free days in one year among all therapies, except for intralesional
corticosteroid injections (“ICI”); XTRAC has the lowest cost per
treatment-free-day, with the exception of ICI; XTRAC has the lowest cost per
remission day among all phototherapies; and XTRAC has the highest number of
remission days among all therapies. The results of this study were compiled
in a
data compendium and distributed to all the major health insurers; the results
have also been published in a peer-review journal. In 2005 substantive progress
was made in connection with obtaining approvals for covering medically necessary
targeted UVB therapy for psoriasis. As a result of certain national insurers
approving the XTRAC excimer laser therapy in the latter part of 2005, we
initiated – and have continued in 2007 - a direct-to-consumer advertising
campaign in certain geographic regions.
In
addition to the level of insurance reimbursement that currently exists, we
were
advised in February 2007 that the technology assessment branch of the Blue
Cross
Blue Shield Association had determined that among other things, phototherapy
with the excimer laser is not an experimental use and may be used in the
treatment of up to 20% the skin surface area for psoriasis. We believe that
this
determination will positively influence some remaining subscribing private
plans
to cover treatment of psoriasis with the XTRAC laser and increase our estimated
level of reimbursement beyond the current level. In fact, Blue Shield of
California approved a favorable policy in January 2008. In addition, in 2007
a
bill was introduced in Congress, at the urging of NPF, to increase the patient’s
awareness of available treatments of psoriasis. We believe that this too should
positively influence patients suffering from psoriasis to seek
treatment.
Competition
The
market that our XTRAC system competes in is highly competitive. We compete
with
other products and methodologies used to treat the symptoms of psoriasis,
vitiligo, atopic dermatitis and leukoderma, including topical treatments,
systemic medications and other phototherapies. We believe that our XTRAC system
will favorably compete with alternative treatments for these disorders primarily
on the basis of its effectiveness, as well as on the basis of the lower
out-of-pocket costs, as compared to costs associated with alternative
treatments. Market acceptance of our XTRAC system treatment for these diseases
is dependent on our ability to establish, with the medical and patient
communities, the efficacy of our XTRAC system as a preferred treatment modality.
In addition, all or a portion of patient costs for many of the alternative
treatments are paid or are reimbursable by health insurance coverage or other
third-party payers, such as Medicaid and Medicare. Patient costs for treatments
utilizing our XTRAC system may not be initially eligible for health care
coverage or reimbursement by third-party payers until such payers approve
reimbursement. This may cause some patients or physicians to choose alternative
treatments offered by our competitors.
We
also
face direct competition from other companies, including large pharmaceutical
companies, engaged in the research, development and commercialization of
treatments for psoriasis, atopic dermatitis, vitiligo and leukoderma. In some
cases, those companies have already received FDA approval or commenced clinical
trials for such treatments. Many of these companies have significantly greater
financial resources and expertise in research and development, manufacturing,
conducting pre-clinical studies and clinical trials, and marketing than we
do.
Various
other companies are now marketing laser-based phototherapy treatment products.
In addition to one company that has received FDA clearance to market an excimer
laser for the treatment of psoriasis in the United States, there have been
at
least three foreign-based companies which market an excimer laser for the
treatment of skin disorders outside of the United States. Other devices include
pulse-dye lasers, lamp-based systems, intense pulsed systems and standard UVB
systems using fiber-optic delivery systems. We expect that other devices will
enter the market as well. All of these technologies will continue to evolve
with
time. We cannot say how much these technologies will impact us, but we
anticipate that competitors that enter the US market will predominantly not
use
a fee-per-procedure model but will use an outright sales model, and will likely
sell not on claims of superior quality, but on claims of lower prices and better
economic returns. In part, the economic returns of such non-laser systems may
be
based on the incorrect application of laser reimbursement codes to non-laser
systems. Non-laser systems are typically reimbursed at substantially lower
rates.
Competition
in the wound care, skin health and hair care markets is intense. Our competitors
include well-established pharmaceutical, cosmetic and healthcare companies
such
as Obagi, La Roche Posay, Pavonia, Declore, Murad and Allergan. These
competitors have substantially more financial and other resources, larger
research and development staffs, and more experience and capabilities in
researching, developing and testing products in clinical trials, in obtaining
FDA and other regulatory approvals, and in manufacturing, supply chain control,
marketing and distribution than we do. A number of smaller companies are also
developing or marketing competitive products. Our competitors may succeed in
developing and commercializing products or obtaining patent protection or other
regulatory approvals for products more rapidly than we can. In addition,
competitive products may be manufactured and marketed more successfully than
our
potential products. Such developments could render our existing or potential
products less competitive or obsolete and could have a material adverse effect
on our business, financial condition and results of operations.
With
regard to surgical lasers, we face substantial competition from other
manufacturers of surgical laser systems, whose identity varies depending on
the
medical application for which the surgical system is being used, and from
traditional surgical methods. Other companies are developing competitive
surgical systems and related technologies. Many of these companies are
substantially larger and have substantially greater resources than we do.
In
addition, we face competition from other surgical services companies and from
product manufacturers who may offer their products through a similar
per-procedure method. Additionally, we face substantial competition from
well-established manufacturers of non-laser products. These well-established
companies have substantially greater resources than we do and could exert
considerable competitive pressure on us.
Employees
As
of
March 14, 2008, we had 205 full-time employees, which consisted of 3 executive
officers, 11 other senior officers or managers, 69 sales and marketing staff,
84
people engaged in manufacturing of lasers and laser-related products, 8
customer-field service personnel, 4 people engaged in research and development,
8 engineers and 18 finance and administration staff. We intend to hire
additional personnel as the development of our business makes such action
appropriate. The loss of the services of key employees could have a material
adverse effect on our business. Since there is intense competition for qualified
personnel knowledgeable in our industry, no assurances can be given that we
will
be successful in retaining and recruiting needed personnel.
Our
employees are not represented by a labor union nor covered by a collective
bargaining agreement. We believe that we have good relations with our employees.
The
following discussion of risk factors contains forward-looking statements as
discussed on page 1. These risk factors may be important to understanding any
statements in this Annual Report on Form 10-K or elsewhere. Our business
routinely encounters and addresses risks, some of which may cause our future
results to be different – sometimes materially different – than we
presently anticipate.
Risks
Related to Our Business
We
have a history of losses, entertain the possibility of future losses and cannot
assure you that we will become or remain profitable.
Historically,
we have incurred significant losses and have had negative cash flows from our
phototherapy operations. Our surgical products and services business also has
generated losses in recent years. To date, we have dedicated most of our
financial resources to research and development and selling, general and
administrative expenses. As of December 31, 2007, our accumulated deficit was
approximately $94.0 million.
Our
future revenues and success depend significantly upon acceptance of our excimer
laser systems for the treatment principally of psoriasis, but also of vitiligo,
atopic dermatitis and leukoderma. Our XTRAC system for the treatment of these
conditions generates revenues, but those revenues are presently insufficient
to
generate consistent, positive cash flows from our operations in the two
XTRAC-related business segments. Our future revenues and success also depend
on
the continued growth of the revenue from the skin health and hair care products
of our skincare business and from our surgical services business and revenue
stability within our surgical products business. Our ability to market our
products and services successfully and the expected benefits to be obtained
from
our products and services may be adversely affected by a number of factors,
such
as unforeseen costs and expenses, technological changes, economic downturns,
competitive factors or other events beyond our control.
We
expect
to incur losses as we move into fiscal 2008 because we plan to continue to
spend
substantial amounts on expanding, in controlled fashion, our sales and marketing
operations in phototherapy, and particularly in increasing our customers’
effective utilization of the XTRAC system. We cannot assure you 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.
We
may fail to meet the ongoing Nasdaq listing requirements.
Nasdaq placed
our common stock on a watch list on November 19, 2007, due to the fact that
the
stock had traded for under $1.00 for more than 30 consecutive trading days.
On
March 10, 2008, we received a letter from Nasdaq stating that we were now in
compliance with Nasdaq listing requirements. If our stock price falls below
$1.00 for more than 30 consecutive trading days again, or if we fail to satisfy
any other Nasdaq listing requirements, our common stock could be delisted from
Nasdaq.
Our
ability to raise funds through issuance of our common stock may be compromised
by the fact that our stock has been put on the Nasdaq watch list because it
has
been trading for under $1.00. We cannot guarantee that market demand for our
common stock by itself or in response to our business strategy will suffice
to
take us off the watch list in timely fashion.
We
may need additional financing to maintain and expand our business, and such
financing may not be available on favorable terms, if at
all.
We
have
historically financed our activities through working capital provided from
operations, the private placement of equity securities and from lines of credit.
We believe that our cash balance, together with access to debt financing for
capital expenditures and other existing financial resources, and revenues from
sales, distribution, licensing and manufacturing relationships, should be
sufficient to meet our operating and capital requirements beyond the second
quarter of 2009. However, we may have to raise substantial additional capital
if:
|
·
|
operating
losses continue, because anticipated demand for the XTRAC system
for the
treatment of psoriasis or surgical laser systems does not meet our
current
expectations;
|
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·
|
our current line of credit, with a remaining balance of $1,672,675 at December 31, 2007, is not adequate to fund expansion of future domestic XTRAC placements; |
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we
fail to maintain existing, or develop new, customers or corporate
partners
for the marketing and distribution of our skincare products;
|
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the
geographic expansion of our surgical services is stymied by competition
and revenue increases do not materialize;
|
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·
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we
need to maintain or accelerate favorable, but costlier, growth of
our
revenues;
|
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·
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changes
in our research and development plans necessitate unexpected, large
future
expenditures; or
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costs to defend existing and unknown future litigation exceed our current planned resources. |
If
we need additional financing, we cannot assure you that such financing will
be
available on favorable terms, if at all. In addition, if we raise additional
financing via issuance of securities, such future issuance of our securities
may
result in substantial dilution to existing stockholders. If we need funds and
cannot raise them on acceptable terms, we may not be able
to:
|
·
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execute
our growth plan for the XTRAC system, surgical services and skincare
products;
|
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expand
our manufacturing facilities, if necessary, based on increased demand
for
the XTRAC system or other surgical products or new skincare products,
which may be introduced;
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take
advantage of future opportunities, including synergistic
acquisitions;
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·
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respond
to customers, competitors or violators of our proprietary and contractual
rights; or
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remain
in operation.
|
Our
laser treatments of psoriasis, vitiligo, atopic dermatitis and leukoderma,
our
skincare products and our surgical laser products and any of our future products
or services may fail to gain market acceptance, which could adversely affect
our
competitive position.
No
independent studies with regard to the feasibility of our proposed business
plan
have been conducted by third parties with respect to our present and future
business prospects and capital requirements. We have generated limited
commercial distribution for our XTRAC system and our other products. Skincare
products sales are dependent on existing strategic partners for distributing
and
marketing our products. Though we were successful in assigning our spa business
to Universal Business Solutions in December 2007, we may still be unsuccessful
in continuing existing, or developing new, strategic partners in order to
maintain or expand the markets for the skincare business’ existing or future
products. Our surgical services may fail to gain market acceptance in new
territories into which we expand. In addition, our infrastructure to enable
such
expansion, though stronger than in the past, is still limited.
Even
if
adequate financing is available and our products are ready for market, we cannot
assure you that our products and services will find sufficient acceptance in
the
marketplace to fulfill our long and short-term goals. Our efforts to help
physicians increase patient awareness and interest in the XTRAC system may
fail,
as may also our efforts through our clinical specialists to improve and increase
physicians’ effective utilization of the XTRAC system.
We
also
face a risk that other companies in the market for dermatological products
and
services may be able to provide dermatologists a higher overall yield on
investment and therefore compromise our ability to increase our base of users
and ensure they engage in optimal usage of our products. If, for example, such
other companies have products (such as Botox, or topical creams for disease
management) that require less time commitment from the dermatologist and yield
an attractive return on the dermatologist’s time and investment, we may find
that our efforts to increase our base of users is hindered, or even if we place
a laser with a dermatologist, we may find that insufficient time is devoted
to
increasing patient awareness of laser treatment of psoriasis.
While
we
have engaged in clinical studies for our psoriasis treatment, and based on
these
studies, we have gained FDA clearance, appropriate CPT reimbursement codes
for
treatment and suitable reimbursement rates from CMS for those codes, we may
face
other hurdles to market acceptance if, for example, practitioners in significant
numbers wait to see longer-term studies or if it becomes necessary to conduct
studies corroborating the role of the XTRAC system as a second-line therapy
for
treating psoriasis or if patients do not elect to undergo psoriasis treatment
using the XTRAC system. We have not had sufficient time to observe the long-term
effectiveness or potential side effects of our treatment system for psoriasis,
vitiligo, atopic dermatitis or leukoderma nor to gauge fully what marketing
and
sales programs, if any, are effective in increasing patients’ demand for the
treatment of psoriasis with the XTRAC system.
We
have
designed the XTRAC system so that a properly in-serviced medical technician
in a
physician’s office may, under the physician’s supervision, safely and
effectively administer treatments to a patient. In fact, the CMS reimbursement
rates at the lower labor rates achieved through such delegation. Nevertheless,
whether a treatment may be delegated, and if so to whom and to what extent,
are
matters that may vary state by state, as these matters are within the province
of the state medical boards. In states that may be more restrictive in such
delegation, a physician may decline to adopt the XTRAC system into his or her
practice, deeming it to be fraught with too many constraints and finding other
outlets for the physician’s time and staff time to be more remunerative. There
can be no assurance that we will be successful in persuading such medical boards
that a liberal standard for delegation is appropriate for the XTRAC system,
based on its design for ease and safety of use. If we are not successful, we
may
find that even if a geographic region has wide insurance reimbursement, the
region’s physicians may decline to adopt the XTRAC system into their
practices.
We
therefore cannot assure you that the marketplace will be receptive to our
excimer laser technology, skincare products, or our surgical services over
competing products, services and therapies or that a cure will not be found
for
the underlying diseases we are focused on treating. Failure of our products
and
surgical services to achieve market acceptance could have a material adverse
effect on our business, financial condition and results of
operations.
Our
success is dependent on intellectual property rights held by us, and our
business will be adversely affected by direct competition if we are unable
to
protect these rights.
Our
success will depend, in part, on our ability to maintain and defend our patents.
However, we cannot guarantee that the technologies and processes covered by
our
patents will not be found to be obvious or substantially similar to prior work,
which could render these patents unenforceable. Moreover, as our patents expire,
competitors may utilize the technology found in such patents to commercialize
their own laser systems. While we seek to offset the losses relating to expiring
patents by securing additional patents on critical, commercially desirable
improvements to the inventions of the expiring patents, there can be no
assurance that we will be successful in securing such additional patents, or
that such additional patents will adequately offset the effect of the expiring
patents.
Of
particular note is US Patent No. 4,891,818, the so-called “818 Patent”, which
covers, among other things, the design of the gas chamber in the XTRAC laser.
The ‘818 Patent expired on August 31, 2007; it no longer serves as a barrier to
entry to the relatively reimbursement-rich US market. The additional patent
rights we seek may serve less to bar competitors from entry and may serve more,
when aggregated with other clinical and competitive strengths, to differentiate
and distinguish our product (e.g. the Ultra), in both its utility and its range
of applications, from those of competitors. If we unable through our
technological innovations to preserve our proprietary rights, our ability to
market the XTRAC system could be materially and adversely affected.
A
U.S.
patent relating to a copper peptide compound manufactured and used in products
distributed by Neutrogena under the Neutrogena license agreement expired on
February 5, 2005. Upon expiration of this patent, the agreement specifies that
lower royalty percentages from sales of such products be used for the remaining
term, the impact of which is a reduction in the average effective royalty rate.
The actual amount of royalty income recognized in future periods is dependent
upon the royalty percentages in effect during the period and the actual
applicable sales reported by Neutrogena, which can vary from quarter to quarter.
The expiration of the patent would also allow others, including Neutrogena,
to
apply the technology covered by that patent in their products.
We
have
licensed marketing rights to MD Lash Factor™ eyelash conditioner. Allergan, Inc.
has brought a patent infringement suit under U.S Patent No. 6,262,105 (the
“’105
Patent”) against us and several other companies which also market eyelash
conditioners. While we believe that Allergan is wrong in its interpretation
of
the ‘105 Patent, we cannot guarantee that a court will agree with our
assessment. It has been reported to us that Allergan intends to introduce its
own eyelash conditioner, possibly in connection with efforts with Clinique
to
tap the market of physicians, and has another patent pending for its own eyelash
conditioner. Allergan has greater resources than we do to maintain a
lengthy infringement suit.
Trade
secrets and other proprietary information which are not protected by patents
are
also critical to our business. We attempt to protect our trade secrets by
entering into confidentiality agreements with third parties, employees and
consultants. However, these agreements can be breached and, if they are and
even
if we are able to prove the breach or that our technology has been
misappropriated under applicable state law, there may not be an adequate remedy
available to us. In addition, costly and time-consuming litigation may be
necessary to enforce and determine the scope of our proprietary rights; even
should we prevail in such litigation, the party we prevail over may have scant
resources available to satisfy a judgment.
Further,
our skincare business seeks to establish customer loyalty, in part, by means
of
our use of trademarks. It can be difficult and costly to defend trademarks
from
encroachment or misappropriation overseas. Third parties may also challenge
the
validity of certain of our trademarks. In either eventuality, our customers
may
become confused and direct their purchases to competitors.
Third
parties may independently discover trade secrets and proprietary information
that allow them to develop technologies and products that are substantially
equivalent or superior to our own. Without the protection afforded by our
patent, trade secret and proprietary information rights, we may face direct
competition from others commercializing their products using our technology,
which may have a material adverse effect on our business and our
prospects.
Defending
against intellectual property infringement claims could be time-consuming and
expensive, and if we are not successful, could cause substantial expenses and
disrupt our business.
We
cannot
be sure that the products, services, technologies and advertising we employ
in
our business do not or will not infringe valid patents, trademarks, copyrights
or other intellectual property rights held by third parties. We may be subject
in the ordinary course of our business to legal proceedings and claims relating
to the intellectual property or derivative rights of others. Any legal action
against us claiming damages or seeking to enjoin commercial activities relating
to the affected products or our methods or processes could have a material
adverse effect on our business and prospects by:
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requiring
us, or our collaborators, to obtain a license to continue to use,
manufacture or market the affected products, methods or processes,
and
such a license may not be available on commercially reasonable terms,
if
at all;
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preventing
us from making, using or selling the subject matter claimed in patents
held by others and subject us to potential liability for
damages;
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consuming
a substantial portion of our managerial and financial resources;
or
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resulting
in litigation or administrative proceedings that may be costly or
not
covered by our insurance policies, whether we win or
lose.
|
Our
success depends on third-party reimbursement of patients' costs for our XTRAC
system, which could result in potentially reduced prices or reduced
demand.
Our
ability to market the XTRAC system and other treatment products successfully
will depend in large part on the extent to which various third parties are
willing to reimburse patients or providers for the costs of medical procedures
utilizing such products. These third parties include government authorities,
private health insurers and other organizations, such as health maintenance
organizations. Third-party payers are systematically challenging the prices
charged for medical products and services. They may deny reimbursement if they
determine that a prescribed device is not used in accordance with cost-effective
treatment methods as determined by the payer, or is experimental, unnecessary
or
inappropriate. Further, although third-parties may approve reimbursement, such
approvals may be under terms and conditions that discourage use of the XTRAC
laser system. Accordingly, if less costly drugs or other treatments are
available, third-party payers may not authorize or may limit reimbursement
for
the use of our products, even if our products are safer or more effective than
the alternatives.
Although
we have received reimbursement approvals from an increasing number of private
healthcare plans, we cannot give assurance that private plans will continue
to
adopt or maintain favorable reimbursement policies or to accept the XTRAC system
in its clinical role as a second-line therapy in the treatment of psoriasis.
Additionally, third-party payers may require further clinical studies or changes
to our pricing structure and revenue model before authorizing
reimbursement.
As
of
March 14, 2008, we estimate, based on published coverage policies and on payment
practices of private and Medicare insurance plans, that more than 90% of the
insured population in the United States is covered by insurance coverage or
payment policies that reimburse physicians for using the XTRAC system for
treatment of psoriasis. Based on these reports and estimates, we are continuing
the implementation of a roll-out strategy for the XTRAC system in the United
States in selected areas of the country where reimbursement is widely available.
The success of the roll-out depends on increasing physician and patient demand
for the treatment. We can give no assurance that health insurers will not
adversely modify their reimbursement policies for the use of the XTRAC system
in
the future.
We
intend
to seek coverage and reimbursement for the use of the XTRAC system to treat
other inflammatory skin disorders, after additional clinical studies are
initiated. There can be no assurances that we will be in position to expand
coverage for vitiligo or to seek reimbursement for the use of the XTRAC system
to treat atopic dermatitis or leukoderma, or, if we do, that any health insurers
will agree to any reimbursement policy.
Cost
containment measures and any general healthcare reform could adversely affect
our ability to market our products.
Cost
containment measures instituted by healthcare providers and insurers and any
general healthcare reform could affect our ability to receive revenue from
the
use of our XTRAC system or to market our skincare products, and surgical laser
products, and may have a material adverse effect on us. We cannot predict the
effect of future legislation or regulation concerning the healthcare industry
and third-party coverage and reimbursement on our business. In addition,
fundamental reforms in the healthcare industry in the United States and the
European Union continue to be considered, although we cannot predict whether
or
when any healthcare reform proposals will be adopted and what impact such
proposals might have on demand for our products.
The
XTRAC system will continue to be the most promising product that is currently
marketed by us. If physicians do not adopt the XTRAC system, we will not achieve
anticipated revenue growth.
We
commercially introduced the XTRAC system in August 2000, but decelerated that
introduction while we sought appropriate CPT codes and suitable rates of
reimbursement from CMS. After we obtained CPT codes and reimbursement rates
from
CMS for the CPT codes, we began a roll-out strategy for the XTRAC system in
the
United States. To achieve increasing revenue, this product must also gain
recognition and adoption by physicians who treat psoriasis and other skin
disorders. The XTRAC system represents a significant departure from conventional
psoriasis treatment methods. We believe that the recognition and adoption of
the
XTRAC system would be expedited if there were long-term clinical data
demonstrating that the XTRAC system provides an effective and attractive
alternative to conventional means of treatment for psoriasis. Currently,
however, there are still only limited peer-reviewed clinical reports and
short-term clinical follow-up data on the XTRAC system. Physicians are
traditionally cautious in adopting new products and treatment practices,
partially due to the anticipation of liability risks and partially due to
uncertainty of third-party reimbursement. If physicians do not adopt the XTRAC
system, we may never achieve significant revenues or profitability.
If
the effectiveness and safety of our products are not supported by long-term
data, our revenues could decline.
Our
products may not be accepted if we do not produce clinical data supported by
the
independent efforts of clinicians. We received clearance from the FDA for the
use of the XTRAC system to treat psoriasis based upon our study of a limited
number of patients. Safety and efficacy data presented to the FDA for the XTRAC
system was based on studies on these patients. For the treatment of vitiligo,
atopic dermatitis and leukoderma, we have received clearance from the FDA for
the use of the XTRAC system based primarily on equivalence of predicate devices;
we may discover that physicians will expect clinical data on such treatments
with the XTRAC system. We may find that data from longer-term psoriasis patient
follow-up studies may be inconsistent with those indicated by our relatively
short-term data. If longer-term patient studies or clinical experience indicate
that treatment with the XTRAC system does not provide patients with sustained
benefits or that treatment with our product is less effective or less safe
than
our current data suggests, our revenues could decline. We can give no assurance
that we may find that our data is not substantiated in studies involving more
patients; in such a case we may never achieve significant revenues or
profitability.
Any
failure in our customer education efforts could significantly reduce product
marketing.
It
is
important to the success of our marketing efforts to educate physicians and
technicians in the techniques of using the XTRAC system. We rely on physicians
to spend their time and money to attend our pre-sale educational sessions.
Positive results using the XTRAC system are highly dependent upon proper
physician and technician technique. If physicians and technicians use the XTRAC
system suboptimally or improperly, they may have unsatisfactory patient outcomes
or cause patient injury, which may give rise to negative publicity or lawsuits
against us, any of which could have a material adverse effect on our reputation
as a medical device company and our revenues and profitability.
Similarly,
it is important to our success that we educate and persuade hospitals, surgery
centers and practitioners of the clinical and economic benefits of our surgical
products and services. If we fail to educate and persuade our customers, we
may
suffer adversely in our reputation and our revenues and our
profitability.
If
revenue from a significant customer continues to decline, we may have difficulty
replacing the lost revenue.
Neutrogena,
one of the customers for the skin health and hair care products segment that
we
acquired from ProCyte, used to account for a significant portion of our net
revenue in that business segment. ProCyte’s net revenues from Neutrogena in 2004
were $2,768,072, or approximately 20.8% of ProCyte’s gross revenues of
$13,320,200 (revenues which pre-date our acquisition and which are not reflected
in our financial statements). For the year ended December 31, 2005, Skin
Care’s
(ProCyte) net revenues from Neutrogena were $1,421,946, or approximately
10.9%
of Skin Care’s (ProCyte) gross revenues of $13,011,694 (revenues which are
reflected in our financial statements to the extent that they were earned
since
March 19, 2005). For the year ended December 31, 2006, Skin Care’s net revenues
from Neutrogena were $972,400, approximately 7.7% of Skin Care’s gross revenues
of $12,646,910. For the year ended December 31, 2007, Skin Care’s net revenues
from Neutrogena were $598,058, approximately 4.4% of Skin Care’s gross revenues
of $13,471,973. We receive royalty revenues on sales of products by Neutrogena
under the terms of a license agreement with
Neutrogena. The royalties from Neutrogena for 2004 and for our fiscal years
ended December 31, 2005, December 31, 2006 and December 31, 2007, were
$1,214,073, $609,946, $300,000 and $275,000, respectively. The license agreement
expires in April 2010. A U.S. patent related to the Neutrogena license agreement
expired February 5, 2005, the effect of which was a reduction in the percentage
paid as a royalty during the remaining royalty period under the license
agreement. We also receive revenues from sales of copper peptide compound
to
Neutrogena pursuant to a related supply agreement. ProCyte’s sales to Neutrogena
under the supply agreement for 2004 and for our fiscal years ended December
31,
2005, December 31, 2006 and December 31, 2007, were $1,553,999, $812,000,
$672,400 and $323,058, respectively. To date, we have not found any one customer
which replaces the level of business which Neutrogena once represented to
ProCyte.
Excluding
niche marketing efforts, the Skin Care segment targets its sales in the U.S.
market to physicians, who then mark the products up for sale to their patients.
No single practice in itself is generally responsible for a significant
proportion of our sales. However, a number of practices, specializing in hair
transplants, are united under the management of a single group, and this group
accounts for a disproportionate share of our hair care products aimed at the
care of a scalp that has received a hair transplant. Revenues from this customer
were $1,218,698 in 2007 and $1,170,892 in 2006. We find as well that a few
physicians re-sell our products not just to their own patients, but also at
discounted prices on the internet. These practices undercut the sales of other
physicians and violate our internet sales policy, but it can be difficult to
enforce the sales policy.
In
the
International Dermatology Equipment segment (as well as in the Surgical Products
segment), we depend on the international arena for a material portion of our
sales on several key distributors, as for example our master distributor in
the
Pacific Rim. If we lose one of these distributors, our sales of phototherapy
and
surgical lasers are likely to suffer in the short term.
In
the
Surgical Services segment, we find that our model works best if we have several
accounts in a territory that have sufficient volume to allow us to be efficient
in the delivery of our services. If we lose one of these anchor accounts, then
we may become less efficient and therefore less competitive.
In
order
to pursue a strategic partnership, we have acted as contract developer of a
system designed to detect cancerous cells in human tissue and act as an OEM
manufacturer of surgical lasers and delivery systems and diode laser systems
for
AngioDynamics. This work exposes us to heightened financial risk and
technological uncertainties, and also exposes us to the business risks faced
by
our OEM customers. In addition, OEM work is usually limited to a contracted
period of time, at the end of which there may be no extension or renewal. If
we
fail to obtain a renewal or extension, or if we incur losses associated with
the
development projects we may have a substantive impact on our financial
statements.
The
loss
or reduction of business from any of our significant customers or strategic
partners in that business segment, Neutrogena in particular, or the failure
to
develop new significant customers or strategic partners could have a material
adverse effect on the results of operations and our overall financial
condition.
We
may not be able to protect our intellectual property rights outside the United
States.
Intellectual
property law outside the United States is uncertain and in many countries is
currently undergoing review and revision. The laws of some countries do not
protect our intellectual property rights to the same extent as laws in the
United States. The intellectual property rights we enjoy in one country or
jurisdiction may be rejected in other countries or jurisdictions, or, if
recognized there, the rights may be significantly diluted. It may be necessary
or useful for us to participate in proceedings to determine the validity of
our
foreign intellectual property rights, or those of our competitors, which could
result in substantial cost and divert our resources, efforts and attention
from
other aspects of our business. If we are unable to defend our intellectual
property rights internationally, we may face increased competition outside
the
United States, which could materially and adversely affect our future business,
prospects, operating results and financial results and financial
condition.
Our
failure to obtain or maintain necessary FDA clearances or approvals, or
equivalents there of in relevant foreign markets, could hurt our ability to
distribute and market our products.
Our
laser
products are considered medical devices and are subject to extensive regulation
in the United States and in foreign countries where we intend to do business.
In
addition, certain of our skincare products and product candidates may be
regulated by any of a number of divisions of the FDA and in other countries
by
similar health and regulatory authorities. Unless an exemption applies, each
medical device that we wish to market in the United States and certain skincare
products that we may wish to market must first receive either 510(k) clearance
or pre-market approval from the FDA. Either process can be lengthy and
expensive. The FDA's 510(k) clearance process may take from four to twelve
months, or longer. The pre-market application approval process is much more
costly, lengthy and uncertain. It may take one to three years or even longer.
Delays in obtaining regulatory clearance or approval could adversely affect
our
revenues and profitability. Although we have obtained 510(k) clearances for
our
XTRAC system for use in treating psoriasis, vitiligo, atopic dermatitis and
leukoderma, and extensive 510(k) clearances for our surgical products, our
clearances may be subject to revocation if post-marketing data demonstrates
safety issues or lack of effectiveness. Similar clearance processes may apply
in
foreign countries. Further, more stringent regulatory requirements or safety
and
quality standards may be issued in the future with an adverse effect on our
business.
The
FDA
is currently conducting a limited review of our MD Lash Factor™ eyelash
conditioner to determine if it contains bimatoprost as an active ingredient.
Products that contain bimatoprost require a separate regulatory process for
application. To date, we believe we have established to the satisfaction of
the
FDA that the prostaglandin analogue in MD Lash Factor™ is not bimatoprost, which
is the active ingredient in Allergan’s FDA-approved drug Lumigan, used for
treatment of certain types of glaucoma. In November 2007, the FDA had seized
a
competitor’s eyelash conditioner that contained bimatoprost. This illustrates
the fact that we and every other company subject to FDA regulation faces a
risk
that product believed to conform to regulatory requirements may be challenged
by
the FDA and possibly found not to meet such requirements.
Although
we believe that we are in compliance with all material applicable regulations
of
the FDA, current regulations depend heavily on administrative interpretation.
We
are also subject to periodic inspections by the FDA and other third party
regulatory groups. Future interpretations made by the FDA or other regulatory
bodies, with possible retroactive effect, may vary from current interpretations
and may adversely affect our business and prospects.
Our
market acceptance in international markets require regulatory approvals from
foreign governments and may depend on third party reimbursement of participants
cost.
We
have
introduced our XTRAC system into markets in more than 30 countries in Europe,
the Middle East, the Far East and Southeast Asia, and in Australia, South Africa
and parts of Central and South America. We intend to expand the number of
countries in these markets where we distribute our products. We cannot be
certain that our distributors will be successful in marketing XTRAC systems
in
these or other countries or that our distributors will purchase XTRAC systems
beyond their current contractual obligations or in accordance with our
expectations.
Underlying
our approvals in a number of countries are our quality systems. We are regularly
audited on the compliance of our quality systems with applicable requirements,
which can be extensive and complex and subject to change due to evolving
interpretations and changing requirements. Adverse audit findings could
negatively affect our ability to market our products.
Even
if
we obtain and maintain the necessary foreign regulatory registrations or
approvals, market acceptance of our products in international markets may be
dependent, in part, upon the availability of reimbursement within applicable
healthcare payment systems. Reimbursement and healthcare payment systems in
international markets vary significantly by country, and include both
government-sponsored healthcare and private insurance. We may seek international
reimbursement approvals for our products, but we cannot assure you that any
such
approvals will be obtained in a timely manner, if at all. Failure to receive
international reimbursement approvals in any given market could have a material
adverse effect on the acceptance or growth of our products in that market or
others.
We
have limited marketing experience, and our failure to build and manage our
marketing force or to market and distribute our products effectively would
hurt
our revenues and profits.
There
are
significant risks involved in building and managing our sales and marketing
force and marketing our products, including our ability:
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to
hire, as needed, a sufficient number of qualified sales and marketing
people with the skills and understanding to market the XTRAC system,
our
skincare products and our surgical products services
effectively;
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to
adequately train our sales and marketing force in the use and benefits
of
our products and services, making them more effective promoters;
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to
set the prices and other terms and conditions for treatments using
an
XTRAC system and our surgical services in a complex legal environment
so
that they will be accepted as attractive and appropriate alternatives
to
conventional service modalities and treatments; and
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to
cope with employee turnover among the sales force in the skincare
business, which is highly competitive for talented sales
representatives.
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To
increase acceptance and utilization of our XTRAC-system, we may have to expand
our sales and marketing programs in the United States. While we may be able
to
draw on currently available personnel within our organization to meet this
need,
we also expect that we will have to increase the number of representatives
devoted to the sales and marketing programs and broaden, through such
representatives, the talents we have at our disposal. In some cases, we may
look
outside our organization for assistance in marketing our products. We have
relatively limited marketing experience and cannot predict whether the
anticipated sales and marketing programs will be successful, either in design
or
implementation.
In
similar fashion, we cannot predict how successful we may be in marketing our
skincare products or surgical services in the United States, nor can we predict
the success of new skincare or surgical products that we may introduce. There
are, for example, skincare products and diode and CO2 lasers already in the
market against which our comparable products must compete. No assurance can
be
given that we will be successful in marketing and selling our skin health and
hair care products or our diode and CO2 lasers.
We
may encounter difficulties manufacturing our products in commercial quantities,
which could adversely impact the rate at which we grow.
We
may
encounter difficulties manufacturing our products because we have limited
experience manufacturing our products in significant commercial quantities;
and
because we will, in order to increase our manufacturing output significantly,
have to attract and retain qualified employees, who are in short supply, for
assembly and testing operations.
Although
we believe that our current manufacturing facilities are adequate to support
our
commercial manufacturing activities for the foreseeable future, we may be
required to expand or restructure our manufacturing facilities to increase
capacity substantially. If we are unable to provide customers with high-quality
products in a timely manner, we may not be able to achieve market acceptance
for
our XTRAC system, maintain the benefits of vertical integration in the delivery
of our surgical services or achieve market acceptance and growth for our
skincare products. Our inability to manufacture or commercialize our devices
successfully could have a material adverse effect on our revenue.
We
may have difficulty managing our growth.
If
additional private carriers approve favorable reimbursement policies for
psoriasis (as for example Blue Shield did in California in January 2008) and
our
marketing programs are successful in increasing utilization of the XTRAC system,
we expect to experience growth in the number of our employees and customers
and
the scope of our operations. This growth may place a strain on our management
and operations. Our ability to manage this growth will depend upon our ability
to broaden our management team, attract, hire and retain skilled employees
and
the ability of our officers and key employees to continue to implement and
improve our operational, financial and other systems, to manage multiple,
concurrent customer relationships and to respond to increasing compliance
requirements. Our future success is heavily dependent upon achieving such growth
and acceptance of our products. If we cannot scale our business appropriately
or
otherwise adapt to anticipated growth and complexity and new product
introductions, a key part of our business strategy may not be
successful.
We
are reliant on a limited number of suppliers for production of key products.
Production
of our XTRAC system requires specific component parts obtained from our
suppliers. Production of our surgical laser systems requires some component
parts that will become harder to procure, as the design of a system ages.
Similarly, our skincare products may require compounds that can be efficiently
produced only by a limited number of suppliers. While we believe that we could
find alternative suppliers, in the event that our suppliers fail to meet our
needs, a change in suppliers or any significant delay in our ability to have
access to such resources would have a material adverse effect on our delivery
schedules, business, operating results and financial condition.
Our
failure to respond to rapid changes in technology and its applications and
intense competition in the medical devices industry or the development of a
cure
for skin conditions treated by our products could make our treatment system
obsolete.
The
medical devices industry is subject to rapid and substantial technological
development and product innovations. To be successful, we must respond to new
developments in technology, new applications of existing technology and new
treatment methods. Our response may be thwarted if we require, but cannot
secure, rights to essential third-party intellectual property. In the surgical
services segment, we have faced declining margins partly because we are
obligated to purchase equipment demanded by the customers, but manufactured
by
third parties who hold intellectual property in such equipment. We compete
against numerous companies offering alternative treatment systems to ours,
some
of which have greater financial, marketing and technical resources to utilize
in
pursuing technological development and new treatment methods. Our financial
condition and operating results could be adversely affected if our medical
devices fail to compete favorably with these technological developments, or
if
we fail to be responsive on a timely and effective basis to competitors’ new
devices, applications, treatments or price strategies. The development of a
cure
for psoriasis, vitiligo, atopic dermatitis or leukoderma would eliminate the
need for our XTRAC system for these diseases and would require us to focus
on
other uses of our technology, which would have a material adverse effect on
our
business or prospects.
In
addition, competition in the skin health and hair care markets is intense.
Our
skincare competitors include well-established pharmaceutical, cosmetic and
healthcare companies such as Obagi, La Roche Posay, Pevonia, Declore, Murad
and
Allergan, as we have seen with respect to MD Lash Factor™. These competitors
have substantially more financial and other resources, larger research and
development staffs, and more experience and capabilities in researching,
developing and testing products in clinical trials, in obtaining FDA and other
regulatory approvals and in manufacturing, marketing and distribution than
we
do. Further, a number of smaller companies are developing or marketing
competitive products. Our skincare competitors may succeed in developing and
commercializing products or obtaining patent protection or other regulatory
approvals for products more rapidly than we can. Competitive products may be
manufactured and marketed more successfully than our potential skincare
products. Such developments could render our existing or potential skincare
products less competitive or obsolete and could have a material adverse effect
on our business, financial condition and results of operations.
As
we
develop new products or improve our existing products, we may accelerate the
economic obsolescence of the existing, unimproved products, and their
components. The obsolescent products and related components may have little
to
no resale value, leading to an increase in the reserves we have against our
inventory. Likewise, there is a risk that the new products or improved existing
products may not achieve market acceptance and therefore also lead to an
increase in the reserves against our inventory.
Our
products may be found defective or physicians and technicians may misuse
our
products and damages imposed on us may exceed our insurance coverage, or
we may
be subject to claims that are not covered by insurance.
Product
returns and the potential need to remedy defects or provide replacement products
or parts for items shipped in volume could result in substantial costs and
have
a material adverse effect on our business and results of operations. The
clinical testing, manufacturing, marketing and use of our products and
procedures may also expose us to product liability claims. In addition, the
fact
that we train technicians whom we do not supervise in the use of our XTRAC
system when patients are treated and that we train and provide our technicians
as part of our surgical services business may expose us to third-party claims
if
those doing the training are accused of providing inadequate training or if
a
technician is accused of negligently applying such training. We presently
maintain liability insurance with coverage limits of at least $5,000,000 per
occurrence. However, continuing insurance coverage may not be available at
an
acceptable cost, if at all. We thus may not be able to obtain insurance coverage
that will be adequate to satisfy a liability that may arise. Regardless of
merit
or eventual outcome, product liability claims may result in decreased demand
for
a product, injury to its reputation, withdrawal of clinical trial volunteers
and
loss of revenues. As a result, regardless of whether we are insured, a product
liability claim or product recall may result in losses that could have a
material adverse effect upon our business, financial condition and results
of
operations.
Similarly,
we also may be subjected to third-party claims in the course of our business
for
which we have no insurance coverage. If we should be found liable for any such
claim, we may suffer a material adverse effect on the business.
If
we use hazardous materials in a manner that causes injury or violates laws,
our
business and operations may suffer.
Our
XTRAC
system utilizes a xenon chloride gas mixture under high pressure, which is
extremely corrosive. While methods for proper disposal and handling of this
gas
are well-known, we cannot completely eliminate the risk of accidental
contamination, which could cause:
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an
interruption of our research and development
efforts;
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injury
to our employees, physicians, technicians or patients that results
in the
payment of damages; or
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liabilities
under federal, state and local laws and regulations governing the
use,
storage, handling and disposal of these materials and specified waste
products.
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From
time
to time, customers return surgical products that appear not to have performed
to
specification. Such products must be decontaminated before being returned to
us.
If they are not, our employees may be exposed to dangerous
diseases.
We
depend on our executive officers and key personnel to implement our business
strategy and could be harmed by the loss of their
services.
We
believe that our growth and future success will depend in large part upon the
skills of our management and technical team. In particular, our success depends
in part upon the continued service and performance of:
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Jeffrey
F. O’Donnell, President and Chief Executive Officer;
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Dennis
M. McGrath, Chief Financial Officer;
and
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Michael
R. Stewart, Executive Vice President and Chief Operating
Officer;
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Although
we have employment agreements with Mr. O’Donnell, Mr. McGrath, and Mr.
Stewart, the loss of the services of one or more of these executive officers
could adversely affect our ability to develop and introduce our new
products.
The
competition for qualified personnel in the laser and skincare industries is
intense, and we cannot assure you that we will be able to retain our existing
key personnel or to attract additional qualified personnel. In addition, we
do
not have key-person life insurance on any of our employees. The loss of our
key
personnel or an inability to continue to attract, retain and motivate key
personnel could adversely affect our business.
We
may be unsuccessful in integrating any business we may acquire with our other
business segments.
As
a part
of our strategy to grow our business, we seek to make strategic acquisitions
of,
or significant investments in, complementary companies, products or
technologies. We may not be successful in the future in identifying companies
that meet our acquisition criteria. The failure to identify such companies
may
limit the rate at which we are able to grow our business. Furthermore, any
future acquisitions that we do undertake could be accompanied by risks such
as:
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Difficulties
in integrating the operations and personnel of acquired
companies;
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| · | Diversion of our management's attention from ongoing business concerns; |
| · | Our potential inability to maximize our financial and strategic position through the successful incorporation of acquired technology and rights into our products and services; |
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Additional
expense associated with amortization of acquired
assets;
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Maintenance
of uniform standards, controls, procedures and policies;
and
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Impairment
of existing relationships with employees, suppliers and customers
as a
result of the integration of new management
personnel.
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We
cannot
guarantee that we will be able to successfully integrate any business, products,
technologies or personnel that we might acquire in the future, and our failure
to do so could harm our business.
In
addition, we may acquire additional companies in the medical products and
services industry. Accordingly, in the ordinary course of our business, we
regularly consider, evaluate and enter into negotiations related to potential
acquisition opportunities. We may pay for these acquisitions in cash or
securities, including equity securities, or a combination of both. We cannot
assure you that attractive acquisition targets will be available at reasonable
prices, that we will have sufficient authorized but unissued securities
available to effect an acquisition, or that we will be successful in any such
transaction. Acquisitions involve a number of special risks,
including:
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diversion
of our management’s attention;
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integration
of the acquired business with our business;
and
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unanticipated
legal liabilities and other circumstances or
events.
|
Delaware
law and our charter documents have anti-takeover provisions that could delay
or
prevent actual and potential changes in control, even if they would benefit
stockholders.
We
are
subject to Section 203 of the Delaware General Corporation Law, which
prohibits a business combination between a corporation and an interested
stockholder within three years of the stockholder becoming an interested
stockholder, except in limited circumstances. In addition, our bylaws contain
certain provisions which require stockholders' actions to be taken at meetings
and not by written consent, and also require supermajority votes of stockholders
to amend our bylaws and to notice special meetings of stockholders. These
anti-takeover provisions could delay or prevent actual and potential changes
in
control, even if they would benefit our stockholders.
Potential
fluctuations in our operating results could lead to fluctuations in the market
price for our common stock.
Our
results of operations are expected to fluctuate significantly from
quarter-to-quarter, depending upon numerous factors, including:
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healthcare
reform and reimbursement policies;
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demand
for our products;
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changes
in our pricing policies or those of our
competitors;
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increases
in our manufacturing costs;
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the
number, timing and significance of product enhancements and new product
announcements by ourselves and our competitors;
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the
termination or expiration of significant royalty-generating licensing
contracts to which we are party;
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the
expiration of certain of our key
patents;
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our
ability to develop, introduce and market new and enhanced versions
of our
products on a timely basis considering, among other things, delays
associated with the FDA and other regulatory approval processes and
the
timing and results of future clinical trials;
and
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product
quality problems, personnel changes, and changes in our business
strategy.
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Our
quarter-to-quarter operating results could also be affected by the timing and
usage of individual laser units in the treatment of patients, since our revenue
model for the XTRAC system and for our surgical services is based on a
payment-per-usage plan.
Variations
in the above operating factors could lead to significant fluctuations in the
market price of our stock.
Our
stock price has been and continues to be volatile.
The
market price for our common stock could fluctuate due to various factors. These
factors include:
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announcements
related to our efforts to secure favorable reimbursement policies
from
private carriers concerning the treatment of psoriasis with the XTRAC
system or to our efforts to increase utilization of the XTRAC
system;
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acquisition-related
announcements;
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announcements
by us or our competitors of new contracts, technological innovations
or
new products;
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changes
in government regulations;
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fluctuations
in our quarterly and annual operating results;
and
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general
market conditions.
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In
addition, the stock markets have, in recent years, experienced significant
price
fluctuations. These fluctuations often have been unrelated to the operating
performance of the specific companies whose stock is traded. Market
fluctuations, as well as economic conditions, have adversely affected, and
may
continue to adversely affect, the market price of our common stock.
Our
ability to pay dividends on our common stock may be
limited.
We
do not
expect to pay any cash dividends in the foreseeable future. We intend to retain
earnings, if any, to provide funds for the expansion of our
business.
Limitations
on director liability may discourage stockholders from bringing suit against
a
director.
Our
certificate of incorporation provides, as permitted by governing Delaware law,
that a director shall not be personally liable to us or our stockholders for
monetary damages for breach of fiduciary duty as a director, with certain
exceptions. These provisions may discourage stockholders from bringing suit
against a director for breach of fiduciary duty and may reduce the likelihood
of
derivative litigation brought by stockholders on our behalf against a director.
In addition, our certificate of incorporation and bylaws provide for mandatory
indemnification of directors and officers to the fullest extent permitted by
Delaware law. In addition, we have agreed to indemnify the past and present
directors, officers and employees of ProCyte for certain matters, to the same
extent such individuals are indemnified by ProCyte, for a period of six years
following the effective date of the merger.
There
are
no unresolved comments from the staff of the Securities and Exchange
Commission.
We
lease
an 8,000 sq. ft. facility consisting of office, manufacturing and warehousing
space in Carlsbad, California. The lease expires on June 15, 2012. We have
a
right to cancellation after 5 years, provided that we pay off any remaining
obligation for tenant improvements. The outstanding obligation for the tenant
improvements was $133,507 as of December 31, 2007. The base rent is $6,640
per
month. Our Carlsbad facility houses the manufacturing and development operations
for our excimer laser business.
We
lease
a 42,000 sq. ft. facility in Montgomeryville, Pennsylvania that houses our
executive offices and surgical laser manufacturing operations. The term of
the
lease runs until July 2011. The base rent is $20,475 per month. In addition
to
this facility, we also lease several offices throughout the southeastern United
States and other locations elsewhere. Our marketing and sales representatives
use these offices to perform their sales and training responsibilities. These
offices consist of small one-room facilities and are leased for various terms
and amounts.
We
also
lease a 12,182 sq. ft facility consisting of office and warehousing space in
Redmond, Washington. The lease expires on June 30, 2010. The base rent is
$11,700 per month. Our Redmond facility houses the warehousing operations for
our skincare business.
In
the
matter brought by us on January 4, 2004, against Ra Medical Systems, Inc. and
Dean Irwin in the United States District Court for the Southern District of
California, we have appealed from the new judge’s grant of summary judgment to
the defendants. We expect to file our brief in March 2008.
In
the
matter which Ra Medical and Mr. Irwin brought against us on June 6, 2006 for
unfair competition and which we removed to the United States District Court
for
the Southern District of California, we have filed a petition to lodge an
interlocutory appeal from the new judge’s dismissal, among other things, of our
counterclaim of misappropriation. The plaintiffs have opposed the petition.
No
decision has yet been rendered on the petition.
In
the
action we brought on January 3, 2007, against our insurance carrier in the
United States District Court for the Eastern District of Pennsylvania, we
invoked the carrier to defend us and to indemnify us in the malicious
prosecution action brought by Ra Medical Systems and its principal. In May
2007,
the malicious prosecution case settled. In February 2008, the Court granted
our
motion for partial summary judgment and denied the motion of the carrier for
summary judgment. The Court ruled that the extent to which our defense costs,
amounting to more than $900,000, would also be reimbursable by the carrier
under
the policy would be governed by the law of Pennsylvania based on their
reasonableness, and not by the law of California, which would statutorily impose
a cap on the such fees at a level the carrier would pay in similar cases. A
scheduling order has been issued under which the parties will begin discovery
on
the reasonableness of the fees. We are also evaluating other claims that we
may
have against the carrier, due, among other things, to its dilatory handling
of
our claim for reimbursement under provisional application the carrier’s own,
purportedly self-validated hourly rates for defense counsel and its other
billing guidelines. Our claim under such provisional application was for
approximately $328,000, which we recorded as an offset to our expensed defense
costs; approximately $100,000 remains unreimbursed. The Company has not
recognized any possible reimbursements other than the $328,000.
On
November 7, 2007, Allergan, Inc. brought a patent infringement suit against
PhotoMedex, Inc., as well as against a number of other co-defendants. Suit
was
brought in the United States District Court for the Central District of
California. Allergan alleges that the various eyelash conditioners of the
defendants, including MD Lash Factor, were marketed in violation of the claims
of US Patent No. 6,262,105. We have moved to have the case dismissed on the
grounds that Allergan had failed to join the owner-inventor of the patent in
the
suit and that there had been no common transaction or occurrence among the
various defendants to justify that they should be tried en masse. In January
2008, ProCyte Corporation filed a declaratory judgment action against Allergan
and the owner-inventor of the ‘105 patent in the United States District Court
for the Western District of Washington. ProCyte has petitioned the court to
decide whether its marketing activities of MD Lash Factor infringed the ‘105
patent. Allergan has opposed the actions of PhotoMedex and of ProCyte.
The
Central District Court has ruled that it will not dismiss the action and will
allow Allergan to amend its complaint; nevertheless, that Court has also ruled
that the petition in the Western District Court will be recognized by the
Central District Court as the first action to be filed in respect of ProCyte.
The Western District Court is expected to rule later in March 2008.
We
have
lodged a protest with the Food and Drug Administration under the Freedom of
Information Act. In a limited review of ProCyte Corporation for its marketing
of
MD Lash Factor, the FDA employed a third party’s testing protocol, which the
third party modified to accommodate FDA’s testing equipment, to determine, among
other things, whether MD Lash Factor contained the prostaglandin analogue
bimatoprost. Bimatoprost is the active ingredient of the ophthalmic drug
Lumigan. As best we can discern, that testing protocol has established that
MD
Lash Factor does not contain bimatoprost, and our own collateral, independent
testing has demonstrated the same. The FDA, however, has declined to disclose
to
us the details of the testing protocol that it employed, on the basis that
the
protocol is proprietary to the developer of the drug Lumigan. We are awaiting
a
response to our protest.
On
February 19, 2008, Cardiofocus, Inc. brought a patent infringement suit against
PhotoMedex, Inc., as well as against a number of other co-defendants. Suit
was
brought in the United States District Court for Massachusetts. Cardiofocus
alleges that the various holmium laser systems of the defendants, including
our
LaserPro® CTH holmium laser system, were marketed in violation of the claims of
US Patent No. 5,843,073. We are presently evaluating our course of
action.
On
February 25, 2008, Bella Bella brought a patent infringement suit against a
number of companies in the United States District Court for the Central District
of California. Among the defendants are Johnson & Johnson, L’Oreal, Avon,
Sharper Image and PhotoMedex. Bella Bella alleges that the defendants have
infringed its U.S. patents dealing with microdermabrasion. We are presently
evaluating our course of action. We believe their claim is without
merit.
We
are
involved in certain other legal actions and claims arising in the ordinary
course of business. We believe, based on discussions with legal counsel, that
these other litigation and claims will likely be resolved without a material
effect on our consolidated financial position, results of operations or
liquidity.
None.
As
of
March 14, 2008, we had 63,032,207 shares of common stock issued and
outstanding, including 1,280,000 shares of issued and outstanding
restricted stock. This does not include options to purchase 7,111,252
shares of common stock, of which 4,614,626 were vested as of March 14, 2008,
and
warrants to purchase up to 4,149,583 shares of common stock, all of which
warrants were vested.
Our
common stock is listed on the Nasdaq National Market under the symbol "PHMD."
The following table sets forth, for the periods indicated, the high and low
closing sale prices of our common stock,
|
High
|
Low
|
||||||
|
Year
Ended December 31, 2007:
|
|||||||
|
Fourth
Quarter
|
$
|
1.10
|
$
|
0.79
|
|||
|
Third
Quarter
|
1.30
|
0.90
|
|||||
|
Second
Quarter
|
1.44
|
1.15
|
|||||
|
First
Quarter
|
1.36
|
1.06
|
|||||
|
Year
Ended December 31, 2006:
|
|||||||
|
Fourth
Quarter
|
$
|
1.85
|
$
|
1.04
|
|||
|
Third
Quarter
|
1.65
|
0.99
|
|||||
|
Second
Quarter
|
1.99
|
1.46
|
|||||
|
First
Quarter
|
2.34
|
1.70
|
|||||
On
March
14, 2008, the closing market price for our common stock in The Nasdaq National
Market System was $0.99 per share. As of March 14, 2008, we had approximately
890 stockholders of record, without giving effect to determining the number
of
stockholders who held shares in “street name” or other nominee
accounts.
Nasdaq placed
our common stock on a watch list on November 17, 2007, due to the fact that
the
stock had traded under $1.00 per share for more than 30 consecutive trading
days. On March 10, 2008, we received a letter from Nasdaq stating that we were
now in compliance with Nasdaq listing requirements.
Dividend
Policy
We
have
not declared or paid any dividend since inception on our common stock. We do
not
anticipate that any dividends will be declared or paid in the future on our
common stock.
The
following is a summary of all of our equity compensation plans, including plans
that were assumed through acquisitions and individual arrangements that provide
for the issuance of equity securities as compensation, as of December 31, 2007.
See Notes 1 and 12 to the consolidated financial statements for additional
discussion.
|
(A)
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights
|
(B)
Weighted-
Average Exercise
Price of
Outstanding
Options,
Warrants and
Rights
|
(C)
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(excluding securities
reflected in column (A))
|
||||||||
|
Equity
compensation plans approved by security holders
|
10,228,254
|
$
|
1.85
|
5,591,550
|
||||||
|
Equity
compensation plans not approved by security
holders
|
51,000
|
$
|
1.66
|
-
|
||||||
|
Total
|
10,279,254
|
$
|
1.85
|
5,591,550
|
||||||
Since
January 1, 2006, no options have been granted to employees or consultants out
of
any plans except the 2005 Equity Compensation Plan. Options to our outside
directors will be made from the 2000 Non-Employee Director Stock Option Plan;
options under the 2005 Investment Plan may be made only to executive officers.
Most warrants issued by us have been to investors or placement agents, and
no
warrants, including warrants issued to each of CIT Healthcare and Life Sciences
Capital, have been issued pursuant to equity compensation plans. Additionally,
all outstanding options were granted as compensation for benefits inuring to
us
other than for benefits from capital-raising activities. With limited exceptions
under Nasdaq membership requirements, we intend in the future to issue options
pursuant to equity compensation plans which have already been approved by our
stockholders without necessity of further, special approval by our
stockholders.
Recent
Issuances of Unregistered Securities
On
November 3, 2006, we completed a private placement for 9,760,000 shares of
common stock at $1.17 per share resulting in gross proceeds of $11,419,200.
The
closing price of our common stock on November 1, 2006 was $1.27 per share,
the
date we agreed to the private placement. In connection with this private
placement, we paid commissions and other expenses of $864,308, resulting in
net
proceeds of $10,554,892. In addition, the investors received warrants to
purchase 2,440,000 shares of common stock at an exercise price of $1.60 per
share, and Cowen & Company, the placement agent, received warrants to
purchase 244,000 shares of common stock, under the same terms and conditions
as
the warrants issued to the investors. All such warrants have a five-year term
and became first exercisable on May 1, 2007. Cowen & Company is entitled to
a 6.5%
commission on any proceeds to us from future exercises by the investors of
their
warrants. To date, there have been no exercises of these warrants. The warrants
issued to Cowen & Company were in consideration of its services as the
placement agent and have a value under the Black Scholes method of approximately
$200,000. We have used the proceeds of this financing to pay for working capital
and other general corporate purposes. The shares sold in the private placement,
including the shares underlying the warrants, have been registered with the
Securities and Exchange Commission.
On
March
31, 2006, we issued to Stern 101,010 of our restricted common stock, pursuant
to
a Master Asset Purchase Agreement (the “Master Agreement”) dated September 7,
2004 with Stern. As of December 31, 2007, we have issued to Stern an aggregate
589,864 shares of our restricted common stock in connection with the Master
Agreement. We do not expect to issue any further shares of stock to Stern,
as
the time for completing remaining milestones has expired.
On
March
30, 2006, we closed the transaction provided for in the Investment Agreement
with AzurTec. We issued 200,000 restricted shares of our common stock in
exchange for 6,855,141 shares of AzurTec common stock and 181,512 shares of
AzurTec Class A preferred stock, which represent a 14% interest in AzurTec,
on a
fully diluted basis. In accordance with APB No. 18, and related interpretations,
we account for our investment in AzurTec on the cost basis.
In
December 2007, we issued 235,525 warrants to each of CIT Healthcare and Life
Sciences Capital to purchase our common stock in connection with the term loan
commenced in December 2007.
In
March
2007, we issued to GE Capital Corporation (“GE”) 33,297 warrants to purchase our
common stock. In 2006, we issued to GE 20,545, 24,708, 25,038 and 32,057
warrants to purchase our common stock issued on March 29, 2006, June 30, 2006,
September 29, 2006 and December 28, 2006, respectively, in connection with
draws
we made against a Master Lease Agreement. We redeemed all such warrants from
GE
in December 2007 for $178,699 as part of the termination of the lending
arrangement, which we recognized as part of the refinancing charge. (See
Note
9)
We
believe that all of the foregoing issuances of securities were made solely
to
accredited investors in transactions exempt from registration under Section
4(2)
of the Securities Act.
|
ISSUER
PURCHASES OF EQUITY
SECURITIES
|
|
Period
|
Total Number of
Shares (or Units)
Purchased
|
Average Price Paid
per Share (or Units)
|
Total Number of
Shares (or Units)
Purchased as part of
Publicly Announced
Plans or Programs
|
Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under the
Plans or Programs
|
|||||||||
|
December
2007
|
213,071
|
$
|
0.84
|
0
|
0
|
||||||||
The
securities were warrants held by GE Capital Corporation.
You
should read the following selected historical consolidated financial data in
conjunction with our consolidated financial statements included elsewhere in
this Report and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” beginning in Item 7 below. The selected historical
consolidated statements of operations data for the years ended December 31,
2007, December 31, 2006 and December 31, 2005, and the selected historical
consolidated balance sheet data as of December 31, 2007 and December 31, 2006,
are derived from our audited consolidated financial statements included in
this
Report on Form 10-K. The selected historical consolidated statements of
operations data for the years ended December 31, 2004 and December 31, 2003
and
the selected historical consolidated balance sheet data as of December 31,
2005,
December 31, 2004 and December 31, 2003 are derived from our audited
consolidated financial statements not included in this Annual Report on Form
10-K. The historical results presented here are not necessarily indicative
of
future results.
|
Year Ended December 31,
|
||||||||||||||||
|
(In thousands, except per- share
data)
|
||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||
|
Statement
of Operations Data:
|
||||||||||||||||
|
Revenues
|
$
|
38,714
|
$
|
33,190
|
$
|
28,384
|
$
|
17,745
|
$
|
14,319
|
||||||
|
Costs
of revenues
|
20,068
|
18,472
|
15,675
|
10,363
|
10,488
|
|||||||||||
|
Gross
profit (loss)
|
18,646
|
14,718
|
12,709
|
7,382
|
3,831
|
|||||||||||
|
Selling,
general and administrative
|
23,229
|
20,682
|
16,477
|
10,426
|
9,451
|
|||||||||||
|
Engineering
and product development
|
799
|
1,006
|
1,128
|
1,802
|
1,777
|
|||||||||||
|
Loss
from operations before interest and other income, net
|
(5,382
|
)
|
(6,970
|
)
|
(4,896
|
)
|
(4,846
|
)
|
(7,397
|
)
|
||||||
|
Interest
income
|
384
|
149
|
61
|
43
|
50
|
|||||||||||
|
Interest
expense
|
(914
|
)
|
(671
|
)
|
(403
|
)
|
(181
|
)
|
(96
|
)
|
||||||
|
Refinancing
charge
|
(442
|
)
|
-
|
-
|
-
|
-
|
||||||||||
|
Other
income, net
|
-
|
-
|
1,302
|
-
|
-
|
|||||||||||
|
Net
loss
|
$ |
(6,354
|
)
|
$ |
(7,492
|
)
|
$ |
(3,936
|
)
|
$ |
(4,984
|
)
|
$ |
(7,443
|
)
|
|
|
Basic
and diluted net loss per share
|
$ |
(0.10
|
)
|
$ |
(0.14
|
)
|
$ |
(0.08
|
)
|
$ |
(0.13
|
)
|
$ |
(0.21
|
)
|
|
|
Shares
used in computing basic and diluted net loss per share (1)
|
62,810
|
54,189
|
48,786
|
38,835
|
35,134
|
|||||||||||
|
Balance
Sheet Data (At Period End):
|
||||||||||||||||
|
Cash
and cash equivalents
|
$
|
9,954
|
$
|
12,886
|
$
|
5,610
|
$
|
3,997
|
$
|
6,633
|
||||||
|
Working
capital
|
13,706
|
16,070
|
11,151
|
6,119
|
8,678
|
|||||||||||
|
Total
assets
|
56,687
|
57,482
|
48,675
|
22,962
|
22,753
|
|||||||||||
|
Long-term
debt (net of current portion)
|
5,701
|
3,727
|
2,437
|
1,399
|
457
|
|||||||||||
|
Stockholders’
equity
|
$
|
39,533
|
$
|
44,103
|
$
|
38,417
|
$
|
14,580
|
$
|
15,978
|
||||||
|
(1)
|
For
all periods, all common stock equivalents and convertible issues
are
antidilutive and, therefore, are not included in the weighted shares
outstanding during the years in which we incurred net
losses.
|
The
following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and related notes included elsewhere in this
Report.
Overview
We
view
our business as comprised of the following five business segments:
|
·
|
Domestic
XTRAC,
|
|
·
|
International
Dermatology Equipment,
|
|
·
|
Skin
Care (ProCyte),
|
|
·
|
Surgical
Services, and
|
|
·
|
Surgical
Products.
|
Domestic
XTRAC
Our
Domestic XTRAC segment is a U.S. business with revenues primarily derived from
procedures performed by dermatologists. We are engaged in the development,
manufacturing and marketing of our proprietary XTRAC® excimer laser and delivery
systems and techniques used in the treatment of inflammatory skin
disorders, including
psoriasis, vitiligo, atopic dermatitis and leukoderma.
As
part
of our commercialization strategy in the United States, we offer the XTRAC
laser
system to targeted dermatologists at no initial capital cost. Under this
contractual arrangement, we maintain ownership of the laser and earn revenue
each time a physician treats a patient with the equipment, and we believe this
arrangement will increase market penetration. At times, however, we sell the
laser directly to the customer for certain reasons, including the costs of
logistical support and customer preference. We are finding that through sales
of
lasers we are able to reach, at respectable margins, a sector of the market
that
is better suited to a sale model than a per-procedure model.
For
the
past six years, we have sought to clear the path of obstacles and barriers
to a
roll-out of the XTRAC laser system in dermatology. Our efforts culminated in
March 2007, when the Blue Cross Blue Shield Association (BCBSA) published a
National Reference Policy that now recommends positive reimbursement coverage
for psoriasis, including the XTRAC, as first-step therapy for moderate to severe
psoriasis comprising less than 20% body area. Subsequent to publication of
this
reference policy many states adopted the XTRAC as a reimbursable procedure
including the Blue Cross Blue Shield Insurance plans in Illinois, New Mexico,
Oklahoma, Texas and California. Only a few remaining states do not have a
positive payment policy. We estimate that 90% of the insured population in
the
United States has plan coverage for the treatment of psoriasis by the excimer
laser.
Our
26-person XTRAC sales organization includes 13 sales representatives, 11
clinical specialists and 2 marketing support personnel. Our 28-person skin
care
sales organization includes 20 sales representatives, 6 customer service
representatives and 2 marketing support personnel. The sales representatives
of
each segment provide follow-up sales support and share sales leads to enhance
opportunities for cross-selling. Our marketing department has been instrumental
in expanding the advertising campaign for the XTRAC laser system.
While
our
sales and marketing expenses have grown faster than the revenues on which the
expenses are targeted to have positive impact, we expect to increase our overall
revenue and productivity as a result of these expenditures in the long term.
For
example, we have tried various direct-to-consumer marketing programs that have
positively influenced utilization, but the payback in utilization is expected
to
be attained in periods subsequent to the period in which we incurred the
expense. We have also increased the number of sales representatives and
established a group of clinical support specialists to optimize utilization
levels and better secure the willingness and interest of patients to seek
follow-up courses of treatment after the effect of the first battery of
treatment sessions starts to wear off.
International
Dermatology Equipment
In
the
international market, we derive revenues by selling our dermatology laser
systems to distributors and directly to physicians. In this market, we have
benefited from both our clinical studies and from the improved reliability
and
functionality of the XTRAC laser system. Compared
to the domestic segment, the sales of laser systems in the international segment
is influenced to a greater degree by competition from similar laser technologies
as well as non-laser lamp alternatives. Over time, this competition has reduced
the prices we are able to charge to international distributors for our XTRAC
products. In 2005, as a result of the acquisition of worldwide rights to certain
proprietary light-based technology from Stern, we also explored new product
offerings in the treatment of dermatological conditions. We expanded the
international marketing of this product, called the VTRAC™, in 2006. The VTRAC
is a lamp-based UVB targeted therapy, positioned at a price point lower than
the
XTRAC laser system so that it will effectively compete with other
non-laser-based therapies for psoriasis and vitiligo.
Skin
Care (ProCyte)
On
March
18, 2005, we completed the acquisition of ProCyte Corporation. ProCyte generates
revenues from the sale of skin health, hair care and wound care products; the
sale of copper peptide compound in bulk; and royalties on licenses for the
patented copper peptide compound. The operating results of ProCyte for the
year
ended December 31, 2005 are included from March 19, 2005 through December 31,
2005. Under purchase accounting rules, the operating results of ProCyte for
prior periods are not included in our Statement of Operations. A description
of
transaction and pro-forma operating results are disclosed as part of Note 2,
“Acquisitions”,
to the
financial statements.
ProCyte’s
focus has been to provide unique products, primarily based upon patented
technologies for selected applications in the dermatology, plastic and cosmetic
surgery and spa markets. ProCyte has also expanded the use of its novel copper
peptide technologies into the mass retail market for skin and hair care through
targeted technology licensing and supply agreements.
ProCyte’s
products are aimed at the growing demand for skin health and hair care products,
including products to enhance appearance and address the effects of aging on
skin and hair. ProCyte’s products are formulated, branded and targeted at
specific markets. ProCyte’s initial products addressed the dermatology, plastic
and cosmetic surgery markets for use after various procedures. Anti-aging skin
care products were added to offer a comprehensive approach for a patient’s
skincare regimen.
Surgical
Services
The
Surgical Services segment typically generates revenues by providing fee-based
procedures using our mobile surgical laser equipment delivered and operated
by a
technician at hospitals and surgery centers in the United States. We have
pursued a cautious growth strategy for this business segment in order to
conserve our cash resources for the XTRAC business segments.
We
have
limited marketing experience in expanding our surgical services business. The
majority of this business is in the southeastern part of the United States.
New
procedures and geographical expansion, together with new customers and different
business habits and networks, will likely continue to pose different challenges
compared to those that we have encountered in the past.
Surgical
Products
The
Surgical Products segment generates revenues by selling laser products and
disposables to hospitals and surgery centers both inside and outside of the
United States. Also included are various non-laser surgical products (e.g.
the
ClearEss® II suction-irrigation system). Surgical product revenues decreased in
2007 compared to 2006, reflecting we believe that sales of surgical laser
systems and the related disposable base have eroded as hospitals continue to
seek outsourcing solutions instead of purchasing lasers and related disposables
for their operating rooms. We are working to offset this erosion by increasing
sales from the Diode surgical laser introduced in 2004, including OEM
arrangements.
In
September 2007, we entered into a three-year OEM agreement with AngioDynamics
under which we manufacture for AngioDynamics, on a non-exclusive basis, a
private-label, 980-nanometer diode laser system. The system is designed for
use
with AngioDynamics’ NeverTouch™ VenaCure® patented endovenous therapy for
treatment of varicose veins. The OEM agreement provides that we shall supply
this laser on an exclusive basis to AngioDynamics, should AngioDynamics meet
certain purchase requirements. Having received from AngioDynamics a purchase
order that exceeded the minimum purchase requirement for delivery of lasers
over
the first contract year, we will now provide this laser exclusively to
AngioDynamics for worldwide sale in the peripheral vascular treatment field.
Critical
Accounting Policies
The
discussion and analysis of our financial condition and results of operations
in
this Report are based upon our Consolidated Financial Statements, which have
been prepared in accordance with accounting principles generally accepted in
the
United States. The preparation of financial statements requires management
to
make estimates and judgments that affect the reported amounts of assets and
liabilities, revenues and expenses and disclosures at the date of the financial
statements. On an on-going basis, we evaluate our estimates, including, but
not
limited to, those related to revenue recognition, accounts receivable,
inventories, impairment of property and equipment and of intangibles and
accruals for warranty claims. We use authoritative pronouncements, historical
experience and other assumptions as the basis for making estimates. Actual
results could differ from those estimates. Management believes that the
following critical accounting policies affect our more significant judgments
and
estimates in the preparation of our Consolidated Financial Statements. These
critical accounting policies and the significant estimates made in accordance
with these policies have been discussed with our Audit Committee.
Revenue
Recognition
XTRAC-Related
Operations
We
have
two distribution channels for our phototherapy treatment equipment. We either
(i) place the laser in a physician’s offices (at no charge to the
physician) and charge the physician a fee for an agreed-upon number of
treatments or (ii) to a lesser extent, sell the laser through a distributor
or
directly to a physician. When we sell an XTRAC laser to a distributor or
directly to a foreign or domestic physician, revenue is recognized when the
following four criteria under Staff Accounting Bulletin No. 104 have been met:
(i) the product has been shipped and we have no significant remaining
obligations; (ii) persuasive evidence of an arrangement exists; (iii) the price
to the buyer is fixed or determinable; and (iv) collection is probable (the
“SAB
104 Criteria”). At times, units are shipped, but revenue is not recognized until
all of the SAB 104 Criteria have been met, and until that time, the unit is
carried on our books as inventory.
We
ship
most of our products FOB shipping point, although from time to time certain
customers, for example governmental customers, will insist upon FOB destination.
Among the factors we take into account in determining the proper time at which
to recognize revenue are when title to the goods transfers and when the risk
of
loss transfers. Shipments to distributors or physicians that do not fully
satisfy the collection criteria are recognized when invoiced amounts are assured
or fully paid. Under the terms of our distributor agreements, distributors
do
not have a unilateral right to return any unit that they have purchased.
However, we do allow products to be returned by our distributors for product
defects or other claims.
When
we
place a laser in a physician’s office, we recognize service revenue based on the
number of patient treatments performed by the physician. Treatments in the
form
of random laser-access codes that are sold to physicians, but not yet used,
are
deferred and recognized as a liability until the physician performs the
treatment. Unused treatments remain an obligation of ours because the treatments
can only be performed on our equipment. Once the treatments are delivered to
a
patient, this obligation has been satisfied.
We
exclude all sales of treatment codes made within the last two weeks of the
period in determining the amount of procedures performed by our
physician-customers. Our management believes this approach closely approximates
the actual amount of unused treatments that existed at the end of a period.
For
the years ended December 31, 2007 and 2006, we deferred $563,336 and $506,440,
respectively, under this approach.
We
have a
program to support certain physicians in addressing treatments with the XTRAC
laser system that may be denied reimbursement by private insurance carriers.
We
recognize service revenue from the sale of treatment codes to physicians
participating in this program only if and to the extent the physician has been
reimbursed for the treatments. We estimate a contingent liability for potential
refunds under this program by reviewing the history of denied insurance claims
and appeals processed. At December 31, 2007 and 2006, we had net deferred
revenues of $72,812 and $80,697, respectively, under this program.
Skin
Care Operations
We
generate revenues from our Skin Care business primarily through three channels.
The primarily channel is through product sales for skin health, hair care and
wound care; the second is through sales of the copper peptide compound,
primarily to Neutrogena Corporation, a Johnson & Johnson company; and the
third is through royalties generated by our licenses, principally to Neutrogena.
The second and third channels have become minor. We recognize revenues on the
products and copper peptide compound when they are shipped, net of returns
and
allowances. We ship the products FOB shipping point. Royalty revenues are based
upon sales generated by our licensees. We recognize royalty revenue at the
applicable royalty rate applied to shipments reported by our
licensee.
Surgical
Products and Service Operations
We
generate revenues from our surgical businesses primarily from two channels.
The
first is through product sales of laser systems, related maintenance service
agreements, recurring laser delivery systems and laser accessories, and the
second is through per-procedure surgical services. We recognize revenues from
surgical laser and other product sales, including sales to distributors and
other customers, when the SAB 104 Criteria have been met.
For
per-procedure surgical services, we recognize revenue upon the completion of
the
procedure. Revenue from maintenance service agreements is deferred and
recognized on a straight-line basis over the term of the agreements. Revenue
from billable services, including repair activity, is recognized when the
service is provided.
Inventory.
We
account for inventory at the lower of cost (first-in, first-out) or market.
Cost
is determined to be purchased cost for raw materials and the production cost
(materials, labor and indirect manufacturing cost) for work-in-process and
finished goods. Throughout the laser manufacturing process, the related
production costs are recorded within inventory. Work-in-process is immaterial,
given the typically short manufacturing cycle, and therefore is disclosed in
conjunction with raw materials. We perform full physical inventory counts for
XTRAC and cycle counts on the other inventory to maintain controls and obtain
accurate data.
Our
XTRAC
laser is either (i) sold to distributors or physicians directly or (ii) placed
in a physician's office and remains our property. The cost to build a laser,
whether for sale or for placement, is accumulated in inventory. When a laser
is
placed in a physician’s office, the cost is transferred from inventory to
“lasers in service” within property and equipment. At times, units are shipped
to distributors, but revenue is not recognized until all of the SAB 104 Criteria
have been met, and until that time, the unit is carried on our books as
inventory. Revenue is not recognized from these distributors until payment
is
either assured or paid in full.
Reserves
for slow-moving and obsolete inventories are provided based on historical
experience and product demand. Management evaluates the adequacy of these
reserves periodically based on forecasted sales and market trends.
Allowance
for Doubtful Accounts.
Accounts
receivable are reduced by an allowance for amounts that may become uncollectible
in the future. The majority of receivables related to phototherapy sales are
due
from various distributors located outside of the United States and from
physicians located inside the United States. The majority of receivables related
to skincare products, surgical services and surgical products are due from
various customers and distributors located inside the United States. From time
to time, our customers dispute the amounts due to us, and, in other cases,
our
customers experience financial difficulties and cannot pay on a timely basis.
In
certain instances, these factors ultimately result in uncollectible accounts.
The determination of the appropriate reserve needed for uncollectible accounts
involves significant judgment. Such factors include changes in the financial
condition of our customers as a result of industry, economic or
customer-specific factors. A change in the factors used to evaluate
collectibility could result in a significant change in the reserve needed.
Property
and Equipment.
As of
December 31, 2007 and 2006, we had net property and equipment of $10,143,808
and
$9,054,098, respectively. The most significant component of these amounts
relates to the XTRAC lasers placed by us in physicians’ offices. We own the
equipment and charge the physician on a per-treatment basis for use of the
equipment. The recoverability of the net carrying value of the lasers is
predicated on continuing revenues from the physicians’ use of the lasers. If the
physician does not generate sufficient treatments, then we remove the laser
from
the physician’s office and redeploy elsewhere. In reflection of their improved
reliability, XTRAC lasers placed in service after December 31, 2005 are
depreciated on a straight-line basis over the estimated useful life of
five-years; other XTRAC lasers-in-service continue to be depreciated over the
original useful life of three years. Surgical lasers-in-service are depreciated
on a straight-line basis over an estimated useful life of seven years if new,
five years or less if used equipment. The straight-line depreciation basis
for
lasers-in-service is reflective of the pattern of use. For other property and
equipment, including property and equipment acquired from ProCyte, depreciation
is calculated on a straight-line basis over the estimated useful lives of the
assets, primarily three to seven years for computer hardware and software,
furniture and fixtures, automobiles, and machinery and equipment. Leasehold
improvements are amortized over the lesser of the useful lives or lease terms.
Useful lives are determined based upon an estimate of either physical or
economic obsolescence, or both.
Intangibles.
Our
balance sheet includes goodwill and other intangible assets which affect the
amount of future period amortization expense and possible impairment expense
that we will incur. Management’s judgments regarding the existence of impairment
indicators are based on various factors, including market conditions and
operational performance of our business. As of December 31, 2007 and 2006,
we
had $20,933,681 and $22, 151,160, respectively, of goodwill and other
intangibles, accounting for 37% and 39% of our total assets at the respective
dates. The goodwill is not amortizable; the other intangibles are. The
determination of the value of such intangible assets requires management to
make
estimates and assumptions that affect our consolidated financial statements.
We
test our goodwill for impairment, at least annually. This test is usually
conducted in December of each year in connection with the annual budgeting
and
forecast process. Also, on a quarterly basis, we evaluate whether events have
occurred that would negatively impact the realizable value of our intangibles
or
goodwill.
There
has
been no change in 2007 and 2006 to the carrying value of goodwill that is
allocated to the XTRAC domestic segment and the XTRAC international segment
in
the amounts of $2,061,096 and $883,327, respectively. The allocation of goodwill
to each segment was based upon the relative fair values of the two segments
as
of August 2000, when we bought out the minority interest in Acculase, Inc.
and
thus recognized the goodwill. In connection with the acquisition of ProCyte
on
March 18, 2005, we acquired certain intangibles recorded at fair value as of
the
date of acquisition and allocated fully to the Skin Care (ProCyte) segment.
In
2006, we adjusted the carrying value of the goodwill from the ProCyte
acquisition reflecting management’s best estimate of pre-acquisition
contingencies based upon plans entered into prior to March 18, 2005. The
balances of these acquired intangibles, net of amortization, were :
|
December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
ProCyte
Neutrogena Agreement
|
$
|
1,062,000
|
$
|
1,542,000
|
|||
|
ProCyte
Customer Relationships
|
752,261
|
1,092,257
|
|||||
|
ProCyte
Tradename
|
793,364
|
903,368
|
|||||
|
ProCyte
Developed Technologies
|
120,356
|
148,928
|
|||||
|
Goodwill
|
13,973,385
|
13,973,385
|
|||||
|
Total
|
$
|
16,701,366
|
$
|
17,659,938
|
|||
Deferred
Income Taxes. We
have a
deferred tax asset that is fully reserved by a valuation allowance. We have
not
recognized the deferred tax asset, given our historical losses and the lack
of
certainty of future taxable income. However, if and when we become profitable
and can reasonably foresee continuing profitability, then under SFAS No. 109
we
may recognize some of the deferred tax asset. The recognized
portion may variously reduce acquired goodwill, increase stockholders’ equity
directly and/or benefit the statement of operations.
Warranty
Accruals.
We
establish a liability for warranty repairs based on estimated future claims
for
XTRAC systems and based on historical analysis of the cost of the repairs for
surgical laser systems. However, future returns of defective laser systems
and
related warranty liability could differ significantly from estimates, and
historical patterns, which would adversely affect our operating
results.
Results
of Operations
Revenues
The
following table illustrates revenues from our five business segments for the
periods listed below:
|
For the Year Ended December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Dermatology:
|
||||||||||
|
XTRAC
Domestic Services
|
$
|
9,141,857
|
$
|
5,611,387
|
$
|
3,498,235
|
||||
|
International
Dermatology Equipment Revenues
|
3,256,505
|
2,186,424
|
1,404,096
|
|||||||
|
Skin
Care (ProCyte) Revenues
|
13,471,973
|
12,646,910
|
10,042,132
|
|||||||
|
Total
Dermatology Revenues
|
$
|
25,870,335
|
$
|
20,444,721
|
$
|
14,944,463
|
||||
|
Surgical:
|
||||||||||
|
Surgical
Services
|
$
|
7,667,174
|
$
|
6,944,292
|
$
|
7,719,529
|
||||
|
Surgical
Products
|
5,176,108
|
5,800,864
|
5,720,514
|
|||||||
|
Total
Surgical Revenues
|
$
|
12,843,282
|
$
|
12,745,156
|
$
|
13,440,043
|
||||
|
Total
Revenues
|
$
|
38,713,617
|
$
|
33,189,877
|
$
|
28,384,506
|
||||
Domestic
XTRAC Segment
Recognized
treatment revenue for the years ended December 31, 2007, 2006, and 2005 was
$6,981,223, $5,142,022 and $3,498,235, respectively, reflecting billed
procedures of 109,139, 83,272 and 54,255, respectively. In addition, 4,157,
5,168 and 6,371 procedures were performed for the years ended December 31,
2007,
2006 and 2005, respectively, without billing from us, in connection with
clinical research and customer evaluations of the XTRAC laser. The increase
in
procedures in the year ended December 31, 2007 compared to the comparable
periods in 2006 and 2005 was largely related to our continuing progress in
securing favorable reimbursement policies from private insurance plans and
to
our increased marketing programs. Increases in procedures are dependent upon
building market acceptance through marketing programs with our physician
partners and their patients that the XTRAC procedures will be of clinical
benefit and be generally reimbursed.
We
have a
program to support certain physicians who may be denied reimbursement by private
insurance carriers for XTRAC treatments. In accordance with the requirements
of
SAB No. 104, we recognize service revenue during the program only to the extent
the physician has been reimbursed for the treatments. For the year ended
December 31, 2007, we deferred revenues of $103,851 (1,587 procedures) net,
under this program, compared to deferred revenues of $124,427 (1,897 procedures)
net, under this program for the year ended December 31, 2006. For the year
ended
December 31, 2005, we deferred revenues of $57,302, (873 procedures) net,
under this program. The change in deferred revenue under this program is
presented in the table below.
For
the
years ended December 31, 2007 and 2006, domestic XTRAC laser sales were
$2,160,634 and $469,365, respectively. There were 43 and 11 lasers sold,
respectively. There were no lasers sold for the year ended December 31, 2005.
Overall, laser sales have been made for various reasons, including costs of
logistical support and customer preferences. We are finding that through sales
of lasers we are able to reach, at reasonable margins, a sector of the market
that is better suited to a sale model than a per-procedure model.
The
following table illustrates the above analysis for the Domestic XTRAC segment
for the periods reflected below:
|
For the Year Ended December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Total
revenue
|
$
|
9,141,857
|
$
|
5,611,387
|
$
|
3,498,235
|
||||
|
Less:
laser sales revenue
|
(2,160,634
|
)
|
(469,365
|
)
|
-
|
|||||
|
Recognized
treatment revenue
|
6,981,223
|
5,142,022
|
3,498,235
|
|||||||
|
Change
in deferred program revenue
|
103,851
|
124,427
|
57,302
|
|||||||
|
Change
in deferred unused treatments
|
56,896
|
194,869
|
5,371
|
|||||||
|
Net
billed treatment revenue
|
7,141,970
|
5,461,318
|
$
|
3,560,908
|
||||||
|
Procedure
volume total
|
113,296
|
88,440
|
60,626
|
|||||||
|
Less:
Non-billed procedures
|
4,157
|
5,168
|
6,371
|
|||||||
|
Net
billed procedures
|
109,139
|
83,272
|
54,255
|
|||||||
|
Avg.
price of treatments sold
|
$
|
65.44
|
$
|
65.58
|
$
|
65.63
|
||||
|
Procedures
with deferred program revenue, net
|
1,587
|
1,897
|
873
|
|||||||
|
Procedures
with deferred unused treatments, net
|
869
|
2,971
|
82
|
|||||||
The
average price for a treatment may be reduced in some instances based on the
volume of treatments performed. The average price for a treatment also varies
based upon the mix of mild and moderate psoriasis patients treated by our
physician partners. We charge a higher price per treatment for moderate
psoriasis patients due to the increased body surface area required to be
treated, although there are fewer patients with moderate psoriasis than there
are with mild psoriasis. Due to the length of treatment time required, it has
not generally been practical to use our therapy to treat severe psoriasis
patients, but this may change as our new product, the XTRAC Ultra, has shorter
treatment times. A study undertaken with the guidance of John Koo, MD, of the
University of California at San Francisco, is evaluating the effectiveness
of
the Ultra in treating patients suffering from severe psoriasis. In March 2007,
the BCBSA published a National Reference Policy that now recommends positive
reimbursement coverage for treatment of psoriasis by laser, including the XTRAC
as first step therapy for moderate to severe psoriasis comprising less than
20%
body area.
International
Dermatology Equipment Segment
International
sales of our XTRAC and VTRAC systems and related parts were $3,256,505 for
the
year ended December 31, 2007 compared to $2,186,424 and $1,404,096 for the
years ended December 31, 2006 and 2005, respectively. We sold 65 systems in
the year ended December 31, 2007 compared to 46 and 26 systems in the years
ended December 31, 2006 and 2005, respectively. Compared to the domestic
business, the international dermatology equipment operations are more influenced
by competition from similar laser technology from other manufacturers and from
non-laser lamps. Such competition has caused us at times to reduce the prices
we
charge to international distributors. The average price of dermatology equipment
sold internationally also varies due to the quantities of refurbished domestic
XTRAC systems sold and the amount of VTRACs sold. Both of these products have
lower average selling prices than new XTRAC laser systems, however, by adding
these to our product offerings along with expanding into new geographic
territories where the products are sold, we have been able to increase overall
international dermatology equipment revenues.
|
·
|
We
began selling refurbished domestic XTRAC laser systems into the
international market during 2005. The selling price for used equipment
is
substantially less than new equipment. We sold five of these used
lasers
in the year ended December 31, 2007 at an average price of $36,500.
We
sold six of these used lasers, in each year, at an average price
of
$28,000 and $27,000 for the years ended December 31, 2006 and 2005,
respectively; and
|
| ● |
We
began selling the new VTRAC, a lamp-based, alternative UVB light
source
that has a wholesale sales price that is substantially below our
competitors’ international dermatology equipment and below our XTRAC laser
during 2006. In the years ended December 31, 2007 and 2006, we
sold 20 and
12 VTRAC systems, respectively.
|
The
following table illustrates the key changes in the International XTRAC segment
for the periods reflected below:
|
For the Year Ended December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Revenues
|
$
|
3,256,505
|
$
|
2,186,424
|
$
|
1,404,096
|
||||
|
Laser
and lamp systems sold
|
65
|
46
|
26
|
|||||||
|
Average
revenue per system
|
$
|
50,100
|
$
|
47,531
|
$
|
54,004
|
||||
Skin
Care (ProCyte) Segment
For
the
year ended December 31, 2007, ProCyte revenues were $13,471,973 compared to
$12,646,910 for the year ended December 31, 2006 and $10,042,132 for the year
ended December 31, 2005. Inasmuch as ProCyte was acquired on March 18, 2005,
the
operating results of ProCyte for the year ended December 31, 2005 include
activity from ProCyte from March 19, 2005 through December 31, 2005. Skin Care
revenues are generated from the sale of various skin and hair care products,
from the sale of copper peptide compound and from royalties on licenses, mainly
from Neutrogena. For the full year 2005, unaudited Skin Care revenues were
approximately $13 million.
|
●
|
Physician
dispensed product revenues, our most strategic and most profitable
revenues, increased approximately 16% in 2007 over 2006, or about
$985,000.
|
|
●
|
Bulk
product and royalty revenues decreased approximately 24% in 2007
over
2006, or about $233,000.
|
The
following table illustrates the key changes in the Skin Care (ProCyte) segment
for the periods reflected below:
|
For the Year Ended December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Product
sales
|
$
|
12,732,973
|
$
|
11,674,510
|
$
|
8,902,615
|
||||
|
Bulk
compound sales
|
464,000
|
672,400
|
679,550
|
|||||||
|
Royalties
|
275,000
|
300,000
|
459,967
|
|||||||
|
Total
Skin Care revenue
|
$
|
13,471,973
|
$
|
12,646,910
|
$
|
10,042,132
|
||||
Surgical
Services Segment
In
the
years ended December 31, 2007, 2006 and 2005, surgical service revenues
were $7,667,174, $6,944,292and $7,719,529, respectively, representing a 10%
increase and a 1% decrease from the comparable prior year periods. The increases
were primarily due to an increase in revenue from urological procedures
delivered using a laser system purchased from a third party manufacturer. Such
procedures included a charge to the customer for the use of the laser and the
technician to operate it, as well as a charge to the customer for the third
party’s proprietary fiber delivery system. The decrease from the year ended
December 31, 2006 compared to the year ended December 31, 2005, was primarily
due to the six territories that we closed since January 1, 2005, the largest
of
which was in the fourth quarter of 2005, and business interruption in New
Orleans and Alabama from the hurricanes in August and September 2005. Operations
in two of our territories on the western side of Florida were closed due to
the
termination of a customer contract. We closed operations in the other four
territories for insufficient profitability.
Surgical
Products Segment
Surgical
Products revenues include revenues derived from the sales of surgical laser
systems together with sales of related laser fibers and laser disposables.
Sales
of laser systems create recurring sales of laser fibers and laser disposables
that are more profitable than laser systems.
For
the
year ended December 31, 2007, surgical products revenues were $5,176,108
compared to $5,800,864 in the year ended December 31, 2006. The decrease was
due
to $434,133 less disposable and fiber sales compared to the prior year period.
Also, there was a decline in the average price per laser sold for the year
ended
December 31, 2007 compared to the prior year period.
Disposables
and fiber sales decreased approximately 15% from the comparable year ended
December 31, 2006. This is due to the fact that in the year ended December
31,
2006, we had a one-time customer order for approximately $250,000 in
disposables. We expect that the disposables base may continue to erode over
time
as hospitals continue to seek outsourcing solutions instead of purchasing lasers
and related disposables for their operating rooms. We have sought to offset
this
erosion through expansion of our surgical services. We expect that our OEM
contract with AngioDynamics with initial shipments in December 2007 will help
grow this segment of the business.
For
the
year ended December 31, 2006, surgical products revenues were $5,800,864
compared to $5,720,514 in the year ended December 31, 2005. The increase was
almost entirely due to $207,000 in additional laser system revenues derived
from
an increase in the number of systems sold (80 vs. 47), as partially offset
by a
decline in the average price per laser sold. The $207,000 in additional laser
system revenues was offset, in part, by a decrease in disposable and fiber
sales
of approximately 5%.
As
set
forth in the table below, the decrease in average price per laser between the
periods was largely due to the mix of lasers sold and partly due to the trade
level at which the lasers were sold (i.e. wholesale versus retail). Our diode
laser has replaced our Nd:YAG laser, which had a higher sales price. Included
in
laser sales during the years ended December 31, 2007, 2006 and 2005 were sales
of 78, 65 and 28 diode lasers, respectively. The diode lasers have lower sales
prices than our other types of lasers, and thus the increase in the number
of
diodes sold reduced the average price per laser. We expect that we will continue
to sell more diode lasers than our other types of lasers into the near
future.
The
following table illustrates the key changes in the Surgical Products segment
for
the periods reflected below:
|
For the Year Ended December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Revenues
|
$
|
5,176,108
|
$
|
5,800,864
|
$
|
5,720,514
|
||||
|
Percent
(decrease)/increase
|
(10.8
|
)%
|
1.4
|
%
|
13.6
|
%
|
||||
|
Laser
systems sold
|
87
|
80
|
47
|
|||||||
|
Laser
system revenues
|
$
|
1,684,000
|
$
|
1,801,000
|
$
|
1,594,000
|
||||
|
Average
revenue per laser
|
$
|
19,356
|
$
|
22,513
|
$
|
33,915
|
||||
Cost
of Revenues
Cost
of
revenues divides into product cost of revenues and service cost of revenues.
Within product cost of revenues are the costs of products sold in the
International Dermatology Equipment segment, the Skin Care segment (with
royalties included as part of services), and the Surgical Products segment
(with
laser maintenance included as part of services). Within services cost of
revenues are the costs associated with the Domestic XTRAC segment and the
Surgical Services segment, as well as costs associated with the royalties and
maintenance.
Product
cost of revenues during the year ended December 31, 2007 were $9,539,787,
compared to $8,628,651 for the year ended December 31, 2006. The $911,136
increase is due to the increases in product cost of sales for domestic XTRAC
laser sales in the amount of $689,893 and international dermatology equipment
sales in the amount of $378,199, due to increased number of laser sales. There
was also an increase in skincare cost of revenues of $349,343 due to increased
revenues. These increases were offset, in part, by a decrease of $506,299 for
surgical products.
Product
cost of revenues during the year ended December 31, 2006 were $8,628,651,
compared to $7,219,504 for the year ended December 31, 2005. The $1,409,147
increase reflected the cost of sales for the domestic XTRAC laser sales of
$128,840, an increase of $726,412 in costs for the ProCyte business acquired
on
March 18, 2005, and therefore the operating results of ProCyte for the year
ended December 31, 2005 include activity from ProCyte from March 19, 2005
through December 31, 2005. Additionally there was an increase of $216,389 for
surgical products, due to increased laser system sales and a $337,506 increase
in costs associated with sales of XTRAC laser equipment sold outside the United
States.
Services
cost of revenues was $10,528,247 and $9,843,199 in the years ended December
31,
2007 and 2006, respectively. Contributing to the $685,048 increase was a
$886,578 increase in the Surgical Services business associated with the increase
in urological procedures performed with laser systems and fibers purchased
from
a third-party manufacturer, which carry a higher cost of sale rather than
equipment and fibers we manufacture. This increase was offset, in part, by
a
decrease in the cost of revenues in the Domestic XTRAC business segment of
$201,531.
Services
cost of revenues was $9,843,199 and $8,456,001 in the years ended December
31,
2006 and 2005, respectively. Contributing to the $1,387,198 increase was a
$1,345,853 increase in the Domestic XTRAC business segment due to increased
depreciation on the lasers of $629,000, an increase in excess and obsolete
inventory reserve and abnormal gas consumption, which has been corrected by
software modifications. Additionally there was an increase of $41,345 in the
cost of revenues for the Surgical Services business.
Certain
allocable XTRAC manufacturing overhead costs are charged against the XTRAC
service revenues. The manufacturing facility in Carlsbad, California is used
exclusively for the production of the XTRAC lasers, which are placed in
physicians’ offices domestically or sold. The unabsorbed costs, relating to
excess capacity, are allocated to the Domestic XTRAC and the International
Dermatology Equipment segments based on actual production of lasers for each
segment. Included in these allocated manufacturing costs are unabsorbed labor
and direct plant costs.
The
following table illustrates the key changes in cost of revenues for the periods
reflected below:
|
For
the Year Ended December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Product:
|
||||||||||
|
XTRAC
Domestic
|
$
|
818,733
|
$
|
128,840
|
$
|
-
|
||||
|
International
Dermatology Equipment
|
1,646,279
|
1,268,080
|
930,574
|
|||||||
|
Skin
Care
|
4,208,287
|
3,858,944
|
3,132,532
|
|||||||
|
Surgical
products
|
2,866,488
|
3,372,787
|
3,156,398
|
|||||||
|
Total
Product costs
|
$
|
9,539,787
|
$
|
8,628,651
|
$
|
7,219,504
|
||||
|
Services:
|
||||||||||
|
XTRAC
Domestic
|
$
|
3,835,828
|
$
|
4,037,359
|
$
|
2,691,506
|
||||
|
Surgical
Services
|
6,692,419
|
5,805,840
|
5,764,495
|
|||||||
|
Total
Services costs
|
$
|
10,528,247
|
$
|
9,843,199
|
$
|
8,456,001
|
||||
|
Total
Costs of Revenues
|
$
|
20,068,034
|
$
|
18,471,850
|
$
|
15,675,505
|
||||
Gross
Margin Analysis
Gross
margin increased to $18,645,583 during the year ended December 31, 2007
from $14,718,027 during the same period in 2006. As a percentage of revenues,
the gross margins for the year ended December 31, 2007 increased to 48.2%
compared to 44.3% for the same period in 2006.
Gross
margin increased to $14,718,027 during the year ended December 31, 2006
from $12,709,001 during the same period in 2005. As a percentage of revenues,
the gross margins for the year ended December 31, 2006, decreased to 44.3%
compared to 44.8% for the same period in 2005.
The
following table analyzes changes in our gross margin for the periods reflected
below:
|
Company Margin Analysis
|
For the Year Ended December 31,
|
|||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Revenues
|
$
|
38,713,617
|
$
|
33,189,877
|
$
|
28,384,506
|
||||
|
Percent
increase
|
16.6
|
%
|
16.9
|
%
|
||||||
|
Cost
of revenues
|
20,068,034
|
18,471,850
|
15,675,505
|
|||||||
|
Percent
increase
|
8.6
|
%
|
17.8
|
%
|
||||||
|
Gross
profit
|
$
|
18,645,583
|
$
|
14,718,027
|
$
|
12,709,001
|
||||
|
Gross
margin percentage
|
48.2
|
%
|
44.3
|
%
|
44.8
|
%
|
||||
The
primary reasons for changes in gross profit for the year ended December 31,
2007, compared to the same period in 2006 were as follows:
|
·
|
We
sold a greater number of treatment procedures for the XTRAC laser
systems
in 2007 than in 2006. Since each incremental treatment procedure
carries
negligible variable cost, this significantly enhanced profit margins.
The
increase in procedure volume was a direct result of improving insurance
reimbursement and increased marketing efforts.
|
|
·
|
We
sold approximately $1.7 million worth of additional lasers domestically
in
the year ended December 31, 2007 at high margins compared to the
same
period in 2006. Certain of these lasers were previously being
depreciated.
|
|
·
|
We
sold approximately $850,000 worth of additional international dermatology
equipment for the year ended December 31, 2007 compared to the same
period
in 2006.
|
|
·
|
Offsetting
the above was an increase in depreciation of $417,000 included in
the
XTRAC Domestic cost of sales as a result of increasing the overall
placements of new lasers since the year ended December 31,
2006.
|
The
primary reasons for changes in gross profit for the year ended December 31,
2006, compared to the same period in 2005 were as follows:
|
·
|
Our
Skin Care business has the highest gross profit percentage of any
of our
business segments. However, we acquired ProCyte on March 18, 2005,
and, as
such, the operating results of ProCyte for the year ended December
31,
2005 only included activity from March 19, 2005 through December
31, 2005.
|
|
·
|
We
sold a greater number of treatment procedures for the XTRAC laser
systems
in 2006 than in 2005. Each incremental treatment procedure carries
negligible variable cost. The increase in procedure volume was a
direct
result of improving insurance reimbursement and increased marketing
efforts.
|
|
·
|
We
sold a greater number of surgical laser systems due to the increased
marketing of the Diode laser. These units were primarily sold to
our
master distributor at a gross margin of approximately
36%.
|
|
·
|
We
sold XTRAC laser systems domestically during the year ended December
31, 2006. The gross margin on these sales is higher, approximately
73%,
since certain of the lasers were previously being
depreciated.
|
|
·
|
Offsetting
the above was an increase in depreciation of $629,000 included in
the
XTRAC Domestic cost of sales as a result of increasing the overall
placements of new lasers since the year ended December 31,
2005.
|
|
·
|
In
the Surgical Products segment, unabsorbed labor and overhead plant
costs,
due to lower production levels, accounted for $387,000 of the increase
in
cost of goods sold for the year ended December 31,
2006.
|
|
·
|
Surgical
services revenues decreased due to lost contracts, while costs related
to
laser repairs increased during the period. Some revenues were lost
due to
hurricanes. While we believe a portion of the loss will be covered
by
insurance, we will not record any expected recovery until we have
greater
assurance of such recovery.
|
The
following table analyzes the gross profit for our Domestic XTRAC segment for
the
periods reflected below:
|
XTRAC Domestic Segment
|
For the Year Ended December 31,
|
|||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Revenues
|
$
|
9,141,857
|
$
|
5,611,387
|
$
|
3,498,235
|
||||
|
Percent
increase
|
62.9
|
%
|
60.4
|
%
|
||||||
|
Cost
of revenues
|
4,654,561
|
4,166,199
|
2,691,506
|
|||||||
|
Percent
increase
|
11.7
|
%
|
54.8
|
%
|
||||||
|
Gross
profit
|
$
|
4,487,296
|
$
|
1,445,188
|
$
|
806,729
|
||||
|
Gross
margin percentage
|
49.1
|
%
|
25.8
|
%
|
23.1
|
%
|
||||
The
gross
profit increased for this segment for the year ended December 31, 2007 from
the
comparable periods in 2006 by $3,042,108. The key factors were as
follows:
|
·
|
Key
drivers in increased revenue in this segment are insurance reimbursement
and increased direct-to-consumer advertising in targeted territories.
Improved insurance reimbursement, together with greater consumer
awareness
of the XTRAC therapy, increased treatment revenue accordingly. Our
clinical support specialists have also begun to show favorable impact
on
increasing physicians’ utilization of the XTRAC laser
system.
|
|
·
|
Procedure
volume increased 31% from 83,272 to 109,139 billed procedures in
the year
ended December 31, 2007 compared to the same period in 2006. Price
per
procedure did not change significantly between the periods. Each
incremental treatment procedure carries negligible variable
cost.
|
|
·
|
We
sold approximately $1.7 million worth of additional domestic XTRAC
lasers
in the year ended December 31, 2007 at high margins compared to the
same
period in 2006. Certain of these lasers were previously being depreciated.
The margin on these capital equipment sales was 62% in 2007 compared
to
73% in 2006.
|
|
·
|
The
cost of revenues increased by $221,932 for the year ended December
31,
2007. This increase is due to additional cost of sales for the lasers
sold
domestically of approximately $227,000 in 2007 compared to the same
period
in 2006.
|
The
gross
profit increased for this segment for the year ended December 31, 2006 from
the
comparable periods in 2005 by $638,459. The key factors were as
follows:
|
·
|
We
sold XTRAC lasers domestically during the year ended December 31,
2006.
The gross margin on these sales was approximately 72%, which is higher
than overall gross margin of 25.8% in this segment and which is largely
due to the fact that certain of the lasers were previously being
depreciated.
|
|
·
|
A
key driver in increased revenue in this segment is insurance reimbursement
and increased direct-to-consumer advertising in targeted territories.
In
2005, several private health insurance plans adopted a favorable
policy to
cover the medically necessary treatment of psoriasis using our XTRAC
laser
system (e.g. United Healthcare, Highmark, Independence Blue Cross,
Empire
BCBS, Cigna, Premera, Blue Cross of Michigan). These insurers added
to the
group of companies that had already adopted a favorable policy in
2004. In
2006, we increased our level of direct-to-consumer advertising to
recruit
patients to dermatologists’ offices to seek treatment with the XTRAC laser
system. While the advertising helped increase revenues, the advertising
is
also costly. We continue to analyze and adjust the advertising campaigns
for cost-effectiveness.
|
|
·
|
Procedure
volume increased 46% from 60,626 to 88,440 procedures in the year
ended
December 31, 2006 compared to the same period in 2005. Price per
procedure
did not change significantly between the
periods.
|
|
·
|
Price
per procedure was not a meaningful component of the revenue change
between
the periods.
|
|
·
|
The
cost of revenues increased by $1,474,693 for the year ended December
31,
2006. This increase is due to the cost of sales for the lasers of
$128,840
and to an increase in depreciation on the lasers-in-service of $629,000
over the comparable prior year period, an increase in excess and
obsolete
inventory reserve and abnormal gas consumption, which has been corrected
by software modification. The depreciation costs will continue to
increase
in subsequent periods as the business grows. In addition, there was
an
increase in certain allocable XTRAC manufacturing overhead costs
that are
charged against the XTRAC service
revenues.
|
The
following table analyzes the gross profit for our International Dermatology
Equipment segment for the periods reflected below:
|
International Dermatology Equipment
Segment
|
For the Year Ended December 31,
|
|||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Revenues
|
$
|
3,256,505
|
$
|
2,186,424
|
$
|
1,404,096
|
||||
|
Percent
increase
|
48.9
|
%
|
55.7
|
%
|
||||||
|
Cost
of revenues
|
1,646,279
|
1,268,080
|
930,574
|
|||||||
|
Percent
increase
|
29.8
|
%
|
36.3
|
%
|
||||||
|
Gross
profit
|
$
|
1,610,226
|
$
|
918,344
|
$
|
473,522
|
||||
|
Gross
margin percentage
|
49.4
|
%
|
42.0
|
%
|
33.7
|
%
|
||||
The
gross
profit for the year ended December 31, 2007 increased by $691,882 from the
comparable prior year period. The key factors in this business segment were
as
follows:
|
·
|
We
sold 45 XTRAC laser systems and 20 VTRAC lamp-based excimer systems
during
the year ended December 31, 2007 and 34 XTRAC laser systems and 12
VTRAC
systems in the comparable period in 2006.
|
| · |
The
International Dermatology Equipment operations are influenced by
competition from similar laser technology from other manufacturers
and
from non-laser lamp alternatives for treating inflammatory skin disorders,
which has served generally to reduce the prices we charge international
distributors for our excimer products.
|
| · |
There
were more new XTRAC lasers sold in the year ended December 31, 2007
compared to the year ended December 31, 2006. The average selling
price in
2007 was approximately 6% higher in 2007 compared to the average
selling
price in 2006.
|
| · |
Additionally,
international part sales increased for the year ended December 31,
2007 by
approximately $219,000 compared to the same period in
2006.
|
The
gross
profit for the year ended December 31, 2006 increased by $444,822 from the
comparable prior year period. The key factors in this business segment were
as
follows:
|
·
|
We
sold 34 XTRAC laser systems and 12 VTRAC lamp-based excimer systems
during
the year ended December 31, 2006 and 26 XTRAC laser systems in the
comparable period in 2005. The VTRAC systems have a higher gross
margin
than the XTRAC laser systems.
|
|
|
| · | The International dermatology equipment operations are influenced by competition from similar laser technology from other manufacturers and from non-laser lamp alternatives for treating inflammatory skin disorders, which has served generally to reduce the prices we charge international distributors for our excimer products. |
|
·
|
There were more new XTRAC lasers sold in the year ended December 31, 2006 compared to the year ended December 31, 2005 and the average selling price was approximately the same. |
|
·
|
Additionally,
international part sales increased for the year ended December 31,
2006 by
approximately $106,000 compared to the same period in
2005.
|
The
following table analyzes our gross margin for our Skin Care (ProCyte) segment
for the periods presented below:
|
Skin Care (ProCyte) Segment
|
For the Year Ended December 31,
|
|||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Product
revenues
|
$
|
12,732,973
|
$
|
11,674,510
|
$
|
8,902,615
|
||||
|
Bulk
compound revenues
|
464,000
|
672,400
|
679,550
|
|||||||
|
Royalties
|
275,000
|
300,000
|
459,967
|
|||||||
|
Total
revenues
|
13,471,973
|
12,646,910
|
10,042,132
|
|||||||
|
Percent
increase
|
6.5
|
%
|
25.9
|
%
|
||||||
|
Product
cost of revenues
|
3,885,229
|
3,441,636
|
2,664,959
|
|||||||
|
Bulk
compound cost of revenues
|
323,058
|
417,308
|
467,573
|
|||||||
|
Total
cost of revenues
|
4,208,287
|
3,858,944
|
3,132,532
|
|||||||
|
Percent
increase
|
9.1
|
%
|
23.2
|
%
|
||||||
|
Gross
profit
|
$
|
9,263,686
|
$
|
8,787,966
|
$
|
6,909,600
|
||||
|
Gross
margin percentage
|
68.8
|
%
|
69.5
|
%
|
68.8
|
%
|
||||
Gross
profit for the year ended December 31, 2007 increased by $475,720 over the
comparable period in 2006. The key factors in this business segment were as
follows:
|
·
|
The
gross margin for our skin care products is relatively consistent
from year
to year; 68.8% in 2007 and 69.5% in 2006. The increase in total cost
of
revenues of $349,343 in 2007 from 2006 is directly related to the
increases in revenues between the
periods.
|
|
·
|
Copper
peptide bulk compound is sold at a substantially lower gross margin
than
skincare products, while revenues generated from licensees have no
significant costs associated with this revenue
stream.
|
Gross
profit for the year ended December 31, 2006 increased by $1,878,366 over the
comparable period in 2005. The key factors impacting gross profit were as
follows:
|
·
|
Skin
Care (ProCyte) business was acquired on March 18, 2005 and, as such,
the
operating results of ProCyte for the year ended December 31, 2005
only
included activity from March 19, 2005 through December 31,
2005.
|
|
·
|
The
gross margin for our skin care products is relatively consistent
from year
to year 69.5% in 2006 and 68.8% in 2005. The increase in total cost
of
revenues of $726,412 in 2006 from 2005 is directly related to the
increases in revenues between the
periods.
|
The
following table analyzes the gross profit for our Surgical Services segment
for
the periods reflected below:
|
Surgical Services Segment
|
For the Year Ended December 31,
|
|||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Revenues
|
$
|
7,667,174
|
$
|
6,944,292
|
$
|
7,719,529
|
||||
|
Percent
increase (decrease)
|
10.4
|
%
|
(10.0
|
)%
|
||||||
|
Cost
of revenues
|
6,581,722
|
5,703,925
|
5,675,787
|
|||||||
|
Percent
increase
|
15.4
|
%
|
0.5
|
%
|
||||||
|
Gross
profit
|
$
|
1,085,452
|
$
|
1,240,367
|
$
|
2,043,742
|
||||
|
Gross
margin percentage
|
14.2
|
%
|
17.9
|
%
|
26.5
|
%
|
||||
Gross
profit in the Surgical Services segment for year ended December 31, 2007
decreased by $154,915, from the comparable period in 2006. The key factors
impacting gross margin for the Surgical Services business were as
follows:
|
·
|
For
the year ended December 31, 2007 compared to the year ended December
31,
2006, we incurred incremental costs in technicians of $165,000 and
outside
contractors of $140,000 and incremental depreciation of $197,000.
These
increases were offset, in part, by a decrease in repairs of
$81,000.
|
|
·
|
Although
our revenues have increased by 10%, our product cost of revenue has
increased 30%. This is due to a continuing change in the mix of procedures
performed. A certain urological procedure performed on a laser purchased
from an unrelated party has increased as a percentage of revenue
from
2006. This procedure has a lower gross margin than margins obtained
from
procedures performed on lasers manufactured by
us.
|
Gross
profit in the Surgical Services segment for year ended December 31, 2006
decreased by $803,375, from the comparable period in 2005. The key factors
impacting gross margin for the Surgical Services business were as
follows:
|
·
|
We
have closed business operations in six territories due to unacceptable
operating profit and in one additional territory due to competition.
Although closing these unprofitable territories will save costs and
improve profitability over time, the overall costs saved for the
year
ended December 31, 2006 have not kept pace with the revenues lost.
Nevertheless, in the case of the territory lost to competition, we
have
opened a new, contiguous territory in which we have secured a long-term
contract from which we anticipate significant procedure volume. For
that
reason, we have relocated our personnel and material from the lost
territory to the new one.
|
|
·
|
Our
product cost percentage has increased due to a change in the mix
of
procedures performed. A certain urological procedure performed on
a laser
purchased from an unrelated party has increased as a percentage of
revenue
from 2005. This procedure has a lower gross margin than margins obtained
from procedures performed on lasers manufactured by
us.
|
The
following table analyzes our gross profit for our Surgical Products segment
for
the periods reflected below:
|
Surgical Products Segment
|
For the Year Ended December 31,
|
|||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Revenues
|
$
|
5,176,108
|
$
|
5,800,864
|
$
|
5,720,514
|
||||
|
Percent
(decrease) increase
|
(10.8
|
)%
|
1.4
|
%
|
||||||
|
Cost
of revenues
|
2,977,185
|
3,474,702
|
3,245,103
|
|||||||
|
Percent
(decrease) increase
|
(14.3
|
)%
|
7.1
|
%
|
||||||
|
Gross
profit
|
$
|
2,198,923
|
$
|
2,326,162
|
$
|
2,475,411
|
||||
|
Gross
margin percentage
|
42.5
|
%
|
40.1
|
%
|
43.3
|
%
|
||||
The
gross
profit for the year ended December 31, 2007 decreased by $127,239 from the
comparable prior year period. The key factors in this business segment were
as
follows:
|
·
|
This
segment includes product sales of surgical laser systems and laser
disposables. Disposables are more profitable than laser systems,
but the
sale of laser systems generates the subsequent recurring sale of
laser
disposables.
|
|
·
|
Revenues
for the year ended December 31, 2007 decreased by $624,756 from the
year
ended December 31, 2006 while cost of revenues decreased by $497,517
between the same periods. There were 7 more laser systems sold in
the year
ended December 31, 2007 than in the comparable period of 2006. However,
the lasers sold in the 2006 period were at higher prices than those
sold
in the comparable period in 2007. The decrease in average price per
laser
was largely due to the mix of lasers sold and volume discounts. Included
in the laser sales for the year ended December 31, 2007 and 2006
were
sales of $1,190,000, representing 78 systems, and $1,120,000, representing
65 systems, of diode lasers, respectively, which have substantially
lower
list sales prices than the other types of surgical
lasers.
|
|
·
|
Additionally
there was a decrease in sales of disposables between the periods.
Fiber
and other disposables sales decreased 15% between the comparable
periods
ended December 31, 2007 and 2006. This is due in part to having a
one-time
order of approximately $250,000 in the year ended December 31,
2006.
|
The
gross
profit for the year ended December 31, 2006 decreased by $149,249 from the
comparable prior year period. The key factors in this business segment were
as
follows:
|
·
|
This
segment includes product sales of surgical laser systems and laser
disposables. Disposables are more profitable than laser systems,
but the
sale of laser systems generates the subsequent recurring sale of
laser
disposables.
|
|
·
|
Revenues
for the year ended December 31, 2006 increased by $80,350 from the
year
ended December 31, 2005 while cost of revenues increased by $229,599
between the same periods. There were 33 more laser systems sold in
the
year ended December 31, 2006 than in the comparable period of 2005.
However, the lasers sold in the 2005 period were at higher prices
than in
the comparable period in 2006. The decrease in average price per
laser was
largely due to the mix of lasers sold. Included in the laser sales
for the
year ended December 31, 2006 and 2005 were sales of $1,120,000 and
$605,000 of diode lasers, respectively, which have substantially
lower
list sales prices than the other types of surgical
lasers.
|
|
·
|
Unabsorbed
labor and overhead plant costs, due to lower production levels, accounted
for $387,000 of the increase in cost of goods sold for the year ended
December 31, 2006.
|
|
·
|
This
revenue increase was partly offset by a decrease in AzurTec project
revenues of $156,000 and a decrease in sales of disposables between
the
periods. The AzurTec revenues recognized in 2005 had substantially
no
associated direct costs. Disposables, which have a higher gross margin
as
a percent of revenues than lasers, represented a higher percentage
of
revenue in the year ended December 31, 2006 compared to the same
period in
2005.
|
Selling,
General and Administrative Expenses
For
the
year ended December 31, 2007, selling, general and administrative expenses
increased to $23,229,276 from $20,682,056 for the year ended December 31, 2006.
|
·
|
We have increased our investment in sales and marketing to respond to the improved reimbursement environment related to our domestic XTRAC business. We expect this investment to increase future revenues; |
|
·
|
The
majority of the increase related to a $1,770,000 increase in salaries,
benefits and travel expenses associated with an increase in the sales
force and increased revenues, particularly in the Domestic XTRAC
segment;
|
|
·
|
An
increase
of $292,000 in salaries, benefits and travel expenses associated
with an
increase in the marketing team, particularly in the Domestic XTRAC
segment;
|
|
·
|
An
increase of $262,000 for legal expenses;
|
|
·
|
An
increase of $174,000 in outside services and consulting
expenses;
|
|
·
|
An
increase of $176,000 in additional warranty expense due to the increase
in
lasers sold; and
|
|
·
|
These
increases were offset, in part, by a decrease in commercial, workers’
compensation and directors and officers liability insurance of
$171,000.
|
For
the
year
ended December 31, 2006, selling, general and administrative expenses increased
to $20,682,056 from $16,477,322 for the year ended December 31, 2005.
|
·
|
Selling,
general and administrative expenses related to the ProCyte business
accounted for $1,360,000 of the increase. This is due to the acquisition
which occurred on March 18, 2005, so only expenses from March 19,
2005
through December 31, 2005 were
included.
|
|
·
|
The
remaining increase related to a $387,000 increase in salaries, benefits
and travel expenses associated with an increase in the sales force,
particularly in the Domestic XTRAC
segment;
|
|
·
|
An
increase in direct-to-consumer advertising of
$676,000;
|
|
·
|
An
increase in royalties to Mount Sinai of
$112,000;
|
|
·
|
An
increase in bonus accrual of
$255,000;
|
|
·
|
An
increase of $210,000 for legal
expenses;
|
|
·
|
An
increase of $1,304,546 for stock-based compensation expense following
adoption of SFAS No. 123R (see Note 1, “Stock-Based
Compensation”)
and $132,624 for stock options issued to consultants;
and
|
|
·
|
These
increases were partially offset by a reduction in bad debt expense
of
$213,000.
|
Engineering and
Product Development
Engineering
and product development expenses for the year ended December 31, 2007 decreased
to $799,108 from $1,006,600 for the year ended December 31, 2006. The decrease
is primarily due to a decrease in salaries and related benefits of $154,000
due
to reduced headcount. During the 2007 and 2006 periods, the engineers at the
Carlsbad plant were primarily focused on manufacturing efforts, and therefore,
their costs have been reflected in cost of goods sold.
Engineering
and product development expenses for the year ended December 31, 2006 decreased
to $1,006,600 from $1,127,961 for the year ended December 31, 2005. The decrease
was primarily due to a decrease of $117,000 in salaries associated with reduced
headcount. During the 2006 and 2005 periods, the engineers at the Carlsbad
plant
were primarily focused on manufacturing efforts, and therefore, their costs
have
been reflected in cost of goods sold.
Other
Income
Other
income for the year ended December 31, 2005 was $1,302,537 reflecting the
following components: a litigation settlement, net of expenses, of $968,882,
a
non-monetary exchange of assets during June 2005 of two depreciable engineering
development prototypes in exchange for four product units to be held for sale
for $88,667 and the expiration, and therefore reversal, of the liability for
SLT
subordinated notes of $244,988. There was no other income in the comparable
periods in 2007 and 2006.
Refinancing
Charge
Refinancing
charge for the year ended December 31, 2007 was due to the termination of the
lending arrangements with both GE Capital Corporation and Leaf Financial. This
included $108,876 for prepayment penalties; $178,699 buyback of warrants
previously issued to GE; and $154,381 of unamortized costs for previous draws
on
the line of credit. These costs were incurred in order to obtain a new credit
facility with CIT in terms more favorable to us.
Interest
Expense, Net
Net
interest expense for the year ended December 31, 2007 increased to $529,489,
as
compared to $521,768 for the year ended December 31, 2006. The increase in
net
interest expense was the result of the draws on the lease line of credit during
the year ended December 31, 2006 and the first and second quarters of 2007.
This
was offset by the increase in interest income earned on the funds from the
private placement in November 2006.
Net
interest expense for the year ended December 31, 2006 increased to $521,768,
as
compared to $342,299 for the year ended December 31, 2005. The increase in
net
interest expense was the result of the draws on the lease line of credit during
the year ended December 31, 2005 and the first, second and third quarters of
2006.
Net
Loss
The
aforementioned factors resulted in a net loss of $6,354,246 during the year
ended December 31, 2007, as compared to a net loss of $7,492,397 for the year
ended December 31, 2006, a decrease of 15.2%. The decrease was primarily due
to:
|
·
|
The
increase in revenues of 16.6% which resulted in an increase in gross
margin of $3,927,556 or 26.7%.
|
|
·
|
This
increase was offset, in part by increases in personnel for sales
and
marketing in the Domestic XTRAC segment of the business;
|
| · |
A
charge to expense of $441,956 due to the costs involved in refinancing
of
the GE and Leaf Financial Corporation (“Leaf”) credit facilities;
and
|
|
·
|
An
increase of $622,988 of depreciation, substantially all of which
is
included in costs of goods sold, and amortization over the comparable
period of the prior year.
|
The
following table illustrates the impact of the three components between the
periods:
|
For the Year ended December 31,
|
||||||||||
|
2007
|
2006
|
Change
|
||||||||
|
Net
loss
|
$
|
6,354,246
|
$
|
7,492,398
|
$ |
(1,138,152
|
)
|
|||
|
Components
included in net loss:
|
||||||||||
|
Refinancing
charge
|
(441,956
|
)
|
-
|
(441,956
|
)
|
|||||
|
Depreciation
and amortization expense
|
(4,822,035
|
)
|
(4,199,047
|
)
|
(622,988
|
)
|
||||
|
Stock-based
compensation expense
|
(1,444,880
|
)
|
(1,437,170
|
)
|
(7,710
|
)
|
||||
| $ |
(6,768,871
|
)
|
$ |
(5,636,217
|
)
|
$ |
(1,072,654
|
)
|
||
The
aforementioned factors resulted in a net loss of $7,492,397 during the year
ended December 31, 2006, as compared to a net loss of $3,936,044 for the year
ended December 31, 2005, an increase of 90.4%. The increase was primarily due
to:
|
·
|
The
result of the other income for the year ended December 31, 2005 of
$1,302,537;
|
|
·
|
The
increase in cost of sales and resulting decrease in gross margin,
due to
stock option expense of $1,437,170 following the adoption of SFAS
No.
123R; and
|
|
·
|
An
increase of $982,110 of depreciation and amortization over the comparable
period of the prior year.
|
|
For the Year ended December 31,
|
||||||||||
|
2006
|
2005
|
Change
|
||||||||
|
Net loss
|
$
|
7,492,398
|
$
|
3,936,044
|
$
|
3,556,354
|
||||
|
Components
included in net loss:
|
||||||||||
|
Other
income
|
-
|
1,302,537
|
(1,302,537
|
)
|
||||||
|
Depreciation
and amortization expense
|
(4,199,047
|
)
|
(3,216,937
|
)
|
(982,110
|
)
|
||||
|
Stock-based
compensation expense
|
(1,437,170
|
)
|
-
|
(1,437,170
|
)
|
|||||
| $ |
(5,636,217
|
)
|
$ |
(1,914,400
|
)
|
$ |
(3,721,817
|
)
|
||
Income
taxes were immaterial, given our current period losses and operating loss
carryforwards.
Liquidity
and Capital Resources
We
have
historically financed our operations with cash provided by equity financing
and
from lines of credit and, more recently, from positive cash flow generated
from
operations.
At
December 31, 2007, our current ratio was 2.20 compared to 2.66 at December
31,
2006. As of December 31, 2007, we had $13,705,775 of working capital compared
to
$16,069,615 as of December 31, 2006. Cash and cash equivalents were $9,954,303
as of December 31, 2007, as compared to $12,885,742 as of December 31, 2006.
We
had $117,000 of cash that was classified as restricted as of December 31, 2007
compared to $156,000 as of December 31, 2006.
We
believe that our existing cash balance together with our other existing
financial resources, including access to debt financing for capital
expenditures, and revenues from sales, distribution, licensing and manufacturing
relationships, will be sufficient to meet our operating and capital requirements
beyond the second quarter of 2009. The 2008 operating plan reflects increases
in
per-treatment fee revenues for use of the XTRAC system based on increased
utilization of the XTRAC by physicians and on wider insurance coverage in the
United States. In addition, the 2008 operating plan calls for increased revenues
and profits from our Skin Care business.
On
December 31, 2007, we entered into a term-note credit facility from CIT
Healthcare and Life Sciences Capital (collectively “CIT”). The credit facility
has a commitment term of one year, expiring on December 31, 2008. We account
for
each draw as funded indebtedness, with ownership in the lasers remaining with
us. CIT holds a security interest in the lasers. Each draw against the credit
facility has a repayment period of three years. A summary of the activity under
the CIT credit facility is presented in Note 9, “Long-term
Debt”
Of
the
Financial Statements included in this Report.
Net
cash
used in operating activities was $992,858 for the year ended December 31, 2007,
compared to net cash provided by operating activities was $60,984 for the year
ended December 31, 2006. The decrease was mostly due to the increases in
accounts receivable and inventory.
Net
cash
provided by operating activities was $60,984 for the year ended December 31,
2006, compared to cash used of $1,729,842 for the same period in 2005. The
change was primarily due to a decrease in inventory. In the prior year,
significant inventory purchases were made of copper peptide in the skincare
products segment and in launching the diode program in the surgical products
segment. Increases in sales in these segments in 2006, reduced the inventory
levels.
Net
cash
used in investing activities was $4,558,617 for the year ended December 31,
2007
compared to $5,026,811 for the year ended December 31, 2006. This was primarily
for the placement of lasers into service.
Net
cash
used in investing activities was $5,026,811 for the year ended December 31,
2006
compared to cash provided by investing activities of $1,993,412 for the year
ended December 31, 2005. This change was mostly the result of receiving cash
of
$5,578,416, net of costs, in the acquisition of ProCyte in 2005. Of this
increase in cash from the acquisition, we used $3,461,803 for production of
our
lasers-in-service compared to $4,931,835 in 2006.
When
we
retire a laser from service, we transfer the laser into inventory and then
write
off the net book value of the laser, which is typically negligible. Over the
last three years, the retirements of lasers from service have been minor or
immaterial and, therefore, they are reported with placements on a net
basis.
Net
cash
provided by financing activities was $2,659,036 for the year ended December
31,
2007 compared to $12,292,533 for the year ended December 31, 2006. In the year
ended December 31, 2007 we received $3,314,426 from the advances under the
lease
and term-note lines of credit, net of payments, $85,954 from the exercise of
common stock options and a decrease in restricted cash of $39,000. These cash
receipts were offset by $784,543 for the payment of certain notes payable and
capital lease obligations.
Net
cash
provided by financing activities was $12,292,533 for the year ended December
31,
2006 compared to $1,254,649 for the year ended December 31, 2005. In the year
ended December 31, 2006 we received $10,449,402, net from the issuance of common
stock, $2,511,437 from the advances under the lease line of credit, net of
payments, $361,469 from the exercise of common stock options and warrants and
a
decrease in restricted cash of $50,931. These cash receipts were offset by
$1,080,706 for the payment of certain notes payable and capital lease
obligations.
Contractual
Obligations
Set
forth
below is a summary of current obligations as of December 31, 2007 to make future
payments due by the period indicated below, excluding payables and accruals.
We
expect to be able to meet our obligations in the ordinary course. The
obligations under the credit facility from CIT Healthcare and Life Sciences
Capital are term notes. The capital lease obligations are from transactions
entered into for the surgical services division. Operating lease and rental
obligations are respectively for personal and real property which we use in
our
business.
|
Payments due by period
|
|||||||||||||
|
Contractual Obligations
|
Total
|
Less than 1
year
|
1 – 3 years
|
4 – 5 years
|
|||||||||
|
Credit
facility obligations
|
$
|
10,105,609
|
$
|
4,671,811
|
$
|
5,433,798
|
$
|
-
|
|||||
|
Capital
lease obligations
|
254,179
|
74,735
|
131,089
|
48,355
|
|||||||||
|
Operating
lease obligations
|
46,578
|
27,971
|
18,607
|
-
|
|||||||||
|
Rental
obligations
|
1,727,473
|
528,979
|
1,115,497
|
82,997
|
|||||||||
|
Notes
payable
|
235,220
|
129,305
|
92,097
|
13,818
|
|||||||||
|
Total
|
$
|
12,369,059
|
$
|
5,432,801
|
$
|
6,791,088
|
$
|
145,170
|
|||||
Our
ability to expand our business operations is currently dependent in significant
part on financing from external sources. There can be no assurance that changes
in our manufacturing and marketing, research and development plans or other
changes affecting our operating expenses and business strategy will not require
financing from external sources before we will be able to develop profitable
operations. There can be no assurance that additional capital will be available
on terms favorable to us, if at all. To the extent that additional capital
is
raised through the sale of additional equity or convertible debt securities,
the
issuance of such securities could result in additional dilution to our
stockholders. Moreover, our cash requirements may vary materially from those
now
planned because of marketing results, 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.
Off-Balance
Sheet Arrangements
At
December 31, 2007, we had no off-balance sheet arrangements.
Impact
of Inflation
We
have
not operated in a highly inflationary period, and we do not believe that
inflation has had a material effect on sales or expenses.
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.
The
financial statements required by this Item 8 are included in this Report and
begin on page F-1.
None.
Controls
and Procedures
As
of
December 31, 2007, we carried out an evaluation, under the supervision and
with the participation of our chief executive officer and chief financial
officer, of the effectiveness of the design and operations of our disclosure
controls and procedures, as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934.
Our
chief
executive officer and chief financial officer concluded that as of the
evaluation date, such disclosure controls and procedures were effective to
ensure that information required to be disclosed by us in the reports we file
or
submit under the Exchange Act are recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities
and
Exchange Commission, and is accumulated and communicated to our management,
including our chief executive officer and chief financial officer, as
appropriate to allow timely decisions regarding required disclosure.
There
were no changes in our internal controls over financial reporting during the
year ended December 31, 2007 that materially affected, or were reasonably
likely to materially affect, our internal controls over financial reporting.
As
a prophylactic measure and support for our compliance with the Sarbanes Oxley
Act, we adopted an Anti-Fraud Program in October 2007.
Management’s
report on our internal controls over financial reporting can be found with
the
attached financial statements. The Independent Registered Public Accounting
Firm’s attestation report on management’s assessment of the effectiveness of our
internal control over financial reporting can also be found with the attached
financial statements.
Management's
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining an adequate system
of
internal control over financial reporting. Our system of internal control over
financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with accounting principles generally
accepted in the United States of America.
Our
internal control over financial reporting includes those policies and procedures
that:
| · |
pertain
to the maintenance of records that, in reasonable detail, accurately
and
fairly reflect our transactions and dispositions of our
assets;
|
| · |
provide
reasonable assurance that our transactions are recorded as
necessary to
permit preparation of our financial statements in accordance
with
accounting principles generally accepted in the United States
of America,
and that our receipts and expenditures are being made only
in accordance
with authorizations of our management and our directors;
and
|
| · |
provide
reasonable assurance regarding prevention or timely detection
of
unauthorized acquisition, use, or disposition of our assets
that could
have a material effect on the financial statements.
|
Because
of its inherent limitations, a system of internal control over financial
reporting can provide only reasonable assurance and may not prevent or detect
misstatements. Further, because of changes in conditions, effectiveness of
internal controls over financial reporting may vary over time. Our system
contains self-monitoring mechanisms, and actions are taken to correct
deficiencies as they are identified.
Our
management conducted an evaluation of the effectiveness of the system of
internal control over financial reporting based on the framework in
Internal Control-Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on this evaluation, our management concluded that our system of internal control
over financial reporting was effective as of December 31, 2007. Our management's
assessment of the effectiveness of our internal control over financial reporting
has been audited by Amper, Politziner & Mattia, P.C., an independent
registered public accounting firm, as stated in their report which is included
herein.
On
October 30, 2007, we amended Section 6.01 of our By-Laws to provide that each
share of our common stock shall be eligible for record of ownership, and
transfer of ownership for book-entry under a Direct Registration System that
complies under Nasdaq rules, and that a stockholder while entitled to a physical
certificate, shall not be required to have a certificate. This was done in
conformance with Nasdaq requirements to facilitate the trading in listed
companies’ shares.
Our
directors currently have terms which will end at our next annual meeting of
the
stockholders or until their successors are elected and qualify, subject to
their
prior death, resignation or removal. Officers serve at the discretion of the
Board of Directors. There are no family relationships among any of our directors
and executive officers. Our Board members are encouraged to attend meetings
of
the Board of Directors and the Annual Meeting of Stockholders. The Board of
Directors held seven meetings and executed one unanimous written consent in
lieu
of a meeting in 2007.
The
following sets forth certain biographical information concerning our directors
and our current executive officers.
|
Name
|
Position
|
Age
|
||
|
Richard
J. DePiano
|
Non-Executive
Chairman of the Board of Directors
|
66
|
||
|
Jeffrey
F. O'Donnell
|
Director,
President and Chief Executive Officer
|
48
|
||
|
Dennis
M. McGrath
|
Chief
Financial Officer and Vice President – Finance and
Administration
|
51
|
||
|
Michael
R. Stewart
|
Executive
Vice President and Chief Operating Officer
|
50
|
||
|
Alan
R. Novak
|
Director
|
73
|
||
|
Anthony
J. Dimun
|
Director
|
64
|
||
|
David
W. Anderson
|
Director
|
55
|
||
|
Wayne
M. Withrow
|
Director
|
52
|
||
|
Stephen
P. Connelly
|
Director
|
56
|
Directors
and Executive Officers
Richard
J. DePiano
was
appointed to our Board of Directors in May 2000 and was unanimously elected
to
serve as Non-Executive Chairman of the Board on January 31, 2003. Mr. DePiano
has been a director of Escalon Medical Corp., a publicly traded healthcare
business specializing in the development and marketing of ophthalmic devices
and
pharmaceutical and vascular access products, since February 1996, and has served
as its Chairman and Chief Executive Officer since March 1997. Mr. DePiano has
been the Chief Executive Officer of the Sandhurst Company, L.P. and Managing
Director of the Sandhurst Venture Fund since 1986. Mr. DePiano was also the
Chairman of the Board of Directors of SLT prior to our acquisition of
SLT.
Jeffrey
F. O’Donnell
joined
PhotoMedex in 1999 as President and CEO and has served as a member of the Board
of Directors since that date. Prior to PhotoMedex, he joined Radiance Medical
Systems (originally Cardiovascular Dynamics) as Vice President of Sales and
Marketing from 1995 to 1997; from 1997 to 1999 he served as its President and
CEO and subsequently assumed a role as non-executive chairman of the board.
Previously, from 1994 to 1995 Mr. O’Donnell held the position of President and
CEO of Kensey Nash Corporation. Additionally, he has held several senior sales
and marketing management positions at Boston Scientific, Guidant and Johnson
& Johnson Orthopedic. In addition to sitting on the Board of Directors for
PhotoMedex, Mr. O’Donnell is currently an outside Board Member of Endologix,
Inc., Cardiac Sciences Inc. and Replication Medical, Inc. and had served until
December 28, 2004 on the Board of Escalon Medical Corp. He had served as an
outside Board member of AzurTec, Inc. but resigned from that board in 2003.
Mr.
O’Donnell graduated from LaSalle University in 1982 with a B.S. in business
administration.
Dennis
M. McGrath
was
appointed Chief Financial Officer and Vice President-Finance and Administration
in January 2000. Mr. McGrath has held several senior level positions including
from February 1999 to January 2000 serving as the Chief Operating Officer of
Internet Practice, the largest division for AnswerThink Consulting Group, Inc.,
a public company specializing in business consulting and technology integration.
Concurrently, from August 1999 until January 2000, Mr. McGrath assumed the
role
of Chief Financial Officer of Think New Ideas, Inc., a public company
specializing in interactive marketing services and business solutions. In
addition to the financial reporting responsibilities, Mr. McGrath was
responsible for the merger integration of Think New Ideas, Inc. and AnswerThink
Consulting Group, Inc. From September 1996 to February 1999, Mr. McGrath was
the
Chief Financial Officer and Executive Vice-President–Operations of TriSpan,
Inc., an internet commerce solutions and technology consulting company, which
was acquired by AnswerThink in 1999. Mr. McGrath is currently an outside Board
member of RICOMM Systems, Inc. and Noninvasive Medical Technologies, Inc. Mr.
McGrath is a certified public accountant and graduated with a B.S. in accounting
from LaSalle University in 1979. Mr. McGrath holds a license from the states
of
Pennsylvania and New Jersey as a certified public accountant.
Michael
R. Stewart
was
appointed as our Executive Vice President of Corporate Operations on December
27, 2002, immediately following the acquisition of SLT and on July 19, 2005,
he
was appointed our Chief Operating Officer. From July 1999 to the acquisition,
Mr. Stewart was the President and Chief Executive Officer of SLT, and from
October 1990 to July 1999 he served as SLT’s Vice President Finance and Chief
Financial Officer. Mr. Stewart graduated from LaSalle University with a B.S.
in
accounting and received an M.B.A. from LaSalle University in 1986. Mr. Stewart
passed the CPA examination in New York in 1986.
Alan
R. Novak was
appointed to our Board of Directors in October 1997. Mr. Novak is Chairman
of
Infra Group, L.L.C., an international project finance and development company.
He is also Chairman of Lano International, Inc., a real estate development
company. Mr. Novak is a graduate of Yale University, Yale Law School, and
Oxford University as a Marshall Scholar. Mr. Novak practiced law at Cravath,
Swaine & Moore and Swidler & Berlin, Chartered. His public service
includes three years as an officer in the United States Marine Corps, a U.S.
Supreme Court clerkship with Justice Potter Stewart, Senior Counsel to Senator
Edward M. Kennedy, Senior Executive Assistant to Undersecretary of State, Eugene
Rostow, and the Executive Director of President Johnson’s Telecommunications
Task Force. Mr. Novak was appointed by President Carter and served for five
years as Federal Fine Arts Commissioner.
Anthony
J. Dimun
was
appointed to our Board of Directors on October 3, 2003. Mr. Dimun has served
since May 2001 as Chairman of Nascent Enterprises, L.L.C., a medical device
venture advisory firm. He also has served since 1987 as the Managing Director
and Chief Executive Officer of Strategic Concepts, Inc., a financial advisory
company with specific focus on venture capital and acquisition transactions.
From March 1991 to May 2001, Mr. Dimun served as Executive Vice President and
Chief Financial Officer of Vital Signs, Inc., a publicly held anesthesia and
respiratory medical device company. Mr. Dimun also serves as a member of the
Board of Trustees of the New Jersey Center for Biomaterials, a non-profit
collaboration of the three leading New Jersey universities. Prior to 1991,
Mr.
Dimun held positions as a Certified Public Accountant with several national
accounting firms and served as Senior Vice President for an international
merchant-banking firm.
David
W. Anderson
was
appointed to our Board of Directors on September 28, 2004. Mr. Anderson has
been
the President and Chief Executive Officer of Gentis, Inc since November 2004.
He
has over twenty years of entrepreneurial management experience in the medical
device, orthopedics and pharmaceutical field. He has served as President and
CEO
of Sterilox Technologies, Inc., the world’s leader in the development and
marketing of non-toxic biocides; Bionx Implants, Inc., a publicly traded
orthopedic sports medicine and trauma company, and Kensey Nash Corporation,
a
publicly traded cardiology and biomaterials company. In addition, Mr. Anderson
was previously Vice President of LFC Financial Corp., a venture capital and
leasing company, where he was responsible for LFC’s entry into the healthcare
market; and was a founder and Executive Vice President of Osteotech, Inc.,
a
high-technology orthopedic start-up.
Wayne
M. Withrow
was
appointed to our Board of Directors on August 16, 2006. Mr. Withrow is currently
Executive Vice President for SEI Investments Company, a leading global provider
of outsourced asset management, investment processing and investment operation
solutions. He is also the head of SEI’s Investment Advisors Segment, and a
member of its Executive Committee. Mr. Withrow’s broad background was gained
from over 15 years in various senior management positions with SEI Investments.
Formerly, he was with the law firm of Schnader, Harrison, Segal & Lewis,
where he was significantly involved in corporate securities and acquisitions.
His earlier experience also included a federal judicial clerkship with the
Honorable William J. Ditter as well as public accounting experience with
Deloitte & Touche.
Stephen
P. Connelly
was
appointed to our Board of Directors on May 3, 2007. Mr. Connelly has served
as
President and Chief Operating Officer of Viasys Healthcare, Inc. a publicly
traded medical technology and device company. In addition, Mr. Connelly was
Senior Vice President and General Manager of the America’s as well as a member
of the Executive Committee of Rhone Poulenc Rorer. Mr. Connelly’s broad
background includes over twenty-five years of experience in the planning,
development and management of rapid-growth marketing-driven businesses in the
medical device and pharmaceutical fields. In addition, Mr. Connelly has a
diverse and comprehensive business background, with expertise in such areas
as
strategic and tactical business development, joint ventures, mergers,
acquisitions and corporate partnering, structuring and finance. Mr. Connelly
is
well-versed in every aspect of marketing, sales, general management, research
and development of high-technology products and processes. Mr. Connelly
possesses extensive international experience, having lived in Asia and having
had operational P&L responsibility in many developed countries.
Compensation,
Nominations and Corporate Governance and Audit Committees
General.
The
Board maintains charters for select committees. In addition, the Board has
adopted a written set of corporate governance guidelines and a code of business
conduct and ethics and a code of conduct for our chief executive and senior
financial officers that generally formalize practices that we already had in
place. We have adopted a Code of Ethics on Interactions with Health Care
Professionals and have adopted a related Comprehensive Compliance Program and
an
Anti-Fraud Program. To view the charters of the Audit, Compensation and
Nominations and Corporate Governance Committees, the Code of Ethics and
Comprehensive Compliance Program, the corporate governance guidelines and the
codes of conduct and our whistle blower policy, please visit our website at
www.photomedex.com
(this
website address is not intended to function as a hyperlink, and the information
contained on our website is not intended to be a part of this Report). The
Board
determined in 2007 that all members of the Board are independent under the
revised listing standards of The Nasdaq Stock Market, Inc. (“Nasdaq”), except
for Mr. O'Donnell, who is also our Chief Executive Officer.
Compensation
Committee.
Our
Compensation Committee discharges the Board’s responsibilities relating to
compensation of our Chief Executive Officer, other executive officers, produces
an annual report on executive compensation for inclusion in our annual proxy
statement and in this Report, and provides general oversight of compensation
structure. Other specific duties and responsibilities of the Compensation
Committee include:
| · |
reviewing
and approving objectives relevant to executive officer
compensation;
|
|
·
|
evaluating
performance and determining the compensation of our Chief Executive
Officer and other executive officers in accordance with those
objectives;
|
|
·
|
reviewing
employment agreements for executive
officers;
|
|
·
|
recommending
to the Board the compensation for our
directors;
|
|
·
|
administering
our stock option plans (except the 2000 Non-Employee Director Stock
Option
Plan); and
|
|
·
|
evaluating
human resources and compensation strategies, as
needed.
|
Our
Board
of Directors has adopted a written charter for the Compensation Committee.
The
Compensation Committee is composed of Messrs. Novak, DePiano, Dimun, Withrow
and
Connelly. Mr. Dimun serves as the Chairman of the Compensation Committee; Mr.
Connelly joined the Committee in May 2007. The Board determined in 2007 that
each member of the Compensation Committee satisfies the independence
requirements of the Commission and Nasdaq. The Compensation Committee held
eleven meetings during 2007.
The
Compensation Committee reviews executive compensation from time to time and
reports to the Board of Directors, which makes all decisions. The Compensation
Committee adheres to several guidelines in carrying out its responsibilities,
including performance by the employees, our performance, enhancement of
stockholder value, growth of new businesses and new markets and competitive
levels of fixed and variable compensation. The Compensation Committee reviews
and approves the annual salary and bonus for each executive officer (consistent
with the terms of any applicable employment agreement), provides oversight
for
employee benefit plans (and changes thereto) and administers our stock option
plans and such other employee benefit plans as may be adopted by us from time
to
time. The report of the Compensation Committee for 2007 is presented
below.
Nominations
and Corporate Governance Committee.
Our
Board has established a Nominations and Corporate Governance Committee for
the
purpose of reviewing all Board-recommended and stockholder-recommended nominees,
determining each nominee’s qualifications and making a recommendation to the
full Board as to which persons should be our Board’s nominees. Our Board has
adopted a written charter for the Nominations and Corporate Governance
Committee. The Nominations and Corporate Governance Committee is composed of
Messrs. Novak, DePiano and Anderson. Mr. Anderson serves as the Chairman of
the
Nominations and Corporate Governance Committee. The Board of Directors
determined in 2007 that each member of the Nominations and Corporate Governance
Committee satisfies the independence requirements of the Commission and Nasdaq.
The Nominations and Corporate Governance Committee held three meetings during
2007.
The
duties and responsibilities of the Nominations and Corporate Governance
Committee include:
|
·
|
identifying
and recommending to our Board individuals qualified to become members
of
our Board and to fill vacant Board
positions;
|
|
·
|
overseeing
the compensation of non-employee directors, including administering
the
2000 Non-Employee Director Stock Option
Plan;
|
|
·
|
recommending
to our Board the director nominees for the next annual meeting of
stockholders;
|
|
·
|
recommending
to our Board director committee
assignments;
|
|
·
|
reviewing
and evaluating succession planning for our Chief Executive Officer
and
other executive officers;
|
|
·
|
monitoring
the independence of our board
members;
|
|
·
|
developing
and overseeing the corporate governance principles applicable to
our Board
members, officers and employees;
|
|
·
|
monitoring
the continuing education for our directors;
and
|
|
·
|
evaluating
annually the Nominations and Corporate Governance Committee
charter.
|
Our
Board
of Directors believes that it is necessary that the majority of our Board of
Directors be comprised of independent directors and that it is desirable to
have
at least one audit committee financial expert serving on the Audit Committee.
The Nominations and Corporate Governance Committee considers these requirements
when recommending Board nominees. Our Nominations and Corporate Governance
Committee utilizes a variety of methods for identifying and evaluating nominees
for director. Our Nominations and Corporate Governance Committee will regularly
assess the appropriate size of the Board, and whether any vacancies on the
Board
are expected due to retirement or other circumstances. When considering
potential director candidates, the Nominations and Corporate Governance
Committee also considers the candidate’s character, judgment, diversity, age,
skills, including financial literacy, and experience in the context of our
needs, the needs of PhotoMedex and of the existing directors. The Committee
recommended to the Board that Mr. Stephen P. Connelly be invited to join the
Board. The Board accepted the recommendation, and Mr. Connelly accepted the
invitation in May 2007.
Audit
Committee.
Our
Board of Directors has established an Audit Committee to assist the Board in
fulfilling its responsibilities for general oversight of the integrity of our
consolidated financial statements, compliance with legal and regulatory
requirements, the independent auditors’ qualifications and independence, the
performance of our independent auditors and an internal audit function, and
risk
assessment and risk management. The duties of the Audit Committee
include:
| · |
appointing,
evaluating and determining the compensation of our independent
auditors;
|
|
·
|
reviewing
and approving the scope of the annual audit, the audit fee and the
financial statements;
|
|
·
|
reviewing
disclosure controls and procedures, internal control over financial
reporting, any internal audit function and corporate policies with
respect
to financial information;
|
|
·
|
reviewing
other risks that may have a significant impact on our financial
statements;
|
|
·
|
preparing
the Audit Committee report for inclusion in the annual proxy
statement;
|
|
·
|
establishing
procedures for the receipt, retention and treatment of complaints
regarding accounting and auditing matters;
and
|
|
·
|
evaluating
annually the Audit Committee
charter.
|
The
Audit
Committee works closely with management as well as our independent auditors.
The
Audit Committee has the authority to obtain advice and assistance from, and
receive appropriate funding from us for, outside legal, accounting or other
advisors as the Audit Committee deems necessary to carry out its
duties.
Our
Board
of Directors has adopted a written charter for the Audit Committee, meeting
applicable standards of the Commission and Nasdaq. The members of the Audit
Committee in 2007 were Messrs. DePiano, Dimun, Anderson and Withrow. Mr. DePiano
serves as Chairman of the Audit Committee. The Audit Committee meets regularly
and held nine meetings during 2007.
The
Board
of Directors determined in 2007 that each member of the Audit Committee
satisfies the independence and other composition requirements of the Commission
and Nasdaq. Our Board has determined that each member of the Audit Committee
qualifies as an “audit committee financial expert” under Item 401(h) of
Regulation S-K under the Exchange Act, and has the requisite accounting or
related financial expertise required by applicable Nasdaq rules.
Compensation
Committee Interlocks and Insider Participation
No
interlocking relationship exists between any member of our Board or Compensation
Committee and any member of the board of directors or compensation committee
of
any other companies, nor has such interlocking relationship existed in the
past.
Stockholder
Communications with the Board of Directors
Our
Board
of Directors has established a process for stockholders to communicate with
the
Board of Directors or with individual directors. Stockholders who wish to
communicate with our Board of Directors or with individual directors should
direct written correspondence to Davis Woodward, Corporate Counsel at
dwoodward@photomedex.com or to the following address (our principal executive
offices): Board of Directors, c/o Corporate Secretary, 147 Keystone Drive,
Montgomeryville, Pennsylvania 18936. Any such communication must
contain:
| · |
a
representation that the stockholder is a holder of record of
our capital
stock;
|
| · |
the
name and address, as they appear on our books, of the stockholder
sending
such communication; and
|
| · |
the
class and number of shares of our capital stock that are beneficially
owned by such
stockholder.
|
Mr.
Woodward or the Corporate Secretary, as the case may be, will forward such
communications to our Board of Directors or the specified individual director
to
whom the communication is directed unless such communication is unduly hostile,
threatening, illegal or similarly inappropriate, in which case Mr. Woodward
or
the Corporate Secretary, as the case may be, has the authority to discard the
communication or to take appropriate legal action regarding such
communication.
Compliance
with Section 16 of the Securities Exchange Act of 1934
Section
16(a) of the Securities Exchange Act of 1934, as amended, (the "Exchange Act")
requires our directors and executive officers and beneficial holders of more
than 10% of our common stock to file with the Commission initial reports of
ownership and reports of changes in ownership of our equity securities. As
of
March 14, 2008, we believe, based solely on a review of the copies of such
reports furnished to us and representations of these persons that no other
reports were filed and that all reports needed to be filed have been filed
for
the year ended December 31, 2007.
COMPENSATION
DISCUSSION AND ANALYSIS
Introduction
The
Compensation Committee is responsible for reviewing and approving the annual
compensation of our executive officers, of whom we presently have three. The
Nominations and Corporate Governance Committee is responsible for reviewing
and
approving the compensation of our non-employee directors.
The
Compensation Committee of the Board of Directors is composed solely of directors
who are not our current or former employees, and each is independent under
the
revised listing standards of The Nasdaq Stock Market, Inc. The Board of
Directors has delegated to the Compensation Committee the responsibility to
review and approve our compensation and benefits plans, programs and policies,
including the compensation of the chief executive officer and our other
executive officers as well as middle-level management and other key employees.
The Compensation Committee administers all of our executive compensation
programs, incentive compensation plans and equity-based plans and provides
oversight for all of our other compensation and benefit programs.
The
key
components of the compensation program for executive officers are base salary
and bonus, and long-term incentives in the form of stock options and now, under
the 2005 Equity Compensation Plan, in the form of restricted shares of our
common stock. These components are administered with the goal of providing
total
compensation that is competitive in the marketplace, recognizes meaningful
differences in individual performance and offers the opportunity to earn
superior rewards when merited by individual and corporate
performance.
Objectives
of Compensation Program
The
Compensation Committee intends to govern and administer compensation plans
to
support the achievement of our long-term strategic objectives, to enhance
stockholder value, to attract, motivate and retain highly qualified employees
by
paying them competitively and rewarding them for their own and our success.
We
have
no retirement plans or deferred compensation programs in effect for our
non-employee directors and our executive officers, except for our 401(k) plan
in
which the executive officers are eligible to participate. Compensation is
generally paid as earned. We do not have an exact formula for allocating between
cash and non-cash compensation, which has been in the form of stock options
and
awards of stock. We do not have a Non-Equity Incentive Plan, as that term is
used in SFAS No. 123R, “Share-Based Payment.”
In
order
to assess whether the compensation program we had been providing to our
executive officers was competitive and effective, the Compensation Committee
engaged in 2005 a third-party consulting firm specializing in executive
compensation. The consulting firm advised that our program was within the range
of compensation programs that appeared to be offered by a group of our peer
companies. The consulting firm also counseled the Compensation Committee on
modifications to the compensation program which were under consideration. The
primary consideration was the use of performance-based restricted stock. As
an
ongoing matter, the Committee does not engage a third-party consultant to advise
on our compensation policies. Nor does the Committee delegate its
responsibilities for reviewing and approving executive compensation, except
in
the case of the 2005 Investment Plan, where the Plan has pre-approved the grant
of matching options to an executive who purchases shares of our common stock
in
the open market in accordance with the provisions of the Plan.
To
the
extent consistent with the foregoing objectives, the Compensation Committee
also
intends to maximize the deductibility of compensation for tax purposes. The
Committee may, however, decide to exceed the tax deductible limits established
under Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code") when such a decision appears to be warranted based upon competitive
and
other factors.
What
Our Compensation Program is Designed to Reward
The
key
components of the compensation program for executive officers are base salary
and bonus, and long-term incentives in the form of stock options and under
the
2005 Equity Compensation Plan, restricted shares of our common stock. These
components are administered with the goal of providing total compensation that
is competitive in the marketplace, recognizes meaningful differences in
individual performance and offers the opportunity to earn superior rewards
when
merited by individual and corporate performance.
Stock
price performance has not been a factor in determining annual compensation
insofar as the price of our common stock is subject to a number of factors
outside our control. We have endeavored through the grants of stock options
to
the executive officers to incentivize individual and team performance, providing
a meaningful stake in us and linking them to a stake in our overall success.
Through the awards of restricted stock, we have striven to forge a closer link
by tying the vesting of the restricted stock to certain milestone prices of
our
common stock.
Elements
of Company’s Compensation Plan and How Each Element Relates to
Objectives
There
are
three primary elements in the compensation package of our executive officers:
base salary, bonus and long-term incentives. Compensation payable in the event
of an executive’s termination from the Company is a secondary, material element
in the package.
Base
Salaries. Base
salaries for our executive officers are designed to provide a base pay
opportunity that is appropriately competitive within the marketplace. As an
officer's level of responsibility increases, a greater proportion of his or
her
total compensation will be dependent upon our financial performance and stock
price appreciation rather than base salary. Adjustments to each individual’s
base salary are made in connection with annual performance reviews in addition
to the assessment of market competitiveness.
Bonus.
At
the
outset of a fiscal year, the Compensation Committee establishes a bonus program
for executive officers and other managers and key employees eligible to
participate in the program. The program is based on a financial plan for the
fiscal year and other business factors. The amount of bonus, if any, hinges
on
corporate performance and financial condition and on the performance of the
participant in the program. A program will typically allow some partial or
discretionary awards based on an evaluation of the relevant factors. Provision
for bonus expense is typically made over the course of a fiscal year. The
provision becomes fixed, based on the final review of the Committee, which
is
usually made after the financial results of the fiscal year have been reviewed
by our independent accountants. For 2007, there were three factors of generally
equal weight: Company revenues, the Company’s EBITDA and a discretionary
component.
Long-Term
Incentives. Grants
of
stock options under our stock option plans are designed to provide executive
officers and other managers and key employees with an opportunity to share,
along with stockholders, in our long-term performance. Stock option grants
are
generally made annually to all executive officers, with additional grants being
made following a significant change in job responsibility, scope or title or
a
significant achievement. The size of the option grant to each executive officer
is set by the Compensation Committee at a level that is intended to create
a
meaningful opportunity for stock ownership based upon the individual's current
position with us, the individual's personal performance in recent periods and
his or her potential for future responsibility and promotion over the option
term. The Compensation Committee also takes into account the number of unvested
options held by the executive officer in order to maintain an appropriate level
of equity incentive for that individual. The relevant weight given to each
of
these factors varies from individual to individual.
Prior
to
2006, stock options granted under the various stock option plans generally
have
had a four-year vesting schedule depending upon the size of the grant, and
generally have been set to expire five years from the date of grant. In 2006,
the Committee determined that such grants would be for ten years and vest over
five years. The exercise price of options granted under the stock option plans
is at no less than 100% of the fair market value of the underlying stock on
the
date of grant. The number of stock options granted to each executive officer
is
determined by the Compensation Committee based upon several factors, including
the executive officer’s salary grade, performance and the estimated value of the
stock at the time of grant, but the Compensation Committee has the flexibility
to make adjustments to those factors at its discretion. The options granted
to
executives as a rule have provisions by which vesting and exercisability are
accelerated in the event of a change of control or a termination of employment
initiated by the Company other than for cause.
Similar
criteria are applied in making awards of restricted shares of our common stock
under the 2005 Equity Compensation Plan, but in the case of restricted stock,
we
have made direct linkage between the price performance of our stock with the
vesting schedule of the restricted stock.
To
encourage our executive officers to have a greater stake in the equity of the
Company, the Committee recommended, and the Board of Directors and the Company
stockholders approved, the 2005 Investment Plan at the 2005 Annual Stockholders’
Meeting..
Compensation
on Termination of Employment or Change of Control. We
have
employment agreements with Messrs. O'Donnell, McGrath and Stewart. These
agreements provide for severance upon termination of employment, whether in
context of a change of control or not.
In
the
event of a involuntary termination not in connection with a change in control
of
the Company, an executive will be vested in those options that were unvested
as
of the termination but that would have vested in the 12 months following
termination. In the event of a change of control, all of an executive’s unvested
options will vest. As to unvested shares of restricted stock, they will vest
upon a change of control to the extent that the acquisition price exceeds a
milestone price or if the acquirer elects not to continue to employ the services
of the executive.
We
also
have arrangements with other key employees under which we would be obliged
to
pay compensation upon their termination outside a context of change of control,
and, for a lesser number of key employees, by virtue of a change of control.
If
all such executive officers and key employees were terminated other than for
cause and not within a change of control, we would have had an aggregate
commitment of approximately $1,735,000 at December 31, 2007 for severance and
related compensation. However, the obligation for such compensation that would
arise in favor of the executive officers and certain key employees by virtue
of
a change of control would have been approximately $2,148,000 at December 31,
2007.
How
Amounts Were Selected for Each Element of an Executive’s Compensation
Each
executive’s current and prior compensation is considered in setting future
compensation. In addition, we review from time to time the compensation
practices of other companies, particularly peer companies. To some extent,
our
compensation plan is based on the market and the companies we compete against
for executives. Base salary and the long-term incentives are not set with
reference to a formula.
An
executive’s target bonus amount is set by an executive’s employment agreement,
which was negotiated at arm’s length. A target bonus, or portion thereof, is
earned, based on fulfillment of conditions, which are set by the Committee
at
the outset of a fiscal year.
As
a
general rule, options and restricted stock awards are made in the first or
second quarter of a year and after the financial results for the prior year
have
been audited and reported to the Board of Directors. Grants and awards are
valued, and exercise prices are set, as of the date the grant or award is made.
Exceptions to the general rule may arise for grants made to recognize a
promotion or to address the effect of expiring options. The Committee may elect
to defer a grant until after the Company has made public disclosure of its
financial results, typically in a conference call on earnings; in such a case,
the exercise price is set at the higher of the closing prices on the approval
date or the fixed grant date. In these deliberations, the Compensation Committee
does not delegate any related function, unless to the Board of Directors as
a
whole, and the grants or awards made to executives are valued under the same
measurement standards as for grants made to other grantees.
Accounting
and Tax Considerations
On
January 1, 2006, we adopted SFAS No. 123R. Under this accounting standard,
we
are required to value stock options granted, and restricted stock awarded,
in
2006 and beyond under the fair value method and expense those amounts in the
income statement over the vesting period of the stock option or restricted
stock. We were also required to value unvested stock options granted prior
to
our adoption of SFAS 123R under the fair value method and amortize such expense
in the income statement over the stock option’s remaining vesting period. A
material portion of such amortizing expense relates to option grants made to
our
executive officers, and future option grants and stock awards made in 2006
and
beyond to our executive officers will also have a material impact on such
expense.
Our
compensation program has been structured to comply with Internal Revenue Code
Sections 409A and 162(m). If an executive is entitled to nonqualified deferred
compensation benefits that are subject to Section 409A, and such benefits do
not
comply with Section 409A, then the benefits are taxable in the first year they
are not subject to a substantial risk of forfeiture. In such case, the executive
service-provider is subject to regular federal income tax, interest and an
additional federal income tax of 20% of the benefit includible in income.
Under
Section 162(m) of the Internal Revenue Code, a limitation was placed on tax
deductions of any publicly-held corporation for individual compensation to
certain executives of such corporation exceeding $1,000,000 in any taxable
year,
unless the compensation is performance-based. The Compensation Committee has
been advised that based upon prior stockholder approval of the material terms
of
our stock option plans, compensation under these plans is excluded from this
limitation, provided that the other requirements of Section 162(m) are met.
However, when warranted based upon competitive and other factors, the
Compensation Committee may decide to exceed the tax deductible limits
established under Section 162(m) Code. The base salary provided to each
executive in 2005, 2006 and 2007 did not exceed the limits under Section 162(m)
for tax deductibility; no executive exercised any options in 2005, 2006 or
2007.
Overview
of Executive Employment Agreements and 2007 Equity-Based
Awards
Employment
Agreement with Jeffrey F. O'Donnell.
In
November 1999, we entered into an employment agreement with Jeffrey F. O'Donnell
to serve as our President and Chief Executive Officer and amended and restated
that agreement in August 2002 and October 2007. This agreement has been renewed
through December 31, 2008 and will expire then if due notice is given by
December 1, 2008. If due notice is not given, then the agreement will renew
for
an additional year and thereafter on an annual basis. Mr.
O'Donnell's current base salary has been $350,000 per year and will be $367,500
in 2008. If we terminate Mr. O'Donnell other than for "cause" (which definition
includes nonperformance of duties or competition of the employee with our
business), then he will receive severance pay equal to his base salary, payable
over 12 months. If a change of control occurs, Mr. O’Donnell becomes entitled to
severance pay by virtue of provisions related to the change of control, then
he
may become entitled to severance equal to 200% of his then base salary in a
lump
sum.
On
May 1,
2007, Mr. O’Donnell was awarded from the 2005 Equity Compensation Plan 105,000
restricted shares of our common stock, setting their purchase price at $0.01
per
share. Shares that are purchased will be held in escrow by us for as long as
they are subject to our right of repurchase. Our right of repurchase will
continue for such shares for so long as the shares remain subject to performance
restrictions and time restrictions.
As
to the
performance restrictions, our repurchase right will lapse if the trading price
of our common stock attains certain targets above the 2007 Average Price, which
by contract was set at $1.23, being higher than the average fair market value
(generally the closing price of our common stock) for each of the trading days
in the 90-day period ending on May 1, 2007. For the years 2008 through 2012,
the
Average Price will mean the average fair market value of our common stock for
each of the trading days in the period February 1 to April 30 of the applicable
calendar year. Our right of repurchase shall lapse with respect to 20% of the
purchased shares if the 2008 Average Price equals or exceeds the 2008 Target
Price, where the term “2008 Target Price” will equal 125% of the 2007 Average
Price, or $1.54, and where the lapsing shall be effective as of May 1, 2008.
Likewise,
our right of repurchase will lapse with respect to 20% of the purchased shares
if the 2009 Average Price equals or exceeds the 2009 Target Price, where the
term “2009 Target Price” will equal 125% of the 2009 Target Price, or $1.92, and
so on. For 2012, if the 2012 Average Price equals or exceeds the 2012 Target
Price of $3.75, then our right of repurchase will lapse with respect to all
of
the purchased shares for which our repurchase right has not previously lapsed,
and such lapsing will be effective as of May 1, 2012. As to time restrictions,
to the extent that any of the purchased shares remain subject to our right
of
repurchase and therefore are unvested, they will vest ratably (i.e. one-third)
on the fifth, sixth and seventh anniversaries of the award of the restricted
shares.
However,
in the event of a transaction that constitutes a change in control of the
Company, our right of repurchase will lapse with respect to the performance
restrictions on the restricted shares that are unvested immediately prior to
the
consummation of such transaction as follows. Where the per-share purchase price
paid or deemed paid in connection with such change in control is equal to or
greater than a Target Price described above, then it shall be deemed that the
Target Price has been attained as of the change in control, and our repurchase
rights applicable to such Target Price will lapse. Shares that have not vested
on a change of control will remain subject to such repurchase restriction.
Such
shares still subject to repurchase shall vest ratably and monthly over the
period of time (but not greater than 36 months) that the acquirer in the change
in control event contracts for Mr. O’Donnell’s services. If the acquirer opts
not to contract for such services, then the unvested balance of shares will
vest
as of the change in control event.
On
March
6 and March 7, 2007, Mr. O’Donnell was granted 2,000 and 1,000 stock options,
respectively, under the 2005 Investment Plan to match his purchase on the same
date of an equal number of shares of our common stock on the open market.
Employment
Agreement with Dennis M. McGrath.
In
November 1999, we entered into an employment agreement with Dennis M. McGrath
to
serve as our Chief Financial Officer and Vice President-Finance and
Administration and amended and restated that agreement in August 2002 and
September 2007. This agreement has been renewed through December 31, 2008 and
will expire then if due notice is given by December 1, 2008. If due notice
is
not given, then the agreement will renew for an additional year and thereafter
on an annual basis. Mr. McGrath's current base salary has been $285,000 per
year
and will be $299,250 in 2008. If
we
terminate Mr. McGrath other than for "cause" (which definition includes
nonperformance of duties or competition of the employee with our business),
then
he will receive severance pay equal to his base salary, payable over 12 months.
If a change of control occurs, Mr. McGrath becomes entitled to severance pay
by
virtue of provisions related to the change of control, then he may become
entitled to severance equal to 200% of his then base salary in a lump sum.
On
May 1,
2007, Mr. McGrath was awarded from the 2005 Equity Compensation Plan 87,500
restricted shares of our common stock, having a purchase price at $0.01 per
share. The terms and conditions applicable to Mr. McGrath’s award of restricted
stock are the same as the terms and conditions applicable to the award to Mr.
O’Donnell, which are discussed above.
Employment
Agreement with Michael R. Stewart. Effective
December 27, 2002, Michael R. Stewart became the Company’s Executive Vice
President of Corporate Operations, pursuant to an employment agreement. The
employment agreement was amended and restated in September 2007. Mr. Stewart
became our Chief Operating Officer on July 19, 2005, at which time he was
granted 40,000 options. Mr. Stewart’s current base salary has been $250,000 per
year and will be $262,500 in 2008. This agreement has renewed through December
31, 2008 and
will
expire then if due notice is given by December 1, 2008. If due notice is not
given, then the agreement will renew for an additional year and thereafter
on an
annual basis. If we terminate Mr. Stewart other than for “cause” (which
definition includes nonperformance of duties or competition of the employee
with
our business), then he will receive severance pay equal to his base pay, payable
over 12 months. If a change of control occurs, Mr. Stewart becomes entitled
to
severance pay by virtue of provisions related to the change of control, then
he
may become entitled to severance equal to 200% of his then base salary, payable
over 12 months.
On
May 1,
2007 and August 13, 2007, Mr. Stewart was awarded from the 2005 Equity
Compensation Plan 70,000 and 105,000 restricted shares of our common stock,
respectively, having a purchase price at $0.01 per share. The terms and
conditions applicable to Mr. Stewart’s award of restricted stock in May 2007are
the same as the terms and conditions applicable to the award to Mr. O’Donnell,
which are discussed above. The mechanics of the August agreement are the same
as
the mechanics of the May agreement, the notable differences being: (i) that
the
2007 Average Price in the August agreement was set at $1.21; (ii) the Average
Price for the subsequent 5 years is set within the period May 14 to August
12 of
the applicable year, and (iii) our rights lapse as of August 13 of the
applicable year.
The
following
SUMMARY
COMPENSATION TABLE
The
following table includes information for the years ended December 31, 2007
and
2006 concerning compensation for our three incumbent executive officers.
All of
our other officers are not executive officers, within
the meaning ascribed by the Securities and Exchange Act of 1934.
|
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
(1)
|
Stock
Awards ($) (2)
|
Option
Awards ($) (2)
|
Non-Equity
Incentive Plan Compensation ($) (3)
|
Change
in Pension Value and Nonqualified Deferred Compensation Earnings
($)
|
All
Other Compensation ($) (4)
|
Total
($)
|
|||||||||||||||||||
|
Jeffrey
F. O’Donnell,
|
2007
|
350,000
|
175,875
|
127,050
|
0
|
0
|
0
|
19,475
|
672,400
|
|||||||||||||||||||
|
President
and Chief Executive
Officer
|
2006
|
350,000
|
157,500
|
943,005
|
420,213
|
0
|
0
|
17,395
|
1,888,113
|
|||||||||||||||||||
|
Dennis
M. McGrath,
|
2007
|
285,000
|
114,570
|
105,875
|
0
|
0
|
0
|
15,844
|
521,289
|
|||||||||||||||||||
|
Chief
Financial Officer
&
Vice
Pres. - Finance/
Administrative
|
2006
|
285,000
|
102,600
|
601,727
|
377,054
|
0
|
0
|
15,105
|
1,381,486
|
|||||||||||||||||||
|
Michael
R. Stewart,
|
2007
|
250,000
|
83,750
|
275,275
|
0
|
0
|
0
|
19,004
|
628,029
|
|||||||||||||||||||
|
Chief
Operating Officer
and
Executive Vice President
|
2006
|
250,000
|
75,000
|
0
|
190,200
|
0
|
0
|
18,366
|
533,566
|
|||||||||||||||||||
(1)
“Bonus”
in
the foregoing table is the bonus earned in 2007 and 2006, even though it
will
have been paid in a subsequent period.
(2)
The
amounts shown for option awards and restricted stock awards relate to shares
granted under our 2005 Equity Compensation Plan and 2005 Investment Plan.
These
amounts are equal to the aggregate grant-date fair value with respect to
the
awards made in 2007 and 2006, computed in accordance with SFAS 123(R), before
amortization and without giving effect to estimated forfeitures. The assumptions
used in determining the amounts in this column are set forth in Note 1 to
our
consolidated financial statements. For information regarding the number of
shares subject to 2007 and 2006 awards, other features of those awards, and
the
grant-date fair value of the awards, see the Grants of Plan-Based Awards
Table
on p. 71. In 2006, 125,000 and 110,000 options granted to Messrs. O’Donnell and
McGrath, respectively, expired; in 2007, 150,000 options granted to Mr. Stewart
expired.
(3)
The
Company does not have a Non-Equity Incentive Plan.
(4)
“All
Other Compensation” includes car allowance ($12,000), premiums for supplementary
life insurance and matching 401(k) plan contributions for Messrs. O’Donnell,
McGrath
and
Stewart.
Non-Qualified
Deferred Compensation
The
Company has no plan or program of non-qualified deferred compensation.
Potential
Payments on Termination of Employment or Change of Control
Potential
payments to our three incumbent executives on termination of employment or
upon
a change of control of the Company are governed by their respective employment
agreements and by the terms of their option agreements and restricted stock
agreements.
If
any of
the events set forth in the table had occurred by December 31, 2007, then we
estimate the value of the benefits that would have been triggered and thus
accrued to the three incumbent executives as set forth below.
POTENTIAL
PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL TABLE
|
Name
|
Benefit
|
Before Change
in
Control Termination
w/o Cause
or for
Good
Reason
($)
|
After Change
in
Control Termination
w/o Cause
or
for Good
Reason
($)
|
Voluntary
Termination
|
Death
(3)
|
Disability
(3)
|
Change in
Control
|
|
Jeffrey
F. O’Donnell (1)(2)(4)
|
Severance
|
350,000
|
700,000
|
0
|
0
|
0
|
N/A
|
|
Health
continuation
|
15,554
|
31,108
|
0
|
0
|
0
|
N/A
|
|
|
AD&D
insurance
|
780
|
1,560
|
0
|
0
|
0
|
N/A
|
|
|
Executive
life ins.
|
5,355
|
10,711
|
0
|
0
|
0
|
N/A
|
|
|
Accelerated
vesting
|
0
|
592,200
|
0
|
0
|
0
|
0
|
|
|
TOTAL
|
371,689
|
1,335,579
|
0
|
0
|
0
|
0
|
|
|
Dennis
McGrath (1)(2(4))
|
Severance
|
285,000
|
570,000
|
0
|
0
|
0
|
N/A
|
|
Health
continuation
|
15,554
|
31,108
|
0
|
0
|
0
|
N/A
|
|
|
AD&D
insurance
|
780
|
1,560
|
0
|
0
|
0
|
N/A
|
|
|
Executive
life ins.
|
1,680
|
3,360
|
0
|
0
|
0
|
N/A
|
|
|
Accelerated
vesting
|
0
|
397,150
|
0
|
0
|
0
|
0
|
|
|
TOTAL
|
303,014
|
1,003,178
|
0
|
0
|
0
|
0
|
|
|
Michael
Stewart (1)(2)(4)
|
Severance
|
250,000
|
500,000
|
0
|
0
|
0
|
N/A
|
|
Health
continuation
|
15,554
|
31,108
|
0
|
0
|
0
|
N/A
|
|
|
AD&D
insurance
|
780
|
1,560
|
0
|
0
|
0
|
N/A
|
|
|
Executive
life ins.
|
5,076
|
10,152
|
0
|
0
|
0
|
N/A
|
|
|
Accelerated
vesting
|
0
|
213,850
|
0
|
0
|
0
|
0
|
|
|
TOTAL
|
271,410
|
756,670
|
0
|
0
|
0
|
0
|
_________________
(1)
If upon
a change of control, the acquirer does not desire the services of the executive,
then any unvested restricted stock will vest. The closing price of our stock
on
December 31, 2007 (the last trading day of the year) was $0.95. All shares
were
unvested at that date and were purchased for the par value of the stock,
i.e.
$0.01, assuming a change of control as of December 31, 2007, each share would
return a gain of $0.94.
(2)
All
unvested options become exercisable by reason of a change of control. However,
none of the executives’ unvested options as of December 31, 2007 were in the
money, and therefore there would have been no benefit as of December 31,
2007.
Similarly, in the event of an involuntary termination without cause, the
executive optionee becomes vested in those options that would otherwise have
vested in twelve months following the date of termination. As in the
hypothetical change of control, so in this case of hypothetical involuntary
termination, there would have been no benefit to the optionee inasmuch as
no
option was in the money at December 31, 2007.
(3)
An
executive’s salary and benefits are paid through the end of the month of
termination due to death or disability, except that we will pay the disability
premiums during the period of disability.
(4)
Severance based on 2007 salary levels.
STOCK
OPTIONS
The
2005
Equity Compensation Plan is currently the primary vehicle by which restricted
stock awards and option grants are made to the executives and other
service-providers. The Plan has been authorized by the stockholders for
6,160,000 shares of our common stock. Participation in the 2005 Investment
Plan
is limited to the executives; this Plan has been authorized by the stockholders
for 400,000 shares of our common stock.
Grants
of Plan-Based Awards Table
The
following table sets forth certain information with respect to the options
granted and
restricted stock awarded during or for the year ended December 31, 2007 to
each
of our executive officers listed in the Summary Compensation Table as shown
under the caption “Executive Compensation.” Stock awards and option grants made
in 2007 were primarily from the 2005 Equity Compensation Plan. Matching options
grants were made out of the 2005 Investment Plan to Mr. O’Donnell
for 3,000 options.
GRANTS
OF PLAN-BASED AWARDS TABLE
|
Estimated Future Payouts Under
Equity Incentive Plan Awards(2)
|
All Other
Option Awards:
Number of
Securities
Underlying
|
Exercise or
Base Price
of Option
|
Closing
Price on
Grant
|
Grant Date
Fair
Value of Stock
|
||||||||||||||||||||||||
|
Name
|
Grant
Date
|
Approval
Date (1)
|
Threshold
(#)
|
Target
(#)
|
Maximum
(#)
|
Options
(#)
|
Awards
($ / Sh)(3)
|
Date
($ / Sh)(4)
|
and Option
Awards ($)(5)
|
|||||||||||||||||||
|
Jeffrey
O’Donnell
|
3/6/07
|
3/6/07
|
2,000
|
1.13
|
N/A
|
1,854
|
||||||||||||||||||||||
|
|
3/7/07
|
3/7/07
|
1,000
|
1.15
|
N/A
|
924
|
||||||||||||||||||||||
|
|
5/1/07
|
5/1/07
|
-
|
105,000
|
-
|
N/A
|
N/A
|
1.22
|
127,050
|
|||||||||||||||||||
|
Dennis
McGrath
|
5/1/07
|
5/1/07
|
-
|
87,500
|
-
|
N/A
|
N/A
|
1.22
|
105,875
|
|||||||||||||||||||
|
Michael
Stewart
|
5/1/07
|
5/1/07
|
-
|
70,000
|
-
|
N/A
|
N/A
|
1.22
|
84,700
|
|||||||||||||||||||
|
|
8/13/07
|
7/31/07
|
-
|
157,500
|
-
|
N/A
|
N/A
|
1.14
|
190,575
|
|||||||||||||||||||
| (1) |
The
award of restricted stock to Mr. Stewart on August 13, 2007 was approved
on July 31, 2007. The award was delayed due to a pending earnings
call and
publication of our quarterly report. The 2007 average price was to
be set
at the higher of the average closing price in the 90 days from the
second
day following the filing of our 10-Q, and the closing price of the
award
date.
|
|
(2)
|
The
Company does not have a Non-Equity Incentive Plan. The Equity Incentive
Plan is comprised of the restricted shares of common stock issued
to
Messrs. O’Donnell, McGrath and Stewart under the 2005 Equity Compensation
Plan.
|
|
(3)
|
The
exercise prices of options granted under the 2005 Investment Plan
were set
equal to the optionee’s purchase price of shares of common stock on the
date of the grant.
|
|
(4)
|
The
exercise price of options granted on 3/6/07 and 3/7/07 were set equal
to
the optionee’s purchase price of shares of common stock on the date of the
grant.
|
| (5) |
Computed
in accordance with SFAS 123 (R).
|
Outstanding
Equity Awards Value at Fiscal Year-End Table
The
following table includes certain information with respect to the value of all
unexercised options previously awarded to the executive officers named above
at
the fiscal year end, December 31, 2007.
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END TABLE
|
Option
Awards
|
Stock
Awards
|
|||||||||||||||||||||||||||
|
Name
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
Equity
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
Number of
Shares or
Units of
Stock That
Have Not
Vested
(#)
|
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($) (1)
|
Equity Incentive
Plan Awards:
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
(#)
|
Equity
Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
($) (1)
|
|||||||||||||||||||
|
Jeffrey
O’Donnell
|
125,000
|
0
|
0
|
1.66
|
4/29/08
|
0
|
0
|
N/A
|
N/A
|
|||||||||||||||||||
|
112,500
|
37,500
|
0
|
2.14
|
1/22/09
|
0
|
0
|
N/A
|
N/A
|
||||||||||||||||||||
|
75,000
|
75,000
|
0
|
2.45
|
3/1/10
|
0
|
0
|
N/A
|
N/A
|
||||||||||||||||||||
|
40,000
|
160,000
|
0
|
2.50
|
1/15/16
|
0
|
0
|
525,000
|
498,750
|
||||||||||||||||||||
|
0
|
2,000
|
0
|
1.59
|
5/24/16
|
0
|
0
|
N/A
|
N/A
|
||||||||||||||||||||
|
25,000
|
100,000
|
0
|
1.11
|
11/20/16
|
0
|
0
|
N/A
|
N/A
|
||||||||||||||||||||
|
0
|
2,000
|
0
|
1.13
|
3/6/17
|
0
|
0
|
N/A
|
N/A
|
||||||||||||||||||||
|
0
|
1,000
|
0
|
1.15
|
3/7/17
|
0
|
0
|
N/A
|
N/A
|
||||||||||||||||||||
|
0
|
N/A
|
0
|
N/A
|
N/A
|
0
|
0
|
105,000
|
99,750
|
||||||||||||||||||||
|
Dennis
McGrath
|
110,000
|
0
|
0
|
1.66
|
4/29/08
|
N/A
|
N/A
|
|||||||||||||||||||||
|
93,750
|
31,250
|
0
|
2.14
|
1/22/09
|
0
|
0
|
N/A
|
N/A
|
||||||||||||||||||||
|
70,000
|
70,000
|
0
|
2.45
|
3/1/10
|
0
|
0
|
N/A
|
N/A
|
||||||||||||||||||||
|
0
|
N/A
|
0
|
N/A
|
N/A
|
0
|
0
|
335,000
|
318,250
|
||||||||||||||||||||
|
28,000
|
112,000
|
0
|
2.23
|
3/10/16
|
0
|
0
|
N/A
|
N/A
|
||||||||||||||||||||
|
0
|
5,000
|
0
|
1.58
|
5/24/16
|
0
|
0
|
N/A
|
N/A
|
||||||||||||||||||||
|
0
|
2,000
|
0
|
1.63
|
5/25/16
|
0
|
0
|
N/A
|
N/A
|
||||||||||||||||||||
|
22,000
|
88,000
|
0
|
1.11
|
11/20/16
|
0
|
0
|
N/A
|
N/A
|
||||||||||||||||||||
|
0
|
N/A
|
0
|
N/A
|
N/A
|
0
|
0
|
87,500
|
83,125
|
||||||||||||||||||||
|
Michael
Stewart
|
75,000
|
0
|
0
|
1.83
|
1/2/08
|
0
|
0
|
N/A
|
N/A
|
|||||||||||||||||||
|
56,250
|
18,750
|
0
|
2.14
|
1/22/09
|
0
|
0
|
N/A
|
N/A
|
||||||||||||||||||||
|
50,000
|
50,000
|
0
|
2.45
|
3/1/10
|
0
|
0
|
N/A
|
N/A
|
||||||||||||||||||||
|
30,000
|
10,000
|
0
|
2.63
|
7/19/10
|
0
|
0
|
N/A
|
N/A
|
||||||||||||||||||||
|
20,000
|
80,000
|
0
|
2.23
|
3/10/16
|
0
|
0
|
N/A
|
N/A
|
||||||||||||||||||||
|
0
|
N/A
|
0
|
N/A
|
N/A
|
0
|
0
|
70,000
|
66,500
|
||||||||||||||||||||
|
0
|
N/A
|
0
|
N/A
|
N/A
|
0
|
0
|
157,500
|
149,625
|
||||||||||||||||||||
(1)
The
market value of unvested shares of restricted stock is based on $0.95 per share,
which was the closing price of our stock on December 31, 2007, the last trading
day of 2007.
Option
Exercises and Stock Vested Table
None.
Compensation
Committee Report on Executive Compensation
We
have
reviewed and discussed with management certain Compensation Discussion and
Analysis provisions to be included in the Company’s 2007 Form 10-K. Based on the
reviews and discussions referred to above, we recommend to the Board of
Directors that the Compensation Discussion and Analysis referred to above be
included in the Company’s Form 10-K.
Compensation
Committee
Anthony
J. Dimun Richard
J. DePiano Wayne
M.
Withrow Stephen
P. Connelly Alan
R.
Novak
Director
Compensation
Directors
who are also our employees receive no separate compensation for serving as
directors or as members of Board committees. Directors who are not our employees
are compensated under the 2000 Non-Employee Director Plan. Each director
receives non-qualified options to purchase up to 35,000 shares of common stock
on an annual basis. Each outside director receives an annual cash retainer
of
$20,000 and is also paid $1,000 for personal attendance at each meeting of
the
Board and each committee meeting held not in conjunction with meetings of the
Board itself, and $500 for telephonic attendance at each Board or committee
meeting, excluding meetings of limited scope and duration. We pro-rate the
retainer for a director serving less than a full year. The table below sets
forth non-employee directors’ compensation in 2007.
DIRECTOR
COMPENSATION TABLE
|
Name
|
Fees Earned or
Paid in Cash ($)
|
Option Awards
($) (1)
|
Total ($)
|
|||||||
|
Richard
J. DePiano
|
32,500
|
32,060
|
(2)
|
64,560
|
||||||
|
Warwick
Alex Charlton
|
9,167
|
32,060
|
(2)
|
41,227
|
||||||
|
Alan
R. Novak
|
30,000
|
32,060
|
(2)
|
62,060
|
||||||
|
Anthony
J. Dimun
|
32,000
|
32,060
|
(2)
|
64,060
|
||||||
|
David
W. Anderson
|
28,500
|
32,060
|
(2)
|
60,560
|
||||||
|
Wayne
M. Withrow
|
32,000
|
32,060
|
(2)
|
64,060
|
||||||
|
Stephen
P. Connelly
|
13,500
|
26,171
|
(3)
|
39,671
|
||||||
(1)
The
amounts shown for option awards relate to shares granted under our 2000
Non-Employee Director Plan. These amounts are equal to the dollar amounts
recognized in 2007 with respect to the option awards for financial statement
purposes, computed in accordance with SFAS 123(R), but without giving effect
to
estimated forfeitures. The assumptions used in determining the amounts in this
column are set forth in note 1 to our consolidated financial
statements.
(2)
The
grant date fair value computed in accordance with SFAS 123(R) was
$1.11.
(3)
The
grant date fair value computed in accordance with SFAS 123(R) was
$1.22.
In
2008,
the following charges to outside director compensation will be made: (i) each
member of a committee attending a committee meeting on the day of a meeting
of
the Board shall receive $1,000 for such committee attendance; (ii) the chairmen
of the Committees will receive additional annual compensation, i.e. audit,
$10,000; compensation, $5,000; Nominations and Corporate Governance, $5,000.
Limitation
on Directors' Liabilities; Indemnification of Officers and
Directors
Our
Certificate of Incorporation and Bylaws designate the relative duties and
responsibilities of our officers, establish procedures for actions by directors
and stockholders and other items. Our Certificate of Incorporation and Bylaws
also contain extensive indemnification provisions, which will permit us to
indemnify our officers and directors to the maximum extent provided by Delaware
law. Pursuant to our Certificate of Incorporation and under Delaware law, our
directors are not liable to us or our stockholders for monetary damages for
breach of fiduciary duty, except for liability in connection with a breach
of
duty of loyalty, for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, for dividend payments
or
stock repurchases illegal under Delaware law or any transaction in which a
director has derived an improper personal benefit.
We
have
adopted a form of indemnification agreement, which provides the indemnitee
with
the maximum indemnification allowed under applicable law. Since the Delaware
statutes are non-exclusive, it is possible that certain claims beyond the scope
of the statute may be indemnifiable. The indemnification agreement provides
a
scheme of indemnification, which may be broader than that specifically provided
by Delaware law. It has not yet been determined, however, to what extent the
indemnification expressly permitted by Delaware law may be expanded, and
therefore the scope of indemnification provided by the indemnification agreement
may be subject to future judicial interpretation.
The
indemnification agreement provides that we are to indemnify an indemnitee,
who
is or was a party or becomes a party or is threatened to be made a party to
any
threatened, pending or completed action or proceeding whether civil, criminal,
administrative or investigative by reason of the fact that the indemnitee is
or
was one of our directors, officers, key employees or agents. We are to advance
all expenses, judgments, fines, penalties and amounts paid in settlement
(including taxes imposed on indemnitee on account of receipt of such payouts)
incurred by the indemnitee in connection with the investigation, defense,
settlement or appeal of any civil or criminal action or proceeding as described
above. The indemnitee is to repay such amounts advanced only if it shall be
ultimately determined that he or she is not entitled to be indemnified by us.
The advances paid to the indemnitee by us are to be delivered within 20 days
following a written request by the indemnitee. Any award of indemnification
to
an indemnitee, if not covered by insurance, would come directly from our assets,
thereby affecting a stockholder's investment.
Directors'
and Officers' Liability Insurance
We
have
obtained directors' and officers' liability insurance which expires on February
24, 2009.
The
following table reflects, as of March 14, 2008, the beneficial common stock
ownership of: (a) each of our directors, (b) each executive officer (See Item
11, "Executive Compensation"), (c) each person known by us to be a beneficial
holder of five percent (5%) or more of our common stock, and (d) all of our
executive officers and directors as a group:
|
Name
and Address Of Beneficial Owner (1)
|
Number of Shares
Beneficially Owned
|
Percentage of
Shares
Beneficially
Owned (1)
|
|||||
|
Richard
J. DePiano(2)
|
279,300
|
*
|
|||||
|
Jeffrey
F. O’Donnell (3)
|
1,129,500
|
1.78
|
|||||
|
Dennis
M. McGrath (4)
|
851,500
|
1.34
|
|||||
|
Michael
R. Stewart (5)
|
448,940
|
*
|
|||||
|
Alan
R. Novak (6)
|
261,101
|
*
|
|||||
|
David
W. Anderson (7)
|
140,000
|
*
|
|||||
|
Stephen
P. Connelly (8)
|
58,750
|
*
|
|||||
|
Anthony
J. Dimun (9)
|
311,250
|
*
|
|||||
|
Wayne
M. Withrow (10)
|
100,004
|
*
|
|||||
|
LB
I Group, Inc.
(11)
|
6,161,124
|
9.77
|
|||||
|
All
directors and officers as a group (9 persons)
(12)
|
3,580,345
|
5.50
|
|||||
| * |
Less
than 1%.
|
|
(1)
|
Beneficial
ownership is determined in accordance with the rules of the SEC.
Shares of
common stock subject to options or warrants currently exercisable
or
exercisable within 60 days of March 14, 2008, are deemed outstanding
for
computing the percentage ownership of the stockholder holding the
options
or warrants, but are not deemed outstanding for computing the percentage
ownership of any other stockholder. Unless otherwise indicated in
the
footnotes to this table, we believe stockholders named in the table
have
sole voting and sole investment power with respect to the shares
set forth
opposite such stockholder's name. Unless otherwise indicated, the
officers, directors and stockholders can be reached at our principal
offices. Percentage of ownership is based on 63,032,207shares of
common
stock outstanding as of March 14, 2008.
|
|
(2)
|
Includes
31,800 shares and options to purchase up to 247,500 shares of common
stock. Does not include options to purchase up to 17,500 shares of
common
stock, which may vest more than 60 days after March 14, 2008. Mr.
DePiano's address is 351 East Conestoga Road, Wayne, Pennsylvania
19087.
|
|
(3)
|
Includes
7,000 shares, 630,000 additional shares subject to restriction agreements
with us and options to purchase up to 492,500 shares of common stock.
Does
not include options to purchase up to 458,400 shares of common stock,
which may vest more than 60 days after March 14, 2008. Mr. O’Donnell's
address is 147 Keystone Drive, Montgomeryville, PA
18936.
|
|
(4)
|
Includes
11,000 shares, 422,500 additional shares subject to restriction agreements
with us and options to purchase up to 418,000 shares of common stock.
Does
not include options to purchase up to 377,200 shares of common stock,
which may vest more than 60 days after March 14, 2008. Mr. McGrath's
address is 147 Keystone Drive, Montgomeryville, PA
18936.
|
|
(5)
|
Includes
1,440 shares, and options to purchase 220,000 shares of common stock.
Does
not include options to purchase up to 225,600 shares of common stock,
which may vest more than 60 days after March 14, 2008. Mr. Stewart's
address is 147 Keystone Drive, Montgomeryville, PA
18936.
|
|
(6)
|
Includes
28,601 shares of common stock and options to purchase up to 232,500
shares
of common stock. Does not include options to purchase up to 17,500
shares
of common stock, which may vest more than 60 days after March 14,
2008.
Mr. Novak's address is 3050 K Street, NW, Suite 105, Washington, D.C.
20007.
|
|
(7)
|
Includes
options to purchase up to 140,000 shares of common stock. Does not
include
options to purchase up to 17,500 shares of common stock, which may
vest
more than 60 days after March 14, 2008. Mr. Anderson's address is
147
Keystone Drive, Montgomeryville, PA
18936.
|
|
(8)
|
Includes
15,000 shares of common stock and options to purchase up to 43,750
shares
of common stock. Does not include options to purchase up to 17,500
shares
of common stock, which may vest more than 60 days after March 14,
2008.
Mr. Connelly's address is 147 Keystone Drive, Montgomeryville, PA
18936.
|
|
(9)
|
Includes
145,000 shares of common stock owned by Mr. Dimun and his wife and
options
to purchase up to 166,250 shares of common stock. Does not include
options
to purchase up to 17,500 shares of common stock, which may vest more
than
60 days after March 14, 2008. Mr. Dimun’s address is 46 Parsonage Hill
Road, Short Hills, New Jersey
07078.
|
|
(10)
|
Includes
30,004 shares of common stock owned by Mr. Withrow and his wife and
options to purchase up to 70,000 shares of common stock. Does not
include
options to purchase up to 17,500 shares of common stock, which may
vest
more than 60 days after March 14, 2008. Mr. Withrow’s address is 23 Craig
Lane, Malvern, PA 19355.
|
|
(11)
|
LB
I Group Inc. is a wholly-owned subsidiary of Lehman Brothers Inc,
which is
a wholly-owned subsidiary of Lehman Brothers Holdings Inc. LB I Group
Inc.
owns 6,161,124 shares of common stock and warrants which became
exercisable on May 15, 2007 to purchase up to 894,231 shares of common
stock but which cannot be exercised if LBI owns more than 4.999%
of our
stock. The foregoing information has been derived from a Schedule
13G/A
filed on behalf of LBI Group, Inc. on February 13,
2008.
|
|
(12)
|
Includes
249,845 unrestricted shares, 1,2800,000 restricted shares and options
to
purchase 2,030,500 shares of common stock. Does not include options
to
purchase up to 1,166,200 shares of common stock, which may vest more
than
60 days after March 14, 2008.
|
As
of
March 14, 2008, Messrs. Michael R. Matthias and Jeffrey P. Berg, shareholders
in
Baker & Hostetler LLP, outside counsel to us in certain litigation, held in
the aggregate 43,563 shares of our common stock. Messrs. Matthias and Berg
acquired such shares through the exercise of stock options that they accepted
from us in exchange for legal services performed from July 1998 to May 2000.
We
believe that all transactions with our affiliates have been entered into on
terms no less favorable to us than could have been obtained from independent
third parties. We intend that any transactions with officers, directors and
5%
or greater stockholders will be on terms no less favorable to us than could
be
obtained from independent third parties and will be approved by a majority
of
our independent, disinterested directors and will comply with the Sarbanes
Oxley
Act and other securities laws and regulations.
Our
Board
determined in 2007 that all members of our Board are independent under the
applicable Nasdaq listing standards, except for Mr. O'Donnell, who is also
our
Chief Executive Officer.
Our
Audit
Committee has appointed Amper, Politziner & Mattia, P.C. as our independent
auditors for the fiscal years ending December 31, 2007 and 2006.
The
following table shows the fees paid or accrued by us for the audit and other
services provided by Amper, Politziner & Mattia for 2007 and
2006:
|
2007
|
2006
|
||||||
|
Audit
Fees
|
$
|
298,000
|
$
|
343,000
|
|||
|
Audit-Related
Fees
|
20,000
|
20,000
|
|||||
|
Tax
Fees
|
-
|
-
|
|||||
|
All
Other Fees
|
20,000
|
38,140
|
|||||
|
Total
|
$
|
338,000
|
$
|
401,140
|
|||
As
defined by the Commission, (i) “audit fees” are fees for professional services
rendered by our principal accountant for the audit of our annual financial
statements and review of financial statements included in our Form 10-Q, or
for
services that are normally provided by the accountant in connection with
statutory and regulatory filings or engagements for those fiscal years; (ii)
“audit-related fees” are fees for assurance and related services by our
principal accountant that are reasonably related to the performance of the
audit
or review of our financial statements and are not reported under “audit fees”
(iii) “tax fees” are fees for professional services rendered by our principal
accountant for tax compliance, tax advice, and tax planning; and (iv) “all other
fees” are fees for products and services provided by our principal accountant,
other than the services reported under audit fees,” “audit-related fees,” and
“tax fees.”
Audit
Fees.
The
aggregate fees billed to us in 2007 and 2006 by the independent auditors, Amper,
Politziner & Mattia, P.C., for professional services rendered in connection
with our Quarterly Reports on Form 10-Q and for the audits of our financial
statements and internal controls included in this Annual Report on Form 10-K
for
2007 and 2006, totaled approximately $298,000 and $343,000, respectively.
Audit-Related
Fees. The
aggregate fees billed to us by Amper, Politziner & Mattia, P.C. for
assurance and related services that are reasonably related to the performance
of
the audit and review of our financial statements that are not already reported
in the paragraph immediately above totaled approximately $21,000 for 2007 and
$35,000 for 2006, principally for the audit of the 401(K) plan.
All
Other Fees. The
aggregate fees billed to us by Amper, Politziner & Mattia, P.C. for products
and services rendered for tax consulting and other services were for $17,365
for
2007 and $1,250 for 2006.
Engagement
of the Independent Auditor.
The
Audit Committee is responsible for approving every engagement of Amper,
Politziner & Mattia, P.C. to perform audit or non-audit services for us
before Amper, Politziner & Mattia, P.C. is engaged to provide those
services. Under applicable Commission rules, the Audit Committee is required
to
pre-approve the audit and non-audit services performed by the independent
auditors in order to ensure that they do not impair the auditors’ independence.
The Commission’s rules specify the types of non-audit services that an
independent auditor may not provide to its audit client and establish the Audit
Committee’s responsibility for administration of the engagement of the
independent auditors.
Consistent
with the Commission’s rules, the Audit Committee Charter requires that the Audit
Committee review and pre-approve all audit services and permitted non-audit
services provided by the independent auditors to us or any of our subsidiaries.
The Audit Committee may delegate pre-approval authority to a member of the
Audit
Committee and if it does, the decisions of that member must be presented to
the
full Audit Committee at its next scheduled meeting.
The
Audit
Committee’s pre-approval policy provides as follows:
· First,
once a year when the base audit engagement is reviewed and approved, management
will identify all other services (including fee ranges) for which management
knows it will engage Amper, Politziner & Mattia for the next 12 months.
Those services typically include quarterly reviews, specified tax matters,
certifications to the lenders as required by financing documents, consultation
on new accounting and disclosure standards and, in future years, reporting
on
management’s internal controls assessment.
· Second,
if any new “unlisted” proposed engagement arises during the year, the engagement
will require approval of the Audit Committee.
Auditor
Selection for Fiscal 2008
Amper,
Politziner & Mattia, P.C. has
been
selected to serve as our independent auditors for the year ending December
31,
2008, subject to conclusion of an engagement letter and ratification by our
stockholders at the next Annual Meeting.
|
(a)(1)
|
Financial
Statements
|
Consolidated
balance sheet of PhotoMedex, Inc. and subsidiaries as of December 31, 2007
and
2006, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the 3-year period ended December
31, 2007.
| (a)(2) |
Financial
Statement Schedules
|
All
schedules have been omitted because they are not required, not applicable,
or
the information is otherwise set forth in the consolidated financial statements
or notes thereto.
(b) Exhibits
Following
the footnote reference is the number of the exhibit in the original filing
(e.g.
“Exh 10.3”) in which it was submitted to the SEC.
|
2.1
|
Agreement
and Plan of Merger, dated September 25, 2002, between PhotoMedex,
Inc., J
Merger Corp., Inc. and Surgical Laser Technologies, Inc.
(1)
|
|
|
2.2
|
Agreement
and Plan of Merger, dated December 1, 2004, between PhotoMedex, Inc.,
Gold
Acquisition Merger Corp. and ProCyte Corporation (2)
|
|
|
2.3
|
Securities
Purchase Agreement, dated October 31, 2006, by and between PhotoMedex,
Inc. and each purchaser a party thereto (3)
|
|
|
3.1(a)
|
Restated
Certificate of Incorporation, filed on August 8, 2000 (4) (Exh
3.1)
|
|
|
3.1(b)
|
Amendment
to Restated Certificate of Incorporation, filed on January 6, 2004
(5)
(Exh 3.2)
|
|
|
3.2
|
Amended
and Restated Bylaws , (5) (Exh 3.1E)
|
|
|
3.2(a)
|
Amended
Section 6.01 of the By-laws, October 30, 2007
|
|
|
10.1
|
Lease
Agreement dated May 29, 1996, between Surgical Laser Technologies,
Inc.
and Nappen & Associates (Montgomeryville, Pennsylvania) (5)(Exh
10.31)
|
|
|
10.2
|
Lease
Renewal Agreement, dated January 18, 2001, between Surgical Laser
Technologies, Inc. and Nappen & Associates (5)(Exh
10.32)
|
|
|
10.3
|
Lease
Agreement, dated July 10, 2006, PhotoMedex, Inc. and Nappen &
Associates (6)(Exh 10.3)
|
|
|
10.4
|
Lease
Agreement (Carlsbad, California) dated August 4, 1998
(7)
|
|
|
10.5
|
Standard
Industrial/Commercial Multi-Tenant Lease - Net, dated March 17, 2005
(Carlsbad, California)(8)(Exh 10.52)
|
|
|
10.6
|
Industrial
Real Estate Lease, dated May 3, 2007, and delivered December 14,
2007
|
|
|
10.7
|
License
and Development Agreement, dated May 22, 2002, between Surgical Laser
Technologies, Inc. and Reliant Technologies, Inc. (5)(Exh
10.7)
|
|
|
10.8
|
Secured
Promissory Note, dated May 22, 2002, between Surgical Laser Technologies,
Inc. and Reliant Technologies, Inc. (5)(Exh 10.8)
|
|
|
10.9
|
Security
Agreement, dated May 22, 2002, between Surgical Laser Technologies,
Inc.
and Reliant Technologies, Inc. (5)(Exh 10.9)
|
|
|
10.10
|
Agreement
as to Collateral, dated May 22, 2002, among Surgical Laser Technologies,
Inc., Reliant Technologies, Inc. and AmSouth Bank (5)(Exh
10.10)
|
|
|
10.11
|
Master
Purchase Agreement, dated September 7, 2004, between PhotoMedex,
Inc. and
Stern Laser, srl (9)
|
|
|
10.12
|
Master
Lease Agreement, dated June 25, 2004, between PhotoMedex, Inc. and
GE
Capital Corporation. (10)
|
|
|
10.13
|
Investment
Agreement, dated March 30, 2006, between AzurTec, Inc. and PhotoMedex,
Inc. (11)(Exh 10.56)
|
|
|
10.14
|
License
Agreement, dated March 30, 3006, between AzurTec, Inc. and PhotoMedex,
Inc. (11)(Exh 10.57)
|
|
|
10.15
|
License
Agreement, dated March 31, 2006, and effective April 1, 1006, between
Mount Sinai School of Medicine and PhotoMedex, Inc.
(12)
|
|
|
10.16
|
2005
Equity Compensation Plan, approved December 28, 2005
(13)
|
|
|
10.17
|
2005
Investment Plan, approved December 28, 2005 (13)
|
|
|
10.18
|
Amended
and Restated 2000 Non-Employee Director Stock Option Plan
(1)
|
|
|
10.19
|
Amended
and Restated 2000 Stock Option Plan (1)
|
|
|
10.20
|
2004
Stock Option Plan, assumed from ProCyte (14)
|
|
|
10.21
|
1996
Stock Option Plan, assumed from ProCyte (14)
|
|
|
10.22
|
1991
Restated Stock Option Plan for Non-Employee Directors, assumed from
ProCyte (14)
|
|
|
10.23
|
1989
Restated Stock Option Plan, assumed from ProCyte (14)
|
|
|
10.24
|
Amended
and Restated Employment Agreement with Jeffrey F. O'Donnell, dated
October
30, 2007
|
|
|
10.25
|
Amended
and Restated Employment Agreement with Dennis M. McGrath, dated September
1, 2007
|
|
|
10.26
|
Amended
and Restated Employment Agreement of Michael R. Stewart, dated September
1, 2007
|
|
|
10.27
|
Employment
Agreement of John F. Clifford, dated March 18, 2005 (2)
|
|
|
10.28
|
Employment
Agreement of Robin L. Carmichael, dated March 18, 2005
(2)
|
|
|
10.29
|
Separation
Agreement, effective June 30, 2006, between PhotoMedex, Inc. and
John F.
Clifford. (15)
|
|
|
10.30
|
Restricted
Stock Purchase Agreement of Jeffrey F. O’Donnell, dated January 15, 2006
(8)(Exh 10.44)
|
|
|
10.31
|
Restricted
Stock Purchase Agreement of Dennis M. McGrath, dated January 15,
2006
(8)(Exh 10.45)
|
|
|
10.32
|
Consulting
Agreement dated January 21, 1998 between the Company and R. Rox
Anderson, M.D. (7)(Exh 10.4)
|
|
10.33
|
Restricted
Stock Purchase Agreement of Jeffrey F. O’Donnell, dated May 1, 2007
(17)
|
|
|
10.34
|
Restricted
Stock Purchase Agreement of Dennis M. McGrath, dated May 1, 2007
(17)
|
|
|
10.35
|
Restricted
Stock Purchase Agreement of Michael R. Stewart, dated May 1, 2007
(17)
|
|
|
10.36
|
Restricted
Stock Purchase Agreement of Michael R. Stewart, dated August 13,
2007
(18)
|
|
|
10.37
|
Amended and Restated 2000 Non-Employee Director Stock Option Plan, dated as of June 26, 2007 (17) | |
|
10.38
|
Amended and Restated 2005 Employee Compensation Plan, dated as of June 26, 2007 (17) |
|
List
of subsidiaries of the Company
|
||
|
Consent
of Amper, Politziner & Mattia P.C.
|
||
|
Rule
13a-14(a) Certificate of Chief Executive Officer
|
||
|
Rule
13a-14(a) Certificate of Chief Financial Officer
|
||
|
Certificate
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
||
|
Certificate
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
(1)
|
Filed
as part of our Registration Statement on Form S-4, as filed with
the
Commission on October 18, 2002, and as
amended.
|
|
(2)
|
Filed
as part of our Registration Statement on Form S-4/A filed with the
Commission on January 21, 2005, and as
amended.
|
|
(3)
|
Filed
as part of our Current Report on Form 8-K, dated November 6,
2006.
|
|
(4)
|
Filed
as part of our Quarterly Report on Form 10-Q for the quarter ended
June
30, 2000.
|
|
(5)
|
Filed
as part of our Annual Report on Form 10-K for the year ended December
31,
2002.
|
| (6) |
Filed
as part of our Annual Report on Form 10-K for the year ended December
31,
2006.
|
| (7) |
Filed
as part of our Registration Statement on Form S-1, as filed with
the
Commission on January 28, 1998, as
amended.
|
| (8) |
Filed
as part of our Annual Report on Form 10-K for the year ended December
31,
2005.
|
| (9) |
Filed
as part of our Current Report on Form 8-K, dated September 10,
2004.
|
| (10) |
Filed
as part of our Quarterly Report on Form 10-Q for the quater ended
June 30, 2004.
|
| (11) |
Filed
as part of our Current Report on Form 8-K, filed on April 6,
2006.
|
| (12) |
Filed
as part of our Current Report on Form 8-K, filed on April 10,
2006.
|
| (13) |
Filed
as part of our Definitive Proxy Statement on Schedule 14A, as filed
with
the Commission on November 15,
2005.
|
| (14) |
Filed
as part of our Registration Statement on Form S-8, as filed with
the
Commission on April 13, 2005.
|
| (15) |
Filed
as part of our Quarterly Report on Form 10-Q for the quarter ended
March
31, 2006.
|
| (16) |
Filed
as part of our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003.
|
| (17) | Filed as part of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007. |
| (18) | Filed as part of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2007. |
AVAILABLE
INFORMATION
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.
Our
primary Internet address is www.photomedex.com.
Corporate information can be located by clicking on the “Investor Relations”
link in the top-middle of the page, and then clicking on “SEC Filing” in the
menu. We make our periodic Commission Reports (Forms 10-Q and Forms 10-K) and
current reports (Form 8-K) available free of charge through our Web site as
soon
as reasonably practicable after they are filed electronically with the
Commission. We may from time to time provide important disclosures to investors
by posting them in the Investor Relations section of our Web site, as allowed
by
Commission’s rules. The information on the website listed above is not and
should not be considered part of this Annual Report on Form 10-K and is intended
to be an inactive textual reference only.
Pursuant
to the requirements of Section 13 or 15(d) 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:
March 17, 2008
|
By:
|
/s/
Jeffrey F. O’Donnell
|
|
|
Jeffrey
F. O’Donnell
|
|||
|
President,
Chief Executive Officer
and
Director
|
|||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
Capacity
in Which Signed
|
Date
|
||
|
/s/
Richard J. DePiano
|
Chairman
of the Board of Directors
|
March
17, 2008
|
||
|
Richard
J. DePiano
|
||||
|
/s/
Jeffrey F. O’Donnell
|
President,
Chief Executive Officer and Director
|
March
17, 2008
|
||
|
Jeffrey
F. O'Donnell
|
||||
|
/s/
Dennis M. McGrath
|
Chief
Financial Officer
|
March
17, 2008
|
||
|
Dennis
M. McGrath
|
||||
|
/s/
Alan R. Novak
|
Director
|
March
17, 2008
|
||
|
Alan
R. Novak
|
||||
|
/s/
David W. Anderson
|
Director
|
March
17, 2008
|
||
|
David
W. Anderson
|
||||
|
/s/
Stephen P. Connelly
|
Director
|
March
17, 2008
|
||
|
Stephen
P. Connelly
|
||||
|
/s/
Anthony J. Dimun
|
Director
|
March
17, 2008
|
||
|
Anthony
J. Dimun
|
||||
|
/s/
Wayne M. Withrow
|
Director
|
March
17, 2008
|
||
|
Wayne
M. Withrow
|
PHOTOMEDEX,
INC. AND SUBSIDIARIES
Index
to
Consolidated Financial Statements
|
Page
|
||
|
F-2
|
||
|
F-3
|
||
|
F-4
|
||
|
F-5
|
||
|
F-6
|
||
|
F-7
|
Board
of
Directors and shareholders
PhotoMedex,
Inc. and Subsidiaries
We
have
audited the accompany consolidated balance sheets of PhotoMedex, Inc. and
Subsidiaries as of December 31, 2007 and 2006, and the related consolidated
statements of operations, stockholders’ equity and cash flows for each of the
years in the three-year period ended December 31, 2007. We also have audited
PhotoMedex, Inc.’s internal control over financial reporting as of December 31,
2007, based on criteria established in Internal
Control-Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
PhotoMedex, Inc.’s management is responsible for these financial statements, for
maintaining effective internal control over financial reporting. Our
responsibility is to express an opinion on these financial statements and an
opinion on the company’s internal control over financial reporting based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made my management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis
for
our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of PhotoMedex, Inc. and Subsidiaries
as of December 31, 2007 and 2006, and the results of its operations and its
cash
flows for each of the years in the three-year period ended December 31, 2007
in
conformity with accounting principles generally accepted in the United States
of
America. Also in our opinion, PhotoMedex, Inc. and Subsidiaries maintained,
in
all material respects, effective internal control over financial reporting
as of
December 31, 2007, based on criteria established in Internal
Control-Internal Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
As
discussed in Note 1 to the consolidated financial statements, the Company
changed the manner in which it accounts for stock-based compensation in 2006.
As
discussed in Note 13 to the consolidated financial statements, the Company
changed the manner in which it accounts for uncertainty in income taxes in
2007.
/s/
Amper
Politziner & Mattia P.C.
March
11,
2008
Edison,
New Jersey
PHOTOMEDEX,
INC. AND SUBSIDIARIES
|
December
31,
|
|||||||
|
2007
|
2006
|
||||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
9,837,303
|
$
|
12,729,742
|
|||
|
Restricted
cash
|
117,000
|
156,000
|
|||||
|
Accounts
receivable, net of allowance for doubtful accounts of $542,983 and
$508,438, respectively
|
6,759,060
|
4,999,224
|
|||||
|
Inventories
|
7,929,542
|
7,301,695
|
|||||
|
Prepaid
expenses and other current assets
|
508,384
|
534,135
|
|||||
|
Total
current assets
|
25,151,289
|
25,720,796
|
|||||
|
Property
and equipment, net
|
10,143,808
|
9,054,098
|
|||||
|
Patents
and licensed technologies, net
|
1,408,248
|
1,695,727
|
|||||
|
Goodwill,
net
|
16,917,808
|
16,917,808
|
|||||
|
Other
intangible assets, net
|
2,607,625
|
3,537,625
|
|||||
|
Other
assets
|
457,925
|
555,467
|
|||||
|
Total
assets
|
$
|
56,686,703
|
$
|
57,481,521
|
|||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Current
portion of notes payable
|
$
|
129,305
|
$
|
195,250
|
|||
|
Current
portion of long-term debt
|
4,757,133
|
3,018,874
|
|||||
|
Accounts
payable
|
3,634,519
|
3,617,726
|
|||||
|
Accrued
compensation and related expenses
|
1,581,042
|
1,529,862
|
|||||
|
Other
accrued liabilities
|
674,374
|
657,293
|
|||||
|
Deferred
revenues
|
668,032
|
632,175
|
|||||
|
Total
current liabilities
|
11,444,405
|
9,651,180
|
|||||
|
Notes
payable, net of current maturities
|
106,215
|
133,507
|
|||||
|
Long-term
debt, net of current maturities
|
5,602,653
|
3,593,920
|
|||||
|
Total
liabilities
|
17,153,273
|
13,378,607
|
|||||
|
Commitment
and contingencies
|
|||||||
|
Stockholders'
Equity:
|
|||||||
|
Common
Stock, $.01 par value, 100,000,000 shares authorized; 63,032,207
and
62,536,054 shares issued and outstanding, respectively
|
630,322
|
625,360
|
|||||
|
Additional
paid-in capital
|
132,932,357
|
131,152,557
|
|||||
|
Accumulated
deficit
|
(94,029,249
|
)
|
(87,675,003
|
)
|
|||
|
Total
stockholders' equity
|
39,533,430
|
44,102,914
|
|||||
|
Total
liabilities and stockholders’ equity
|
$
|
56,686,703
|
$
|
57,481,521
|
|||
The
accompanying notes are an integral part of these consolidated financial
statements.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
|
For
the Year Ended December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Revenues:
|
||||||||||
|
Product
sales
|
$
|
23,626,660
|
$
|
20,352,905
|
$
|
16,544,894
|
||||
|
Services
|
15,086,957
|
12,836,972
|
11,839,612
|
|||||||
|
38,713,617
|
33,189,877
|
28,384,506
|
||||||||
|
Cost
of revenues:
|
||||||||||
|
Product
cost of revenues
|
9,539,787
|
8,628,651
|
7,219,504
|
|||||||
|
Services
cost of revenues
|
10,528,247
|
9,843,199
|
8,456,001
|
|||||||
|
20,068,034
|
18,471,850
|
15,675,505
|
||||||||
|
Gross
profit
|
18,645,583
|
14,718,027
|
12,709,001
|
|||||||
|
Operating
expenses:
|
||||||||||
|
Selling,
general and administrative
|
23,229,276
|
20,682,056
|
16,477,322
|
|||||||
|
Engineering
and product development
|
799,108
|
1,006,600
|
1,127,961
|
|||||||
|
24,028,384
|
21,688,656
|
17,605,283
|
||||||||
|
Loss
from operations
|
(5,382,801
|
)
|
(6,970,629
|
)
|
(4,896,282
|
)
|
||||
|
Refinancing
charge
|
(441,956
|
)
|
-
|
-
|
||||||
|
Interest
expense, net
|
(529,489
|
)
|
(521,768
|
)
|
(342,299
|
)
|
||||
|
Other
income, net
|
-
|
-
|
1,302,537
|
|||||||
|
Net
loss
|
$ |
(6,354,246
|
)
|
$ |
(7,492,397
|
)
|
$ |
(3,936,044
|
)
|
|
|
Basic
and diluted net loss per share
|
$ |
(0.10
|
)
|
$ |
(0.14
|
)
|
$ |
(0.08
|
)
|
|
|
Shares
used in computing basic and diluted net loss per share
|
62,810,338
|
54,188,914
|
48,786,109
|
|||||||
The
accompanying notes are an integral part of these consolidated financial
statements
PHOTOMEDEX,
INC. AND SUBSIDIARIES
|
Additional
|
|||||||||||||||||||
|
Common
Stock
|
Paid-In
|
Accumulated
|
Deferred
|
||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Deficit
|
Compensation
|
Total
|
||||||||||||||
|
BALANCE,
DECEMBER 31, 2004
|
40,075,019
|
$
|
400,750
|
$
|
90,427,632
|
$ |
(76,246,562
|
)
|
$ |
(1,537
|
)
|
$
|
14,580,283
|
||||||
|
Exercise
of warrants
|
73,530
|
735
|
146,325
|
-
|
-
|
147,060
|
|||||||||||||
|
Exercise
of stock options
|
350,189
|
3,502
|
624,329
|
-
|
-
|
627,831
|
|||||||||||||
|
Issuance
of stock for ProCyte merger, net of expense
|
10,540,579
|
105,406
|
26,197,732
|
-
|
(132,081
|
)
|
26,171,057
|
||||||||||||
|
Stock
options issued to consultants for services
|
-
|
-
|
123,257
|
-
|
-
|
123,257
|
|||||||||||||
|
Reversal
of unamortized portion of deferred compensation for terminated
employee
|
-
|
-
|
(1,534
|
)
|
-
|
1,534
|
-
|
||||||||||||
|
Amortization
of deferred compensation
|
-
|
-
|
-
|
-
|
76,737
|
76,737
|
|||||||||||||
|
Issuance
of stock for Stern laser assets acquisition, net of
expenses
|
374,977
|
3,750
|
723,300
|
-
|
-
|
727,050
|
|||||||||||||
|
Registration
expense
|
-
|
-
|
(161,739
|
)
|
-
|
-
|
(161,739
|
)
|
|||||||||||
|
Issuance
of warrants for draws under line of credit
|
-
|
-
|
61,536
|
-
|
-
|
61,536
|
|||||||||||||
|
Net
loss
|
-
|
-
|
-
|
(3,936,044
|
)
|
-
|
(3,936,044
|
)
|
|||||||||||
|
BALANCE,
DECEMBER 31, 2005
|
51,414,294
|
514,143
|
118,140,838
|
(80,182,606
|
)
|
(55,347
|
)
|
38,417,028
|
|||||||||||
|
Reversal
of deferred compensation upon adoption of SFAS 123R
|
-
|
-
|
(55,347
|
)
|
-
|
55,347
|
-
|
||||||||||||
|
Exercise
of warrants
|
140,000
|
1,400
|
166,600
|
-
|
-
|
168,000
|
|||||||||||||
|
Exercise
of stock options
|
60,750
|
607
|
86,664
|
-
|
-
|
87,271
|
|||||||||||||
|
Sale
of stock, net of expenses
|
9,760,000
|
97,600
|
10,449,402
|
-
|
-
|
10,547,002
|
|||||||||||||
|
Amortization
of deferred compensation
|
-
|
-
|
55,347
|
-
|
-
|
55,347
|
|||||||||||||
|
Stock
options issued to consultants for service
|
-
|
-
|
132,624
|
-
|
132,624
|
||||||||||||||
|
Stock-based
compensation expense related to employee options
|
-
|
-
|
990,372
|
-
|
-
|
990,372
|
|||||||||||||
|
Issuance
of restricted stock
|
860,000
|
8,600
|
314,174
|
-
|
-
|
322,774
|
|||||||||||||
|
Issuance
of stock for Azurtec agreement
|
200,000
|
2,000
|
381,273
|
-
|
-
|
383,273
|
|||||||||||||
|
Issuance
of stock for Stern laser assets acquisition, net of
expenses
|
101,010
|
1,010
|
190,725
|
-
|
-
|
191,735
|
|||||||||||||
|
Stock-based
compensation expense related to severance agreement
|
-
|
-
|
195,497
|
-
|
-
|
195,497
|
|||||||||||||
|
Issuance
of warrants for draws under line of credit
|
-
|
-
|
104,388
|
-
|
-
|
104,388
|
|||||||||||||
|
Net
loss
|
-
|
-
|
-
|
(7,492,397
|
)
|
-
|
(7,492,397
|
)
|
|||||||||||
|
BALANCE,
DECEMBER 31, 2006
|
62,536,054
|
625,360
|
131,152,557
|
(87,675,003
|
)
|
-
|
44,102,914
|
||||||||||||
|
Exercise
of stock options
|
76,153
|
762
|
85,192
|
-
|
-
|
85,954
|
|||||||||||||
|
Stock
options issued to consultants for service
|
-
|
-
|
109,107
|
-
|
-
|
109,107
|
|||||||||||||
|
Stock-based
compensation expense related to employee options
|
-
|
-
|
955,767
|
-
|
-
|
955,767
|
|||||||||||||
|
Issuance
of restricted stock
|
420,000
|
4,200
|
380,007
|
-
|
-
|
384,207
|
|||||||||||||
|
Issuance
of warrants for draws under line of credit
|
-
|
-
|
249,727
|
-
|
-
|
249,727
|
|||||||||||||
|
Net
loss
|
-
|
-
|
-
|
(6,354,246
|
)
|
-
|
(6,354,246
|
)
|
|||||||||||
|
BALANCE,
DECEMBER 31, 2007
|
63,032,207
|
$
|
630,322
|
$
|
132,932,357
|
$ |
(94,029,249
|
)
|
-
|
$
|
39,533,430
|
||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
|
|
For the Year Ended December 31,
|
|||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Cash
Flows From Operating Activities:
|
||||||||||
|
Net
loss
|
$
|
(6,354,246
|
)
|
$
|
(7,492,397
|
)
|
$
|
(3,936,044
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||||
|
Depreciation
and amortization
|
4,822,035
|
4,199,047
|
3,217,200
|
|||||||
|
Refinancing
charge
|
441,956
|
-
|
-
|
|||||||
|
Loss
on disposal of property and equipment
|
1,922
|
7,500
|
101,009
|
|||||||
|
Provision
for doubtful accounts
|
103,064
|
66,211
|
373,964
|
|||||||
|
Stock
options and warrants issued to consultants
for services
|
109,107
|
132,624
|
123,257
|
|||||||
|
Compensatory
charge for stock options and restricted stock issued to employees
|
1,335,773
|
1,304,546
|
-
|
|||||||
|
Non-monetary
exchange
|
-
|
-
|
(88,667
|
)
|
||||||
|
Amortization
of deferred compensation
|
-
|
55,347
|
76,737
|
|||||||
|
Changes
in operating assets and liabilities, net of acquisition:
|
||||||||||
|
Accounts
receivable
|
(1,864,007
|
)
|
(414,355
|
)
|
229,768
|
|||||
|
Inventories
|
(684,193
|
)
|
815,766
|
(782,880
|
)
|
|||||
|
Prepaid
expenses and other assets
|
817,711
|
1,138,691
|
1,011,340
|
|||||||
|
Accounts
payable
|
172,793
|
45,648
|
(518,289
|
)
|
||||||
|
Accrued
compensation and related expenses
|
69,370
|
315,508
|
(246,950
|
)
|
||||||
|
Other
accrued liabilities
|
-
|
(279,295
|
)
|
(1,023,921
|
)
|
|||||
|
Deferred
revenues
|
35,857
|
166,143
|
(266,366
|
)
|
||||||
|
Net
cash (used in) provided by operating activities
|
(992,858
|
)
|
60,984
|
(1,729,842
|
)
|
|||||
|
Cash
Flows From Investing Activities:
|
||||||||||
|
Purchases
of property and equipment
|
(131,654
|
)
|
(94,976
|
)
|
(123,201
|
)
|
||||
|
Lasers
placed into service
|
(4,426,963
|
)
|
(4,931,835
|
)
|
(3,461,803
|
)
|
||||
|
Cash
received from acquisition of ProCyte, net of acquisition
costs
|
-
|
-
|
5,578,416
|
|||||||
|
Net
cash (used in) provided by investing activities
|
(4,558,617
|
)
|
(5,026,811
|
)
|
1,993,412
|
|||||
|
Cash
Flows From Financing Activities:
|
||||||||||
|
Proceeds
from issuance of common stock, net
|
-
|
10,547,002
|
(169,524
|
)
|
||||||
|
Proceeds
from issuance of restricted common stock
|
4,200
|
8,600
|
-
|
|||||||
|
Proceeds
from exercise of options
|
85,954
|
87,271
|
627,831
|
|||||||
|
Proceeds
from exercise of warrants
|
-
|
168,000
|
147,060
|
|||||||
|
Payments
on long-term debt
|
(96,504
|
)
|
(179,993
|
)
|
(263,442
|
)
|
||||
|
Payments
on notes payable
|
(688,040
|
)
|
(900,715
|
)
|
(882,032
|
)
|
||||
|
Net
advances on line of credit
|
3,314,426
|
2,511,437
|
1,889,487
|
|||||||
|
Decrease
(increase) in restricted cash, cash equivalents and short-term
investments
|
39,000
|
50,931
|
(94,731
|
)
|
||||||
|
Net
cash provided by financing activities
|
2,659,036
|
12,292,533
|
1,254,649
|
|||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(2,892,439
|
)
|
7,326,706
|
1,518,219
|
||||||
|
Cash
and cash equivalents, beginning of year
|
12,729,742
|
5,403,036
|
3,884,817
|
|||||||
|
Cash
and cash equivalents, end of year
|
$
|
9,837,303
|
$
|
12,729,742
|
$
|
5,403,036
|
||||
The
accompanying notes are an integral part of these consolidated financial
statements.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
Note
1
The
Company and Summary of Significant Accounting Policies:
The
Company:
Background
PhotoMedex,
Inc. (and its subsidiaries) (the “Company”) is a medical device and specialty
pharmaceutical company focused on facilitating the cost-effective use of
technologies for doctors, hospitals and surgery centers to enable their patients
to achieve a higher quality of life. The Company operates in five distinct
business units, or segments (as described in Note 11): three in Dermatology,
-
Domestic XTRAC®, International Dermatology Equipment, and Skin Care (ProCyte®);
and two in Surgical, - Surgical Services (SIS™) and Surgical Products (SLT®).
The segments are distinguished by our management structure, products and
services offered, markets served or types of customers.
The
Domestic XTRAC segment primarily derives revenues from procedures performed
by
dermatologists in the United States. The Company’s XTRAC laser system is
generally placed in a dermatologist’s office without any initial capital cost to
the dermatologist, and then the Company charges a fee-per-use to treat skin
disease. The Company will also sell an XTRAC system to a new customer or to
an
established customer, as circumstances may dictate. The International
Dermatology Equipment segment was formerly called the International XTRAC
segment, but the Company re-named this segment following the addition of the
VTRAC™ lamp-based system in 2006. In comparison to the Domestic XTRAC segment,
the International Dermatology Equipment segment generates revenues from the
sale
of equipment to dermatologists outside the United States through a network
of
distributors. The Skin Care segment generates revenues primarily by selling
physician-dispensed skincare products worldwide and by earning royalties on
licenses for our patented copper peptide compound.
The
Company designed and manufactured the XTRAC laser system to treat psoriasis,
vitiligo, atopic dermatitis and leukoderma phototherapeutically. In January
2000, the Company received the first Food and Drug Administration (“FDA”)
clearance to market an excimer laser system, the XTRAC® laser system, for the
treatment of psoriasis. It was followed by FDA 510(k) clearance to treat
vitiligo in March 2001, atopic dermatitis in August 2001, and leukoderma in
May
2002. The first XTRAC phototherapy treatment systems were commercially
distributed in the United States in August 2000 before any of its procedures
had
been approved for medical insurance reimbursement. In the last several years,
the Company has sought to obtain reimbursement for psoriasis and other
inflammatory skin disorders. By the latter part of 2005, the Company had
received many approvals for the reimbursement for use of the XTRAC system.
In December 2007, the Company received approval from Blue Shield of California.
The manufacturing facility for the XTRAC laser system is located in Carlsbad,
California.
The
Surgical Services segment generates revenues by providing fee-based procedures
typically using our mobile surgical laser equipment delivered and operated
by a
technician at hospitals and surgery centers in the United States. The Surgical
Products segment generates revenues by selling laser products and disposables
to
hospitals and surgery centers both domestically and internationally. The
Surgical Products segment also sells other non-laser products.
The
Skin
Care business resulted from the acquisition of ProCyte Corporation (“ProCyte”)
on March 18, 2005. ProCyte, located in Redmond, Washington, markets products
for
skin health, hair care and wound care. Many of these products incorporate
patented copper peptide technologies. (see Note
2).
The
Company also develops, manufactures and markets proprietary lasers and delivery
systems for both contact and non-contact surgery and provides surgical services
utilizing these and other manufacturers’ products. The Montgomeryville facility
also serves as the Company’s corporate headquarters.
Liquidity
and Going Concern
The
Company has incurred significant losses and negative cash flows from operations.
As of December 31, 2007, the Company had an accumulated deficit of $94,029,249.
The Company has historically financed its activities from operations, the
private placement of equity securities and borrowings under lines of credit.
To
date, the Company has dedicated most of its financial resources to research
and
development, marketing and general and administrative expenses.
Cash
and
cash equivalents as of December 31, 2007 were $9,954,303, including restricted
cash of $117,000. Management believes that the existing cash balance together
with its other existing financial resources, including its credit line facility
with a remaining availability of $1,672,675 (see Note 9), and any revenues
from
sales, distribution, licensing and manufacturing relationships, will be
sufficient to meet the Company’s operating and capital requirements through the
end of the second quarter of 2009. The 2008 operating plan reflects anticipated
growth from an increase in per-treatment fee revenues for use of the XTRAC
laser
system based on increased utilization and wider insurance coverage in the United
States and cost savings from the growth of the Company’s skincare products. The
Company believes that it will have the necessary financing to meet its operating
and capital requirements through 2008 and into the second quarter of 2009,
at a
minimum.
The
Company’s future success depends in part upon increased patient acceptance of
its excimer-laser-based systems for the treatment of a variety of skin
disorders. The Company’s ability to introduce successful new products may be
adversely affected by a number of factors, such as unforeseen costs and
expenses, technological change, economic downturns, increased competition,
other
factors beyond the Company’s control or excessive costs in order to market the
product and thus win patient acceptance. The Company is continuing to implement
its rollout strategy for the XTRAC laser system in the United States in selected
areas of the country where reimbursement is widely available. The success of
the
rollout depends on increasing physician and patient demand for the treatment.
Management
cannot provide assurance that the Company will market the XTRAC product
successfully or operate profitably in the future, or that it will not require
significant additional financing in order to accomplish or exceed the objectives
of its business plan. Consequently, the Company’s historical operating results
cannot be relied on to be an indicator 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.
Summary
of Significant Accounting Policies:
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect amounts reported in
the
financial statements and accompanying notes. Actual results could differ from
those estimates and be based on events different from those assumptions. Future
events and their effects cannot be perceived with certainty; estimating,
therefore, requires the exercise of judgment. Thus, accounting estimates change
as new events occur, as more experience is acquired, or as additional
information is obtained.
Cash
and Cash Equivalents and Restricted Cash
The
Company invests its excess cash in highly liquid short-term investments. The
Company considers short-term investments that are purchased with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents consisted of cash and money market accounts at December 31, 2007
and
2006. Cash that is pledged to secure obligations is disclosed separately as
restricted cash. The Company maintains its cash and cash equivalents in accounts
in one bank, the balances which at times may exceed federally insured
limits.
Accounts
Receivable
The
majority of the Company’s accounts receivables are due from distributors
(domestic and international), hospitals, universities and physicians and other
entities in the medical field. Credit is extended based on evaluation of a
customer’s financial condition and, generally, collateral is not required.
Accounts receivable are most often due within 30 to 90 days and are stated
at
amounts due from customers net of an allowance for doubtful accounts. Accounts
outstanding longer than the contractual payment terms are considered past due.
The Company determines its allowance by considering a number of factors,
including the length of time trade accounts receivable are past due, the
Company’s previous loss history, the customer’s current ability to pay its
obligation to the Company, and the condition of the general economy and the
industry as a whole. The Company writes-off accounts receivable when they become
uncollectible, and payments subsequently received on such receivables are
credited to the allowance for doubtful accounts. The Company does not accrue
interest on accounts receivable past due.
Inventories
Inventories
are stated at the lower of cost (first-in, first-out basis) or market. Cost
is
determined to be purchased cost for raw materials and the production cost
(materials, labor and indirect manufacturing cost) for work-in-process and
finished goods. Throughout the laser manufacturing process, the related
production costs are recorded within inventory. Work-in-process is immaterial,
given the typically short manufacturing cycle, and therefore is disclosed in
conjunction with raw materials.
The
Company's skin disorder treatment equipment will either (i) be placed in a
physician's office and remain the property of the Company or (ii) be sold to
distributors or physicians directly. The cost to build a laser, whether for
sale
or for placement, is accumulated in inventory. When a laser is placed in a
physician’s office, the cost is transferred from inventory to “lasers in
service” within property and equipment. At times, units are shipped to
distributors, but revenue is not recognized until all of the criteria of Staff
Accounting Bulletin No. 104 have been met, and until that time, the unit is
carried on the books of the Company as inventory. Revenue is not recognized
from
these distributors until payment is either assured or paid in full. Until this
time, the cost of these shipments continues to be recorded as finished goods
inventory.
Reserves
for slow moving and obsolete inventories are provided based on historical
experience and product demand. Management evaluates the adequacy of these
reserves periodically based on forecasted sales and market trend.
Property,
Equipment and Depreciation
Property
and equipment are recorded at cost. Excimer lasers-in-service were depreciated
on a straight-line basis over the estimated useful life of three years. In
reflection of their improved reliability, XTRAC lasers placed in service after
December 31, 2005 are depreciated on a straight-line basis over the estimated
useful life of five years; other XTRAC lasers-in-service continue to be
depreciated over the original useful life of three years. Surgical
lasers-in-service are depreciated on a straight-line basis over an estimated
useful life of seven years if new, and five years or less if used equipment.
The
straight-line depreciation basis for lasers-in-service is reflective of the
pattern of use. For other property and equipment, depreciation is calculated
on
a straight-line basis over the estimated useful lives of the assets, primarily
three to seven years for computer hardware and software, furniture and fixtures,
automobiles, and machinery and equipment. Leasehold improvements are amortized
over the lesser of the useful lives or lease terms. Expenditures for major
renewals and betterments to property and equipment are capitalized, while
expenditures for maintenance and repairs are charged to operations as incurred.
Upon retirement or disposition, the applicable property amounts are deducted
from the accounts and any gain or loss is recorded in the consolidated
statements of operations. Useful lives are determined based upon an estimate
of
either physical or economic obsolescence or both.
Laser
units and laser accessories located at medical facilities for sales evaluation
and demonstration purposes or those units/accessories used for development
and
medical training are included in property and equipment under the caption
“machinery and equipment”. These units and accessories are being depreciated
over a period of up to five years. Laser units utilized in the provision of
surgical services are included in property and equipment under the caption
“lasers in service” and are depreciated over a five year life, given the
additional wear and tear that is incurred with movement from site to site.
Management
evaluates the realizability of property and equipment based on estimates of
undiscounted future cash flows over the remaining useful life of the asset.
If
the amount of such estimated undiscounted future cash flows is less than the
net
book value of the asset, the asset is written down to the net realizable value.
As of December 31, 2007, no such write-down was required (see Impairment
of Long-Lived Assets
below).
Patent
Costs and Licensed Technologies
Costs
incurred to obtain or defend patents and licensed technologies are capitalized
and amortized over the shorter of the remaining estimated useful lives or eight
to 12 years. Developed technology was recorded in connection with the purchase
in August 2000 of the minority interest of Acculase, a former subsidiary of
the
Company, and is being amortized on a straight-line basis over seven years.
Developed technology was also recorded in connection with the acquisition of
ProCyte in March 2005 and is being amortized on a straight-line basis over
seven
years. Other licenses, for example, the AzurTec, Stern and Mount Sinai licenses,
are capitalized and amortized over the estimated useful lives of 10
years.
Management
evaluates the realizability of intangible assets based on estimates of
undiscounted future cash flows over the remaining useful life of the asset.
If
the amount of such estimated undiscounted future cash flows is less than net
book value of the asset, the asset is written down to fair value. As of December
31, 2007, no such write-down was required (see Impairment
of Long-Lived Assets
below).
Other
Intangible Assets
Other
intangible assets were recorded in connection with the acquisition of ProCyte
in
March 2005. The assets are being amortized on a straight-line basis over 5
to 10
years.
Management
evaluates the recoverability of such other intangible assets based on estimates
of undiscounted future cash flows over the remaining useful life of the asset.
If the amount of such estimated undiscounted future cash flows is less than
the
net book value of the asset, the asset is written down to fair value. As of
December 31, 2007, no such write-down was required.
Goodwill
Goodwill
was recorded in connection with the acquisition of ProCyte in March 2005 and
the
acquisition of Acculase in August 2000.
Management
evaluates the recoverability of such goodwill based on estimates of undiscounted
future cash flows over the remaining useful life of the asset. If the amount
of
such estimated undiscounted future cash flows is less than the net book value
of
the asset, the asset is written down to fair value. As of December 31, 2007,
no
such write-down was required (see Impairment
of Long-Lived Assets
below).
Accrued
Warranty Costs
The
Company offers a warranty on product sales generally for a one to three-year
period. The Company provides for the estimated future warranty claims on the
date the product is sold. The activity in the warranty accrual during the years
ended December 31, 2007 and 2006 is summarized as follows:
|
December
31,
|
|||||||
|
2007
|
2006
|
||||||
|
Accrual
at beginning of year
|
$
|
123,738
|
$
|
204,708
|
|||
|
Additions
charged to warranty expense
|
270,000
|
105,000
|
|||||
|
Expiring
warranties
|
(81,899
|
)
|
(87,426
|
)
|
|||
|
Claims
satisfied
|
(93,252
|
)
|
(98,544
|
)
|
|||
|
Accrual
at end of year
|
$
|
218,587
|
$
|
123,738
|
|||
Revenue
Recognition
The
Company has two distribution channels for its phototherapy treatment equipment.
The Company either (i) places the lasers in physicians’ offices (at no
charge to the physician) and charges the physician a fee for an agreed upon
number of treatments or (ii) to a lesser extent, sells the laser through a
distributor or directly to a physician. When the Company sells an XTRAC laser
to
a distributor or directly to a foreign or domestic physician, revenue is
recognized when the following four criteria under Staff Accounting Bulletin
No.
104 have been met: (i) the product has been shipped and the Company has no
significant remaining obligations; (ii) persuasive evidence of an arrangement
exists; (iii) the price to the buyer is fixed or determinable; and (iv)
collection is probable (the “SAB 104 Criteria”). At times, units are shipped,
but revenue is not recognized until all of the SAB 104 Criteria have been met,
and until that time, the unit is carried on the books of the Company as
inventory.
The
Company ships most of its products FOB shipping point, although from time to
time certain customers, for example governmental customers, will insist upon
FOB
destination. Among the factors the Company takes into account in determining
the
proper time at which to recognize revenue are when title to the goods transfers
and when the risk of loss transfers. Shipments to distributors or physicians
that do not fully satisfy the collection criteria are recognized when invoiced
amounts are fully paid or assured full payment.
Under
the
terms of the Company’s distributor agreements, distributors do not have a
unilateral right to return any unit that they have purchased. However, the
Company does allow products to be returned by its distributors for product
defects or other claims.
When
the
Company places a laser in a physician’s office, it recognizes service revenue
based on the number of patient treatments performed by the physician. Treatments
in the form of random laser-access codes that are sold to physicians, but not
yet used, are deferred and recognized as a liability until the physician
performs the treatment. Unused treatments are deemed to remain an obligation
of
the Company because the treatments can only be performed on Company-owned
equipment. Once the treatments are delivered to a patient, this obligation
has
been satisfied.
The
Company excludes all sales of treatment codes made within the last two weeks
of
the period in determining the amount of procedures performed by its
physician-customers. Management believes this approach closely approximates
the
actual amount of unused treatments that existed at the end of a period. For
the
year ended December 31, 2007 and 2006, the Company deferred $563,336 and
$506,440, respectively, under this approach.
The
Company has a program to support certain physicians in addressing treatments
with the XTRAC laser system that may be denied reimbursement by private
insurance carriers. The Company recognizes service revenue from the sale of
treatment codes to physicians participating in this program only if and to
the
extent the physician has been reimbursed for the treatments. The Company
estimates a contingent liability for potential refunds under this program by
reviewing the history of denied insurance claims and appeals processed. At
December 31, 2007 and 2006, the Company had net deferred revenues of $72,812
and
$80,697, respectively, under this program.
The
Company generates revenues from its Skin Care business primarily through three
channels. The first is through product sales for skin health, hair care and
wound care; the second is through sales of the copper peptide compound,
primarily to Neutrogena Corporation, a Johnson & Johnson company; and the
third is through royalties generated by our licenses, principally to Neutrogena.
The Company recognizes revenues on the products and copper peptide compound
when
they are shipped, net of returns and allowances. The Company ships the products
FOB shipping point. Royalty revenues are based upon sales generated by our
licensees. The Company recognizes royalty revenue at the applicable royalty
rate
applied to shipments reported by our licensee.
The
Company generates revenues from its Surgical businesses primarily from two
channels. The first is through product sales of laser systems, related
maintenance service agreements, recurring laser delivery systems and laser
accessories, and the second is through per-procedure surgical services. The
Company recognizes revenues from surgical laser and other product sales,
including sales to distributors and other customers, when the SAB 104 Criteria
have been met.
For
per-procedure surgical services, the Company recognizes revenue upon the
completion of the procedure. Revenue from maintenance service agreements is
deferred and recognized on a straight-line basis over the term of the
agreements. Revenue from billable services, including repair activity, is
recognized when the service is provided.
Product
Development Costs
Costs
of
research, new product development and product redesign are charged to expense
as
incurred.
Income
Taxes
The
Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
for Income Taxes.” Under SFAS No. 109, the liability method is used for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax basis of assets
and
liabilities and are measured using enacted tax rates and laws that are expected
to be in effect when the differences reverse.
The
Company’s deferred tax asset has been fully reserved under a valuation
allowance, reflecting the uncertainties as to realizability evidenced by the
Company’s historical results and restrictions on the usage of the net operating
loss carryforwards. Consistent with the rules of purchase accounting, the
historical deferred tax asset of ProCyte was valued at zero when the Company
acquired ProCyte. If and when components of that asset are realized in future,
the goodwill recognized in the acquisition of ProCyte will be reduced. The
Company does not believe that its historical or expected tax reporting positions
when considered before applications of the valuation allowance will have a
material impact on its consolidated financial statements.
Net
Loss Per Share
The
Company computes net loss per share in accordance with SFAS No. 128, "Earnings
Per Share." In accordance with SFAS No. 128, basic net loss per share is
calculated by dividing net loss available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted net loss
per
share reflects the potential dilution from the conversion or exercise of
securities into common stock, such as stock options and warrants.
In
these
consolidated financial statements, diluted net loss per share is the same as
basic net loss per share. No additional shares for the potential dilution from
the conversion or exercise of securities into common stock are included in
the
denominator since the result would be anti-dilutive. Common stock options and
warrants of 10,279,254, 10,840,382 and 7,177,955 as of December 31, 2007, 2006
and 2005, respectively, were thus excluded from the calculation of fully diluted
earnings per share.
Exchanges
of Nonmonetary Assets
Exchanges
under SFAS No. 153, “Exchanges of Nonmonetary Assets,” are measured based on the
fair value of the assets exchanged. Further, SFAS No. 153 eliminates the
previous narrow exception for nonmonetary exchanges of similar productive assets
and replaces it with a broader exception for exchanges of nonmonetary assets
that do not have “commercial substance.” For the years ended December 31, 2007
and 2006, the Company has not recognized any income or expense in accordance
with this Statement. For the year ended December 31, 2005, the Company
recognized income of $88,667 in accordance with this Statement.
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 and cash
equivalents is based on its demand value, which is equal to its carrying value.
The fair values of notes payable and long-term debt 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 and long-term debt
approximate the carrying values. Additionally, the carrying value of all other
monetary assets and liabilities is estimated to be equal to their fair value
due
to the short-term nature of these instruments.
Impairment
of Long-Lived Assets
In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” long-lived assets, such as property and equipment, and
purchased intangibles subject to amortization, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of
an asset may not be recoverable. Recoverability of assets to be held and used
is
measured by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized in the amount by which the carrying amount
of
the asset exceeds the fair value of the asset. Assets to be disposed of would
be
separately presented in the balance sheet and reported at the lower of the
carrying amount or fair value less costs to sell, and would no longer be
depreciated. The assets and liabilities of a disposed group classified as held
for sale would be presented separately in the appropriate asset and liability
sections of the balance sheet. As of December 31, 2007, no such impairment
exists.
Share-Based
Compensation
On
January 1, 2006, The Company adopted SFAS No. 123R, “Share-Based Payment,” which
requires all companies to measure and recognize compensation expense at fair
value for all stock-based payments to employees and directors. SFAS No. 123R
is
being applied on the modified prospective basis. Prior to the adoption of SFAS
No. 123R, the Company accounted for its stock-based compensation plans for
employees and directors under the recognition and measurement principles of
Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued
to Employees”, and related interpretations, and accordingly, the Company
recognized no compensation expense related to the stock-based plans for grants
to employees or directors. Grants to consultants under the plans were recorded
under SFAS No. 123.
Under
the
modified prospective approach, SFAS No. 123R applies to new grants of options
and awards of stock as well as to grants of options that were outstanding on
January 1, 2006 and that may subsequently be repurchased, cancelled or
materially modified. Under the modified prospective approach, compensation
cost
recognized for the years ended December 31, 2007 and 2006 includes compensation
cost for all share-based payments granted prior to, but not yet vested on,
January 1, 2006, based on fair value as of the prior grant-date and estimated
in
accordance with the provisions of SFAS No. 123R. Prior periods were not required
to be restated to reflect the impact of adopting the new standard.
SFAS
No.
123R also requires companies to calculate an initial "pool" of excess tax
benefits available at the adoption date to absorb any tax deficiencies that
may
be recognized under SFAS No. 123R. The pool includes the net excess tax benefits
that would have been recognized if the Company had adopted SFAS No. 123 for
recognition purposes on its effective date. The Company has elected to calculate
the pool of excess tax benefits under the alternative transition method
described in FASB Staff Position ("FSP") No. FAS 123(R)-3, "Transition Election
Related to Accounting for Tax Effects of Share-Based Payment Awards," which
also
specifies the method to calculate excess tax benefits reported on the statement
of cash flows. The Company is in a net operating loss position; therefore,
no
excess tax benefits from share-based payment arrangements have been recognized
for the years ended December 31, 2007 and 2006.
The
pro-forma information presented in the following table illustrates the effect
on
net income and net income per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, “Accounting for Stock-Based
Compensation,” as amended SFAS No. 148, “Accounting for Stock-Based Compensation
– Transition and Disclosure,” to stock-based employee compensation for the year
ended December 31, 2005:
|
Year Ended
December 31, 2005
|
||||
|
Net
loss:
|
||||
|
As
reported
|
$
|
(3,936,044
|
)
|
|
|
Less:
stock-based employee compensation expense included in reported net
loss
|
76,737
|
|||
|
Impact
of total stock-based compensation expense determined under
fair-value-based method for all grants and awards
|
(1,718,296
|
)
|
||
|
Pro-forma
|
$
|
(5,577,603
|
)
|
|
|
Net
loss per share:
|
||||
|
As
reported
|
$
|
(0.08
|
)
|
|
|
Pro-forma
|
$
|
(0.11
|
)
|
|
The
Company uses the Black-Scholes option-pricing model to estimate fair value
of
grants of stock options with the following weighted average
assumptions:
|
Assumptions for Option Grants
|
Year Ended December 31,
|
|||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Risk-free
interest rate
|
4.74
|
%
|
4.62
|
%
|
4.04
|
%
|
||||
|
Volatility
|
85.94
|
%
|
92.48
|
%
|
97.81
|
%
|
||||
|
Expected
dividend yield
|
0
|
%
|
0
|
%
|
0
|
%
|
||||
|
Expected
life
|
8.1
years
|
7.50
years
|
5
years
|
|||||||
|
Estimated
forfeiture rate
|
16
|
%
|
16
|
%
|
N/A
|
|||||
The
Company calculates expected volatility for a share-based grant based on historic
daily stock price observations of our common stock during the period immediately
preceding the grant that is equal in length to the expected term of the grant.
For estimating the expected term of share-based grants made in the years ended
December 31, 2007 and 2006, the Company has adopted the simplified method
authorized in Staff Accounting Bulletin No. 107. SFAS No. 123R also requires
that estimated forfeitures be included as a part of the estimate of expense
as
of the grant date. The Company has used historical data to estimate expected
employee behaviors related to option exercises and forfeitures. Prior to our
adoption of SFAS No. 123R, the Company reduced pro-forma share-based
compensation expense, presented in the notes to its financial statements, for
actual forfeitures as they occurred.
With
respect to both grants of options and awards of restricted stock, the risk-free
rate of interest is based on the U.S. Treasury rates appropriate for the
expected term of the grant or award.
With
respect to awards of restricted stock, the Company uses the Monte-Carlo pricing
model to estimate fair value of restricted stock awards made in the first and
second quarters 2007 and the first quarter 2006 with the following weighted
average assumptions:
|
Assumptions for Stock Awards
|
Year Ended
December 31, 2007
|
Year Ended
December 31, 2006
|
|||||
|
Risk-free
interest rate
|
4.52
|
%
|
4.32
|
%
|
|||
|
Volatility
|
74.64
|
%
|
70
|
%
|
|||
|
Expected
dividend yield
|
0
|
%
|
0
|
%
|
|||
|
Expected
Life
|
5.07
years
|
4.92
years
|
|||||
The
Company calculated expected volatility for restricted stock based on historic
daily stock price observations of our common stock during the three-year period
immediately preceding the award.
Options
that were assumed from ProCyte and that were unvested as of March 18, 2005
were
re-measured as of March 18, 2005 under intrinsic-value-based accounting.
Unearned or deferred compensation of $132,084 was recorded and was amortized
over the remaining vesting period, which is an average of two years. The Company
recognized $55,347 and $76,737 of such expense in the years ended December
31,
2006 and 2005, respectively.
Compensation
expense for the year ended December 31, 2007 included $955,767 from stock
options grants and $380,007 from restricted stock awards. Compensation expense
for the year ended December 31, 2006 included $990,372 from stock options grants
and $314,174 from restricted stock awards. Compensation expense is presented
as
part of the operating results in selling, general and administrative expenses.
For stock options granted to consultants, an additional selling, general, and
administrative expense in the amount of $109,107, $132,624 and $123,257 was
recognized during the years ended December 31, 2007, 2006 and 2005,
respectively.
Supplemental
Cash Flow Information
During
the year ended December 31, 2007, the Company financed certain credit facility
costs for $149,480, financed insurance policies through notes payable for
$594,815 and issued warrants to a leasing credit facility which are valued
at
$249,727, and which offset the carrying value of debt. In addition, the Company
financed vehicle purchases of $71,941 and laser purchases of $156,000 under
capital leases.
During
the year ended December 31, 2006, the Company financed insurance policies
through notes payable for $763,982, financed certain credit facility costs
for
$160,279, financed a license agreement with a note payable of $77,876 and issued
warrants to credit facilities which are valued at $104,388, and which offset
the
carrying value of debt. In March 2006, the Company issued 101,010 shares of
its
restricted common stock to Stern Laser srl (“Stern”) due upon achievement of a
milestone under the Master Purchase Agreement with Stern. The cost associated
with this issuance is included in the license from Stern, which is found in
patents and licensed technologies. In March 2006, the Company also issued
200,000 shares of its restricted common stock to AzurTec, Inc. (“AzurTec”) as
part of an investment in the capital stock of AzurTec as well as for a license
agreement on AzurTec technology, both existing and to be developed in the
future.
In
connection with the purchase of ProCyte in March 2005, the Company issued
10,540,579 shares of common stock and assumed options to purchase 1,354,973
shares of its own common stock (see Note
2).
During
the year ended December 31, 2005, the Company financed insurance policies
through notes payable for $978,252. During the year ended December 31, 2005,
the
Company issued 345,477 shares of its restricted common stock to Stern upon
attainment of certain milestones, which is included in patents and licensed
technologies.
For
the
years ended December 31, 2007, 2006 and 2005, the Company paid interest of
$913,821, $670,839 and $403,376, respectively. Income taxes paid in the years
ended December 31, 2007, 2006 and 2005 were immaterial.
Recent
Accounting Pronouncements
In
December 2007, the Financial
Accounting Standards Board (“FASB”)
issued
SFAS No. 141 (revised 2007), “Business Combinations”, or SFAS No. 141R, which
replaces SFAS No. 141. This statement establishes principles and requirements
for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any non-controlling
interest in the acquiree and the goodwill acquired. This statement also
establishes disclosure requirements which will enable users to evaluate the
nature and financial effects of the business combination. This statement is
effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The Company is currently evaluating the impact that the
adoption of SFAS No. 141R will have on its consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements—an Amendment of Accounting Research Bulletin
No. 51”, which establishes accounting and reporting standards for ownership
interests in subsidiaries held by parties other than the parent, the amount
of
consolidated net income attributable to the parent and to the noncontrolling
interest, changes in a parent’s ownership interest and the valuation of retained
noncontrolling equity investments when a subsidiary is deconsolidated. This
statement also establishes reporting requirements that provide sufficient
disclosures that clearly identify and distinguish between the interests of
the
parent and the interests of the noncontrolling owners. This statement is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. The Company is currently evaluating
the
impact that the adoption of SFAS No. 160 will have on its consolidated financial
statements.
In
December 2007, the Emerging Issues Task Force (“EITF”) issued EITF Issue No.
07-1, “Accounting for Collaborative Arrangements.” EITF 07-1 provides guidance
concerning: determining whether an arrangement constitutes a collaborative
arrangement within the scope of the Issue; how costs incurred and revenue
generated on sales to third parties should be reported in the income statement;
how an entity should characterize payments on the income statement; and what
participants should disclose in the notes to the financial statements about
a
collaborative arrangement. The provisions of EITF 07-1 will be adopted in
2009.
The Company is in the process of evaluating the impact, if any, of adopting
EITF
07-1 on its financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” This Statement permits entities to
choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value. This
Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and will become effective for the Company
beginning with the first quarter of 2008. The Company has not yet determined
the
impact of the adoption of SFAS No. 159 on its financial statements and footnote
disclosures.
Staff
Accounting Bulletin No. 110 (“SAB 110”), “Share-Based Payment” expresses the
views of the staff regarding the use of a “simplified” method, as discussed in
SAB No. 107 (“SAB No. 107”), in developing an estimate of expected term of
“plain vanilla” share options in accordance with SFAS No. 123 (revised 2004),
“Share-Based Payment”.
Note
2
Acquisitions:
ProCyte
Transaction
On
March
18, 2005, the Company completed the acquisition of ProCyte Corporation, which
was organized in 1986. ProCyte develops, manufactures and markets products
for
skin health, hair care and wound care. Many of the Company’s products
incorporate its patented copper peptide technologies.
The
aggregate purchase price of $28,086,208 consisted of the issuance of 10,540,579
shares of the Company’s common stock valued at $2.29 per share, the assumption
of 1,354,973 common stock options valued at $2,033,132 net of deferred
compensation of $132,084, and the incurrence of $1,915,150 of transaction costs.
The merger consideration was based on a fixed exchange ratio of 0.6622 shares
of
PhotoMedex common stock for each share of ProCyte common stock. As the exchange
ratio was fixed, the fair value of PhotoMedex’s common stock for accounting
purposes was based on a stock price of $2.29 per share, which was the average
of
the closing prices on the date of the announcement of the planned merger and
the
two days prior and afterwards.
Based
on
the purchase price allocation, the following table summarizes the estimated
fair
value of the assets acquired and liabilities assumed at the date of acquisition:
|
Cash
and cash equivalents
|
$
|
6,272,540
|
||
|
Accounts
receivable
|
1,137,413
|
|||
|
Inventories
|
2,845,698
|
|||
|
Prepaid
expenses and other current assets
|
134,574
|
|||
|
Property
and equipment
|
340,531
|
|||
|
Patents
and licensed technologies
|
200,000
|
|||
|
Other
intangible assets
|
5,200,000
|
|||
|
Other
assets
|
38,277
|
|||
|
Total
assets acquired
|
16,169,033
|
|||
|
Accounts
payable
|
(605,520
|
)
|
||
|
Accrued
compensation and related expenses
|
(158,610
|
)
|
||
|
Other
accrued liabilities
|
(1,143,761
|
)
|
||
|
Deferred
revenues
|
(95,436
|
)
|
||
|
Other
liabilities
|
(52,883
|
)
|
||
|
Total
liabilities assumed
|
(2,056,210
|
)
|
||
|
Net
assets acquired
|
$
|
14,112,823
|
The
purchase price exceeded the fair value of the net assets acquired by
$13,973,385, which was recorded as goodwill. The increase in goodwill recognized
in the year ended December 31, 2006 reflects management’s best estimate of
pre-acquisition contingencies based upon plans entered into prior to March
18,
2006.
The
accompanying consolidated financial statements do not include any revenues
or
expenses related to the acquisition on or prior to March 18, 2005, the closing
date. Following are the Company’s unaudited pro-forma results for the years
ended December 31, 2007, 2006 and 2005, assuming the acquisition had occurred
on
January 1, 2005:
|
Year Ended December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Net
revenues
|
$
|
38,713,617
|
$
|
33,189,877
|
$
|
31,354,068
|
||||
|
Net
loss
|
$
|
(6,354,246
|
)
|
$
|
(7,492,397
|
)
|
$
|
(4,038,193
|
)
|
|
|
Basic
and diluted loss per share
|
$
|
(0.10
|
)
|
$
|
(0.14
|
)
|
$
|
(0.08
|
)
|
|
|
Shares
used in calculating basic and diluted loss per share
|
62,810,338
|
54,188,914
|
50,932,410
|
|||||||
These
unaudited pro-forma results have been prepared for comparative purposes only
and
do not purport to be indicative of the results of operations which would have
actually resulted had the acquisition occurred on January 1, 2005, nor to be
indicative of future results of operations.
Stern
Laser Transaction
On
September 7, 2004, the Company closed the transactions provided for in the
Master Asset Purchase Agreement (the “Master Agreement”) with Stern. In March
2006, the Company issued an additional 101,010 shares of its restricted common
stock to Stern based on a milestone set forth in the Master Agreement. As of
December 31, 2006, the Company has issued an aggregate of 589,854 shares of
its
restricted common stock to Stern in connection with the Master Agreement. The
Company does not expect to issue any further shares of stock to Stern, as the
time for completing remaining milestones has expired. Stern also has served
as
the distributor of the Company’s XTRAC laser system in South Africa and Italy
since 2000. The primary asset acquired from Stern in the transaction is a
license for Stern’s lamp-based technology, which was carried on the Company’s
books at $886,383, net, as of December 31, 2007. Amortization of this intangible
is on a straight-line basis over 10 years and began in January 2005. In the
year
ended December 31, 2007, Stern purchased $85,292 of products from the
Company.
AzurTec
Transaction
On
March
30, 2006, the Company closed the transaction provided for in the Investment
Agreement with AzurTec. The Company issued 200,000 shares of its restricted
common stock in exchange for 6,855,141 shares of AzurTec common stock and
181,512 shares of AzurTec Class A preferred stock, which represents a 14%
interest in AzurTec, on a fully diluted basis. In accordance with APB No. 18,
and related interpretations, the Company accounts for its investment in AzurTec
on the cost basis.
The
Company also received a license from AzurTec with respect to its existing and
future technology for the MetaSpex Laboratory System. The license gives the
Company rights to manufacture and market the ex vivo versions of the MetaSpex
product in exchange for certain royalty obligations. The license also provides
the Company certain rights on a potential in situ version of the MetaSpex
product. AzurTec remains responsible for the development and clinical trial
costs of the MetaSpex products, for which AzurTec is committed to raise
additional equity capital. AzurTec has contracted with the Company to resume
development work of the ex vivo versions of the MetaSpex product. The
Company will resume, and be paid for, such work once AzurTec has raised
additional equity capital and has settled its prior indebtedness owed to the
Company for development work. The Company is considering whether to grant
Azurtec an extension of time into 2008 in which to raise the additional
investment.
The
Company assigned $268,291 as the fair value of the investment in AzurTec. It
also assigned $114,982 as the fair value of the license it acquired from
AzurTec, which is carried on the Company’s books at $94,860, net at December 31,
2007. Amortization of this intangible is on a straight-line basis over 10 years,
which began in April 2006.
Mount
Sinai License
On
March
31, 2006, the Mount Sinai School of Medicine of New York University granted
the
Company an exclusive license, effective April 1, 2006, to use Mount Sinai's
patented methodology for utilization of ultraviolet laser light for the
treatment of vitiligo. The licensed patent is US Patent No. 6,979,327, Treatment
of Vitiligo. It was issued December 27, 2005, and the inventor is James M.
Spencer, MD, a member of the Company’s Scientific Advisory Board. The license is
carried on the Company’s books at $64,248, net at December 31, 2007.
Amortization of this intangible is on a straight-line basis over 10 years,
which
began in April 2006.
MD
Lash Factor License
In
July
2007, the Company obtained a marketing license for MD Lash Factor eyelash
conditioner. The license is for 5 years and gives the Company, among other
things, exclusive rights to market this cosmetic conditioner to physicians
in
the United States and other countries. A US patent is pending on the key
ingredient in the product, which is a unique prostaglandin analogue. The Company
pays quarterly royalties over the life of the agreement.
Note
3
Inventories:
Set
forth
below is a detailed listing of inventories.
|
December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Raw
materials and work-in-process
|
$
|
4,527,708
|
$
|
4,433,917
|
|||
|
Finished
goods
|
3,401,834
|
2,867,778
|
|||||
|
Total
inventories
|
$
|
7,929,542
|
$
|
7,301,695
|
|||
Work-in-process
is immaterial given the typically short manufacturing cycle, and therefore
is
disclosed in conjunction with raw materials. There are no finished goods as
of
December 31, 2007 and 2006 for laser systems shipped to distributors, but not
recognized as revenue until all the criteria of Staff Accounting Bulletin No.
104 have been met. At times, units are shipped but revenue is not recognized
until all of the criteria are met, and until that time, the unit is carried
on
the books of the Company as inventory. The Company ships most of its products
FOB shipping point, although from time to time certain customers, for example
governmental customers, will insist on FOB destination. Among the factors the
Company takes into account in determining the proper time at which to recognize
revenue are when title to the goods transfers and when the risk of loss
transfers. Shipments to the distributors that do not fully satisfy the
collection criteria are recognized when invoiced amounts are fully paid. As
of
December 31, 2007 and 2006, the Company carried reserves against its inventories
of $1,124,345 and $1,354,444, respectively.
Note
4
Property
and Equipment:
Set
forth
below is a detailed listing of property and equipment.
|
December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Lasers
in service
|
$
|
19,754,416
|
$
|
16,234,834
|
|||
|
Computer
hardware and software
|
341,407
|
334,490
|
|||||
|
Furniture
and fixtures
|
364,319
|
331,379
|
|||||
|
Machinery
and equipment
|
870,986
|
738,636
|
|||||
|
Autos
and trucks
|
454,631
|
382,690
|
|||||
|
Leasehold
improvements
|
247,368
|
247,368
|
|||||
|
22,033,127
|
18,269,397
|
||||||
|
Accumulated
depreciation and amortization
|
(11,889,319
|
)
|
(9,215,299
|
)
|
|||
|
Property
and equipment, net
|
$
|
10,143,808
|
$
|
9,054,098
|
|||
Depreciation
expense was $3,595,271 in 2007, $2,939,909 in 2006 and $2,226,933 in 2005.
At
December 31, 2007 and 2006, net property and equipment included $471,385 and
$380,875, respectively, of assets recorded under capitalized lease arrangements,
of which $254,178 and $122,717, respectively, of the capital lease obligation
was included in long-term debt at December 31, 2007 and 2006 (see Note
9).
Note
5
Patents
and Licensed Technologies:
Set
forth
below is a detailed listing of patents and licensed technologies.
|
December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Patents,
owned and licensed, at gross costs of $510,942 and $501,657 net of
accumulated amortization of $268,540 and $231,599,
respectively
|
$
|
242,402
|
$
|
270,058
|
|||
|
Other
licensed and developed technologies, at gross costs of $2,432,258,
net of
accumulated amortization of $1,266,412 and $1,006,589
respectively
|
1,165,846
|
1,425,669
|
|||||
|
Total
patents and licensed technologies, net
|
$
|
1,408,248
|
$
|
1,695,727
|
|||
Related
amortization expense was $296,764, $329,138 and $257,894 for the years ended
December 31, 2007, 2006 and 2005, respectively. Included in other licensed
and developed technologies is $200,000 in developed technologies acquired from
ProCyte and $114,982 for the license with AzurTec (see Note
2).
On
March 31, 2006, the Company closed the transaction provided for in the License
Agreement with Mount Sinai School of Medicine of New York University (“Mount
Sinai”). Pursuant to the license agreement, the Company reimbursed $77,876 to
Mount Sinai, over the first 18 months of the license term and at no interest,
for patent prosecution costs incurred. The Company is also obligated to pay
Mount Sinai a royalty on a combined base of domestic sales of XTRAC treatment
codes used for psoriasis as well as for vitiligo. In the first four years of
the
license, however, Mount Sinai may elect to be paid royalties on an alternate
base, comprised simply of treatments for vitiligo, but at a higher royalty
rate
than the rate applicable to the combined base. This technology is for the laser
treatment of vitiligo and is included in other licensed and developed
technologies.
Estimated
amortization expense for amortizable intangible assets for the next five years
is $211,000 in 2008, $211,000 in 2009, $211,000 in 2010, $211,000 in 2011,
$189,000 in 2012 and $374,000 thereafter.
Note
6
Other
Intangible Assets:
Set
forth
below is a detailed listing of other intangible assets, all of which were
acquired from ProCyte and which were initially recorded at their appraised
fair
market values:
|
December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Neutrogena
Agreement, at gross cost of $2,400,000 net of accumulated amortization
of
1,338,000 and $858,000, respectively.
|
$
|
1,062,000
|
$
|
1,542,000
|
|||
|
Customer
Relationships, at gross cost of $1,700,000 net of accumulated amortization
of $947,739 and $607,743, respectively.
|
752,261
|
1,092,257
|
|||||
|
Tradename,
at gross cost of $1,100,000 net of accumulated amortization of $306,636
and $196,632, respectively.
|
793,364
|
903,368
|
|||||
|
$
|
2,607,625
|
$
|
3,537,625
|
||||
Related
amortization expense was $930,000 for 2007 and 2006 and $732,375 for 2005.
Estimated amortization expense for amortizable intangible assets for the next
five years is $930,000 in 2008, $930,000 in 2009, $284,250 in 2010, $110,000
in
2011, $110,000 in 2012 and $243,000 thereafter. Under the Neutrogena Agreement,
the Company has licensed to Neutrogena rights to its copper peptide technology
and for which the Company receives royalties. Customer Relationships embody
the
value to the Company of relationships that ProCyte had formed with its
customers. Tradename includes the name of “ProCyte” and various other trademarks
associated with ProCyte’s products.
Note
7
Other
Accrued Liabilities:
Set
forth
below is a detailed listing of other accrued liabilities.
|
December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Accrued
professional and consulting fees
|
$
|
225,820
|
$
|
320,331
|
|||
|
Accrued
warranty
|
218,587
|
127,738
|
|||||
|
Accrued
sales taxes and other expenses
|
229,967
|
213,224
|
|||||
|
Total
other accrued liabilities
|
$
|
674,374
|
$
|
657,293
|
|||
Note
8
Notes
Payable:
Set
forth
below is a detailed listing of notes payable. The stated interest rate
approximates the effective cost of funds from the notes.
|
December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Note
payable – unsecured creditor, interest at 5.44%, payable in monthly
principal and interest installments of $51,354 through February
2008.
|
$
|
102,013
|
$
|
-
|
|||
|
Note
payable – unsecured creditor, interest at 7.42%, payable in monthly
principal and interest installments of $61,493 through February
2007.
|
-
|
126,279
|
|||||
|
Note
payable – unsecured creditor, interest at 6%, payable in monthly principal
and interest installments of $2,880 through June 2012.
|
133,507
|
159,213
|
|||||
|
Note
payable – unsecured creditor, interest at 0%, payable in monthly principal
installments of $4,326 through October 2007
|
-
|
43,265
|
|||||
|
235,520
|
328,757
|
||||||
|
Less:
current maturities
|
(129,305
|
)
|
(195,250
|
)
|
|||
|
Notes
payable, net of current maturities
|
$
|
106,215
|
$
|
133,507
|
|||
Aggregate
maturities of the notes payable as of December 31, 2007 are $129,305 in 2008,
$28,975 in 2009, $30,762 in 2010, $32,660 in 2011 and $13,818
thereafter.
Note
9
Long-term
Debt:
In
the
following table is a summary of the Company’s long-term debt.
|
December 31, 2007
|
December 31, 2006
|
||||||
|
Total
borrowings on credit facilities
|
$
|
10,105,608
|
$
|
6,490,077
|
|||
|
Capital
lease obligations (see Note 3)
|
254,178
|
122,717
|
|||||
|
Less:
current portion
|
(4,757,133
|
)
|
(3,018,874
|
)
|
|||
|
Total
long-term debt
|
$
|
5,602,653
|
$
|
3,593,920
|
|||
Term-Note
Credit Facility
The
Company entered into a leasing credit facility with GE Capital Corporation
(“GE”) on June 25, 2004. Eleven draws were made against the facility, the last
of which was in March 2007. In June 2007, the Company entered a term-note
facility with Leaf Financial Corporation (“Leaf”) and made its single draw
against that facility. No draw was made in the third quarter of 2007. In
December 2007, the Company extinguished its outstanding indebtedness under
the
GE and Leaf facilities, recognizing as costs (including acceleration of the
amortization of debt issuance costs and the debt discount and termination costs)
of such extinguishment as a refinancing charge of $441,956, including $178,699
related to the premium paid for the buyback of the warrants, under APB No.
26.
Upon
the
pay-off of the GE and Leaf facilities, the Company entered a term-note facility
with CIT Healthcare LLC and Life Sciences Capital LLC, as equal participants
(collectively, “CIT”), for which CIT Healthcare acts as the agent. The facility
is for $12 million and is for one year. The stated interest rate for any draw
is
set as 675 basis points above the three-year Treasury rate. CIT levies no points
on a draw. Each draw is secured by XTRAC laser systems consigned under usage
agreements with physician-customers.
The
first
draw had three discrete components: carryover debt attributable to the former
GE
borrowings, as increased by extinguishment costs (including redemption of the
GE
warrants) which CIT financed; carryover debt attributable to Leaf, as increased
by extinguishment costs which CIT financed; and debt newly incurred to CIT
on
XTRAC units not pledged to GE or Leaf. The carryover components maintained
the
monthly debt service payments from GE and Leaf with increases to principal
and
changes in the stated interest rates causing minor changes in the number of
months set to pay off the discrete draws. The third component will be
self-amortized over three years.
The
beginning principal of each component was $4,724,699, $1,612,626, and
$3,990,000, respectively. The effective interest rate for each component was
17.16%, 15.75%, and 15%, respectively. The months to pay off of each component
are 27, 30, and 36 months, respectively. After these draws on December 31,
2007,
the Company had available $1,672,675 under the credit facility.
In
connection with the CIT facility, the Company issued 235,525 warrants to each
of
CIT Healthcare and Life Sciences Capital. The warrants are treated as a discount
to the debt and are amortized under the interest method over the repayment
term
of 36 months. The Company has accounted for these warrants as equity instruments
in accordance with EITF 00-19, "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock" since there
is no
option for cash or net-cash settlement when the warrants are exercised. The
Company computed the value of the warrants using the Black-Scholes method.
The
GE warrants were redeemed and reflected as part of the refinancing charge.
The
following table summarizes the future minimum payments that the Company expects
to make for the draws made under the credit facility:
|
Year Ending December 31,
|
||||||||||
|
2008
|
2009
|
2010
|
||||||||
|
Future
minimum payments
|
$
|
5,486,346
|
$
|
3,896,693
|
$
|
2,012,868
|
||||
Capital Leases
The
obligations under capital leases are at fixed interest rates of 7.06% to 10.68%
and are collateralized by the related property and equipment (see Note
4).
Future
minimum payments for property under capital leases are as follows:
|
Year
Ending December 31,
|
||||
|
2008
|
$
|
97,984
|
||
|
2009
|
57,032
|
|||
|
2010
|
57,032
|
|||
|
2011
|
57,032
|
|||
|
2012
|
50,438
|
|||
|
Total
minimum lease obligation
|
319,518
|
|||
|
Less:
interest
|
(65,340
|
)
|
||
|
Present
value of total minimum lease obligation
|
$
|
254,178
|
||
Note
10
Warrant
Exercises:
In
the
year ended December 31, 2007, the Company had no warrants that were exercised.
In
the
year ended December 31, 2006, the Company received $168,000 from the exercise
of
140,000 warrants. The warrants were issued in connection with a private
placement of securities in June 2002 and bore an exercise price of
$2.00.
In
the
year ended December 31, 2005, the Company received $147,060 from the exercise
of
73,530 warrants. The warrants were issued in connection with a private placement
of securities in June 2002 and bore an exercise price of $2.00. See also
Common
Stock Warrants
in
Note
12.
Note
11
Commitments
and Contingencies:
Leases
The
Company has entered into various non-cancelable operating leases for personal
property that expire at various dates through 2012. Rent expense was $583,372,
$601,062 and $558,683 for the years ended December 31, 2007, 2006 and 2005,
respectively. The future annual minimum payments under these non-cancelable
operating leases are as follows:
|
Year
Ending December 31,
|
||||
|
2008
|
$
|
556,950
|
||
|
2009
|
505,003
|
|||
|
2010
|
406,096
|
|||
|
Thereafter
|
306,002
|
|||
|
Total
|
$
|
1,774,051
|
||
Litigation
In
the
matter brought by the Company on January 4, 2004, against Ra Medical Systems,
Inc. and Dean Irwin in the United States District Court for the Southern
District of California, the Company has appealed from the new judge’s grant of
summary judgment to the defendants. The Company expects to file its brief in
March 2008.
In
the
matter which Ra Medical and Mr. Irwin brought against the Company on June 6,
2006 for unfair competition and which the Company removed to the United States
District Court for the Southern District of California, the Company has filed
a
petition to file an interlocutory appeal from the new judge’s dismissal, among
other things, of the Company’s counterclaim of misappropriation. The plaintiffs
have opposed the petition. No decision has been rendered on the petition.
In
the
action the Company brought on January 3, 2007 against its insurance carrier
in
the United States District Court for the Eastern District of Pennsylvania,
the
Company invoked the carrier to defend and indemnify the Company in the malicious
prosecution action brought by Ra Medical Systems and its principal. In May
2007,
the malicious prosecution case settled. In February 2008, the Court granted
the
Company’s motion for partial summary judgment and denied the motion of the
carrier for summary judgment. The Court ruled that the extent to which the
Company’s defense costs, amounting to more than $900,000, would be reimbursable
by the carrier under the policy, would be governed by the law of Pennsylvania,
based on their reasonableness, and not by the law of California, which would
statutorily impose a cap on such fees at a level the carrier would pay in
similar cases. A scheduling order has been issued under which the parties will
begin discovery on the reasonableness of the fees. The Company is also
evaluating other claims that it may have against the carrier, due, among other
things, to the carrier’s dilatory handling of the Company’s claim for
reimbursement under provisional application the carrier’s own, self-validated
hourly rates for defense counsel and its other billing guidelines. The Company’s
claim under such provisional application was for approximately $328,000, which
the Company recorded as an offset to its expensed defense costs; approximately
$100,000 of our claim under the provisional application remains unpaid. The
Company has not recognized any possible reimbursements other than the
$328,000.
On
November 7, 2007, Allergan, Inc. brought a patent infringement suit against
PhotoMedex, Inc., as well as against a number of other co-defendants. Suit
was
brought in the United States District Court for the Central District of
California. Allergan alleges that the various eyelash conditioners of the
defendants, including MD Lash Factor, were marketed in violation of the claims
of US Patent No. 6,262,105. The Company has moved to have the case dismissed
on
the grounds that Allergan failed to join the owner-inventor of the patent in
the
suit and that there is no common transaction or occurrence among the various
defendants to justify that they should be tried en masse. In January 2008,
ProCyte Corporation filed a declaratory judgment action against Allergan and
the
owner-inventor of the ‘105 patent in the United States District Court for the
Western District of Washington. ProCyte has petitioned the court to decide
whether its marketing activities of MD Lash Factor infringed the ‘105 patent.
Allergan has opposed the actions of PhotoMedex and of ProCyte. The
Central District Court has ruled that it will not dismiss the action and will
allow Allergan to amend its complaint; nevertheless, that Court has also ruled
that the petition in the Western District Court will be recognized by the
Central District Court as the first action to be filed in respect of ProCyte.
The Western District Court is expected to rule later in March 2008.
On
February 19, 2008, Cardiofocus, Inc. brought a patent infringement suit against
PhotoMedex, Inc., as well as against a number of other co-defendants. Suit
was
brought in the United States District Court for Massachusetts. Cardiofocus
alleges that the various holmium laser systems of the defendants, including
the
Company’s LaserPro® CTH holmium laser system, were marketed in violation of the
claims of US Patent No. 5,843,073. The Company is presently evaluating its
course of action.
On
February 25, 2008, Bella Bella has brought a patent infringement suit against
a
number of companies in the United States District Court for the Central District
of California. Among the defendants are Johnson & Johnson, L’Oreal, Avon,
Sharper Image and PhotoMedex. Bella Bella alleges that the defendants have
infringed its U.S. patents dealing with microdermabrasion. The Company
is presently evaluating its course of action.
The
Company is involved in certain other legal actions and claims arising in the
ordinary course of business. The Company believes, based on discussions with
legal counsel, the above litigation and claims will likely be resolved without
a
material effect on our consolidated financial position, results of operations
or
liquidity.
Employment
Agreements
The
Company has severance agreements with certain key executives and employees
that
create certain liabilities in the event of their termination of employment
without cause, or following a change in control of the Company. The aggregate
commitment under these executive severance agreements, should all covered
executives and employees be terminated other than for cause, was approximately
$1,734,896 as of December 31, 2007, based on 2007 salary levels. Should all
covered executives be terminated following a change in control of the Company,
the aggregate commitment under these executive severance agreements at December
31, 2007 was approximately $2,147,706, based on 2007 salary levels.
Restricted
Securities and Warrants
If
AzurTec succeeds in raising the additional equity capital called for in the
Investment Agreement, then the Company may be obliged to issue to AzurTec
warrants on 100,000 shares of the Company’s common stock. Such warrants will
have a five-year life and be exercisable in full but the first six months of
the
file; the warrants will have an exercise price equal to 90% of the mean of
the
closing prices of PhotoMedex common stock on Nasdaq for the 30 trading days
preceding the issuance of the warrants.
If
an
investor participating in the November 2006 private placement exercises a
warrant received in the placement, then Cowen & Company is entitled to a
6.5% commission on the gross proceeds to the Company from such exercise. If
all
such warrants are exercised, then the Company will receive $3,904,000 and will
owe Cowen & Company $253,760 in commissions. To date, no such exercises of
these warrants has occurred.
Note
12
Stockholders’
Equity:
Common
Stock
As
of
December 31, 2007, the Company had issued 589,864 shares of its restricted
common stock in connection with the Asset Purchase agreement with Stern Laser
Srl, or Stern, of which 113,877 shares had been issued in September 2004 and
248,395 in June 2005, 126,582 in December 2005 and 101,010 in March
2006.
On
June
26, 2007, the stockholders voted to increase the number of authorized shares
of
common stock from 75,000,000 to 100,000,000 shares.
On
November 3, 2006, the Company closed on a private placement for 9,760,000 shares
of common stock at $1.17 per share resulting in gross proceeds of $11,419,200.
The closing price of the Company’s common stock on November 1, 2006 was $1.27
per share. In connection with this private placement, the Company paid
commissions and other expenses of $864,308, resulting in net proceeds of
$10,554,892. In addition, the investors received warrants to purchase 2,440,000
shares of common stock at an exercise price of $1.60 per share, and Cowen &
Company, the placement agent, received warrants to purchase 244,000 shares
of
common stock, under the same terms and conditions as the warrants issued to
the
investors. As such the warrants have a five-year term and will become
exercisable on May 1, 2007 (see Common
Stock Warrants
below).
Cowen & Company is entitled to a 6.5%
commission on any proceeds to the Company from future exercises by the investors
of their warrants. The warrants issued to Cowen & Company were in
consideration of its services as the placement agent and have a value under
the
Black Scholes method of approximately $200,000. The Company has used the
proceeds of this financing to pay for working capital and other general
corporate purposes. The shares sold in the private placement, including the
shares underlying the warrants, have been registered with the Securities and
Exchange Commission.
On
March
18, 2005, the Company completed the acquisition of ProCyte Corporation, paid
through the issuance of 10,540,579 shares of common stock valued at $2.29 per
share. The merger consideration resulted in the equivalent of a fixed ratio
of
0.6622 shares of PhotoMedex common stock for each share of ProCyte common
stock.
Common
Stock Options
In
January 1996, the Company adopted the 1995 Non-Qualified Option Plan (the “1995
Plan”) for key employees, officers, directors, and consultants, and initially
provided for up to 500,000 options to be issued there under.
On
April
10, 1998, the Company created a stock option plan for outside/non-employee
members of the Board of Directors. Pursuant to the stock plan, each
outside/non-employee director was to receive an annual grant of options, in
addition to any other consideration he or she may receive, to purchase up to
20,000 shares of common stock as compensation, at an exercise price equal to
the
market price of the common stock on the last trading day of the preceding year.
The options granted pursuant to this plan vested at the rate of 5,000 options
per quarter during each quarter in which such person had served as a member
of
the Board of Directors. Since the date of adoption of the Non-Employee Director
Stock Option Plan (discussed below), the Company no longer grants options to
members of the Board of Directors under this plan. At December 31, 2007, the
plan had 15,000 options outstanding.
In
May
2000, the Company adopted the 2000 Stock Option Plan (the “2000 Plan”). The 2000
Plan initially reserved for issuance up to 1,000,000 shares of the Company’s
common stock, which was increased to 2,000,000 shares pursuant to the
affirmative vote of the stockholders on June 10, 2002 and to 3,350,000 shares
on
December 16, 2003. The reserved shares are to be used for granting of incentive
stock options (“ISOs”) to employees of the Company and for granting of
non-qualified stock options (“NSOs”) and other stock-based awards to employees
and consultants. The option exercise price for ISOs shall not be less than
the
fair market value of the Company’s stock on the date of grant. All ISOs granted
to less than ten-percent stockholders may have a term of up to 10 years, while
ISOs granted to greater than ten-percent stockholders shall have a term of
up to
five years. The option exercise price for NSOs shall not be less than 85% of
the
fair market value of the Company’s stock on the date of grant. No NSOs shall be
exercisable for more than 10 years after the date of the respective grant.
The
plan became inactive on December 28, 2005, and had 1,933,875 options outstanding
at December 31, 2007.
In
May
2000, the Company also adopted the Non-Employee Director Stock Option Plan
(the
“Non-Employee Director Plan”). The Non-Employee Director Plan reserved for
issuance up to 250,000 shares of the Company’s common stock for the granting of
non-qualified options to members of the Company’s Board of Directors. In
consideration for services rendered, each director received on each of January
1, 2001 and 2002 an option to purchase 20,000 shares of the Company’s common
stock. The Company’s stockholders voted on June 10, 2002 to increase the number
of reserved shares to 650,000 and also to increase the annual grant to each
director from 20,000 to 35,000. On December 16, 2003, the stockholders voted
to
increase the number of reserved shares to 1,000,000,on December 28, 2005, they
voted to increase the number of reserved shares to 1,400,000 and on June 26,
2007, they voted to increase the number of reserved shares to 2,100,000. The
plan is active and had 1,140,000 options outstanding at December 31,
2007.
In
March
2005, the Company assumed four option plans from ProCyte: the 2004 Stock Option
Plan, the 1996 Stock Option Plan, the 1991 Restated Stock Option Plan for
Non-Employee Directors and the 1989 Restated Stock Option Plan. The plans became
inactive on December 28, 2005, and had 193,000, 652,795, 22,514 and 167,537
options outstanding at December 31, 2007, respectively.
On
December 28, 2005, the stockholders approved the 2005 Equity Compensation Plan,
authorizing 3,160,000 shares thereto. The Company’s stockholders voted on June
26, 2007, to increase in the number of shares reserved to 6,160,000. The plan
is
active and had 1,916,450 options outstanding at December 31, 2007.
On
December 28, 2005, the stockholders approved the 2005 Investment Plan,
authorizing 400,000 shares thereto. The plan is active and had 12,000 options
outstanding at December 31, 2007.
In
January 2007 and May 2007, the Company issued 210,000 and 26,250 options,
respectively, to purchase common stock to non-employee directors, in accordance
with the terms of the Non-Employee Director Plan.
On
May 1,
2007, the Company awarded 262,500 restricted shares of our common stock to
three
of the Company’s executive officers, and on August 13, 2007, 157,500 restricted
shares of our common stock to one of the Company’s executive officers.
Also,
during the course of 2007, the Company granted an aggregate of 568,250 options
to purchase common stock to a number of employees and consultants with a strike
price equal to the quoted market value of our stock at the date of grant. The
options vest over five years and expire ten years from the date of grant.
In
January 2006 and August 2006, the Company issued 175,000 and 17,500 options,
respectively, to purchase common stock to non-employee directors, in accordance
with the terms of the Non-Employee Director Plan.
On
January 15, 2006, the Company awarded 860,000 restricted shares of our common
stock to two of the Company’s executive officers, and 200,000 stock options to
one of the two executive officers.
Also,
during the course of 2006, the Company granted an aggregate of 1,238,500 options
to purchase common stock to a number of employees and consultants at the market
value at the date of grant. The options vest over five years and expire ten
years from the date of grant.
In
January 2006, the Company granted 42,000 options to purchase common stock to
the
various members of the Company’s Scientific Advisory Board for services rendered
with a strike price equal to the quoted market value of our stock at the date
of
grant. The options have an exercise price of $1.72 per share. The options vest
upon issuance and will expire ten years from the date of the grant.
In
May
2006, the Company granted 9,000 options to purchase common stock to executives
in accordance with the terms of the 2005 Investment Plan.
In
January 2005, the Company issued 210,000 options to purchase common stock to
non-employee directors, in accordance with the terms of the Non-Employee
Director Plan.
Also,
during the course of 2005, the Company granted an aggregate of 1,182,000 options
to purchase common stock to a number of employees with a strike price equal
to
the quoted market value of our stock at the date of grant. The options vest
over
four years and expire five years from the date of grant.
In
February 2005, the Company granted 18,000 options to purchase common stock
to
the various members of the Company’s Scientific Advisory Board for services
rendered with a strike price equal to the quoted market value of our stock
at
the date of grant. The options have an exercise price of $2.35 per share. The
options vest over three years and will expire five years from the date of the
grant. The Company recorded $31,859 of expense relating to these options for
the
year ended December 31, 2005.
On
March
18, 2005, the Company agreed to assume up to 2,063,000 common stock options
associated with the acquisition of ProCyte Corporation valued at $2,033,132.
These ProCyte common stock options were converted into 1,366,131 common stock
options for PhotoMedex common stock.
In
July
and October 2005, the Company granted 25,000 options, each, to purchase common
stock to consultants for services rendered. The options have an exercise price
of $2.66 and $2.30 per share, respectively. The options vest over four years
and
will expire five years from the date of the grant. The Company recorded $49,120
and $42,278, respectively, of expense relating to these options for the year
ended December 31, 2005.
A
summary
of option transactions for all of the Company’s options during the years ended
December 31, 2007, 2006 and 2005 is as follows:
|
Number
of Shares
|
Weighted
Average
Exercise Price
|
||||||
|
Outstanding
at December 31, 2004
|
4,210,540
|
$
|
3.48
|
||||
|
Granted
|
1,460,000
|
2.57
|
|||||
|
Assumed
from acquisition
|
1,366,131
|
1.73
|
|||||
|
Exercised
|
(350,189
|
)
|
1.80
|
||||
|
Expired/cancelled
|
(1,608,836
|
)
|
5.83
|
||||
|
Outstanding
at December 31, 2005
|
5,077,646
|
2.11
|
|||||
|
Granted
|
1,682,000
|
1.92
|
|||||
|
Exercised
|
(60,750
|
)
|
1.44
|
||||
|
Expired/cancelled
|
(605,171
|
)
|
1.92
|
||||
|
Outstanding
at December 31, 2006
|
6,093,725
|
2.09
|
|||||
|
Granted
|
804,500
|
1.12
|
|||||
|
Exercised
|
(76,153
|
)
|
1.13
|
||||
|
Expired/cancelled
|
(692,401
|
)
|
1.90
|
||||
|
Outstanding
at December 31, 2007
|
6,129,671
|
$
|
2.00
|
||||
|
Exercisable
at December 31, 2007
|
4,068,033
|
$
|
2.01
|
||||
As
of
December 31, 2007, 4,068,033 options to purchase common stock were vested and
exercisable at prices ranging from $0.74 to $9.50 per share. As of December
31,
2006, 3,670,083 options to purchase common stock were vested and exercisable
at
prices ranging from $0.74 to $9.50 per share. Options are issued with exercise
prices equal to the market price on the date of issue, so the weighted-average
exercise price equals the weighted-average fair value price.
The
aggregate intrinsic value for options outstanding and exercisable at December
31, 2007 was immaterial.
The
weighted average grant date fair value of options was $0.92 and $1.52 for
options granted during the years ended December 31, 2007 and 2006, respectively.
The total intrinsic value of options exercised during the years ended December
31, 2007 and 2006 was $13,035
and
$31,494, respectively.
At
December 31, 2007, there was $3,559,917 of total unrecognized compensation
cost
related to non-vested option grants and stock awards that is expected to be
recognized over a weighted-average period of 2.41 years.
The
outstanding options, including options exercisable at December 31, 2007, have
a
range of exercise prices and associated weighted remaining contractual life
and
weighted average exercise price as follows:
|
Options Range
of Exercise
Prices
|
Outstanding
Number of
Shares
|
Weighted Average
Remaining
Contractual Life
(years)
|
Weighted
Average
Exercise Price
|
Exercisable
Number of
Shares
|
Exercisable
Weighted Avg.
Exercise Price
|
|||||||||||
|
$0 -
$2.50
|
5,546,418
|
5.15
|
$
|
1.86
|
3,550,905
|
$
|
1.87
|
|||||||||
|
$2.51
- $5.00
|
488,253
|
2.67
|
$
|
2.74
|
422,128
|
$
|
2.74
|
|||||||||
|
$5.01
- $7.50
|
80,000
|
3.01
|
$
|
5.63
|
80,000
|
$
|
5.63
|
|||||||||
|
$7.51
- up
|
15,000
|
2.34
|
$
|
9.50
|
15,000
|
$
|
9.50
|
|||||||||
|
Total
|
6,129,671
|
4.92
|
$
|
2.00
|
4,068,033
|
$
|
2.06
|
|||||||||
The
outstanding options will expire as follows:
|
Year Ending
|
Number of Shares
|
Weighted
Average
Exercise Price
|
Exercise Price
|
|||||||
|
2008
|
579,138
|
$
|
1.71
|
|
$0.74 - $2.17
|
|||||
|
2009
|
901,823
|
2.03
|
|
$0.99 - $2.70
|
||||||
|
2010
|
1,048,174
|
2.49
|
|
$1.07 - $9.50
|
||||||
|
2011
|
284,433
|
2.91
|
|
$1.49 - $5.63
|
||||||
|
2012 and later
|
3,316,103
|
1.80
|
|
$0.82 - $2.76
|
||||||
|
6,129,671
|
$
|
2.00
|
|
$0.74 - $9.50
|
||||||
Common
Stock Warrants
In
December 2007, the Company issued 235,525 warrants to purchase common stock
to
each of CIT Healthcare and Life Sciences Capital related to the leasing credit
facility of December 31, 2007. The warrants have an exercise price of $1.12
per
share and have a five-year term, expiring in December 2012. Also in December
2007, the Company redeemed and cancelled all of the warrants that were
previously issued to GE Capital Corporation.
In
March
2007, the Company issued 33,297 warrants to purchase common stock to GE Capital
Corporation related to the leasing credit facility. The warrants had an exercise
price of $1.28 per share and had a five-year term.
In
November 2006, in addition to receiving common stock in the Company’s private
placement, the investors and placement agent received warrants to purchase
2,684,000 shares of common stock at an exercise price of $1.60 per share. The
warrants have a five-year term, expiring in November 2011.
In
2006,
the Company issued warrants to purchase common stock to GE Capital Corporation
related to the leasing credit facility in the following manner: on March 29,
2006, 20,545 shares at an exercise price of $2.06; on June 30, 2006, 24,708
shares at an exercise price of $1.69 per share; on September 29, 2006, 25,038
shares at an exercise price of $1.53 per share; and on December 28, 2006, 32,057
at an exercise price of $1.20 per share. The warrants had a five-year
term.
In
2005,
the Company issued warrants to purchase common stock to GE Capital Corporation
related to the leasing credit facility in the following manner: on June 28,
2005, 14,714 shares at an exercise price of $2.50 per share; on September 26,
2005, 13,921 shares at an exercise price of $2.29 per share; and on December
27,
2005, 15,830 at an exercise price of $1.90 per share. The warrants had a
five-year term.
A
summary
of warrant transactions for the years ended December 31, 2007, 2006 and 2005
is
as follows:
|
Number of Warrants
|
Weighted
Average
Exercise Price
|
||||||
|
Outstanding
at December 31, 2004
|
2,168,599
|
2.34
|
|||||
|
Issued
|
43,765
|
2.22
|
|||||
|
Exercised
|
(73,530
|
)
|
2.00
|
||||
|
Expired/cancelled
|
(38,525
|
)
|
13.43
|
||||
|
Outstanding
at December 31, 2005
|
2,100,309
|
1.98
|
|||||
|
Issued
|
2,786,348
|
1.60
|
|||||
|
Exercised
|
(140,000
|
)
|
2.00
|
||||
|
Expired/cancelled
|
-
|
-
|
|||||
|
Outstanding
at December 31, 2006
|
4,746,657
|
1.75
|
|||||
|
Issued
|
504,347
|
1.13
|
|||||
|
Exercised
|
-
|
-
|
|||||
|
Expired/cancelled
|
(1,101,421
|
)
|
1.89
|
||||
|
Outstanding
at December 31, 2006
|
4,149,583
|
$
|
1.64
|
||||
At
December 31, 2007, all outstanding warrants were exercisable at prices ranging
from $1.12 to $2.00 per share.
If
not
previously exercised, the outstanding warrants will expire as
follows:
|
Year Ending December 31,
|
Number of Warrants
|
Weighted Average
Exercise Price
|
|||||
|
2008
|
994,533
|
$
|
2.00
|
||||
|
2009
|
-
|
-
|
|||||
|
2010
|
-
|
-
|
|||||
|
2011
|
2,684,000
|
1.60
|
|||||
|
2012
|
471,050
|
1.12
|
|||||
|
4,149,583
|
$
|
1.64
|
|||||
Note
13
Income
Taxes:
The
Company accounts for income taxes pursuant to SFAS No. 109, "Accounting for
Income Taxes". SFAS No. 109 is an asset-and-liability approach that requires
the
recognition of deferred tax assets and liabilities for the expected tax
consequences of events that have been recognized in the Company's financial
statements or tax returns.
The
Company recorded no provisions in 2007, 2006 and 2005 due to losses incurred.
Any other provisions, including accrual adjustments for prior periods, were
completely offset by changes in the deferred tax valuation
allowance.
Because
the Company acquired ProCyte Corporation on March 18, 2005, the effect of
ProCyte’s deferred tax asset is included for 2007, 2006 and only a part of 2005.
Income tax expense (benefit) consists of the following:
|
Year Ended December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Federal,
including AMT tax:
|
||||||||||
|
Current
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
Deferred
|
(2,371,000
|
)
|
(1,805,000
|
)
|
8,887,000
|
|||||
|
State:
|
||||||||||
|
Current
|
-
|
-
|
-
|
|||||||
|
Deferred
|
(630,000
|
)
|
(2,131,000
|
)
|
68,000
|
|||||
|
(3,001,000
|
)
|
(3,936,000
|
)
|
8,955,000
|
||||||
|
Change
in valuation allowance
|
3,001,000
|
3,936,000
|
8,955,000
|
|||||||
|
Income
tax expense
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
A
reconciliation of the effective tax rate with the Federal statutory tax rate
of
34% follows:
|
Year Ended December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Expected
Federal tax benefit at statutory rate
|
$
|
2,160,000
|
$
|
2,547,000
|
$
|
1,338,000
|
||||
|
Gross
change in valuation allowance
|
(3,001,000
|
)
|
3,936,000
|
(8,955,000
|
)
|
|||||
|
Adjustments
of temporary differences and net operating loss expirations and
limitations
|
130,000
|
(4,460,000
|
)
|
7,652,000
|
||||||
|
State
income taxes
|
630,000
|
278,000
|
68,000
|
|||||||
|
Other,
including adjustment due to State loss carryforwards
|
81,000
|
(2,301,000
|
)
|
(103,000
|
)
|
|||||
|
Income
tax expense
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
In
2006,
the gross deferred tax asset from net operating loss carryforwards was reduced
to take into account expirations of state and federal net operating loss
carryforwards and cumulative limitations as to the utilization of such loss
carryforwards. In 2007, the gross deferred tax asset from net operating loss
carryforwards was further adjusted to account for a change of ownership,
as
defined under the Internal Revenue Code Section 382, deemed to have occurred
as
of July 31, 2005.
As
of
December 31, 2007, the Company had approximately $151,491,000 of federal net
operating loss carryforwards. Included in the aggregate net operating loss
carryforward are approximately $12,361,000 of losses sustained by SLT prior
to
the tax-free acquisition on December 27, 2002 and approximately $48,589,000
of
losses sustained by ProCyte prior to the tax-free acquisition on March 18,
2005.
As of December 31, 2007, the Company has estimated that only $3,421,000 of
the
net operating loss from SLT and $16,426,000 of the loss from ProCyte can be
realized upon, based on Federal limitations on the useabililty of such expiring
losses. There have been no other changes of ownership identified by management
since July 31, 2005 that materially constrain the Company’s utilization of loss
carryforwards. If the Company undergoes a change or ownership in the future,
the
utilization of the Company’s loss carryforwards may be materially constrained.
In
addition, the Company had approximately $2,035,000 of Federal tax credit
carryforwards as of December 31, 2007. The credit carryforwards have begun,
and
continue, to expire over the ensuing 20 years. Under Federal rules applicable
to
the acquisition of SLT and ProCyte, the research credit carryforwards from
these
companies which are from years prior to their respective acquisitions and which
approximate $1,419,000, are subject to severe utilization constraints and
accordingly have been ascribed minimal value in the deferred tax asset.
Net
deductible, or favorable, temporary differences were approximately $23,353,000
at December 31, 2007.
The
changes in the deferred tax asset are as follows.
|
December
31,
|
|||||||
|
2007
|
2006
|
||||||
|
Beginning
balance, gross
|
$
|
46,115,000
|
$
|
50,051,000
|
|||
|
Net
changes due to:
|
|||||||
|
Operating
loss carryforwards
|
1,955,000
|
(6,687,000
|
)
|
||||
|
Other,
including adjustments due to state loss carryforwards and net operating
loss limitations and expirations
|
1,046,000
|
2,751,000
|
|||||
|
Ending
balance, gross
|
49,116,000
|
46,115,000
|
|||||
|
Less:
valuation allowance
|
(49,116,000
|
)
|
(46,115,000
|
)
|
|||
|
Ending
balance, net
|
$
|
-
|
$
|
-
|
|||
The
ending balances of the deferred tax asset have been fully reserved, reflecting
the uncertainties as to realizability evidenced by the Company’s historical
results and restrictions on the usage of the net operating loss carryforwards.
Deferred
tax assets (liabilities) are comprised of the following.
|
December
31,
|
|||||||
|
2007
|
2006
|
||||||
|
Loss
carryforwards
|
$
|
39,411,000
|
$
|
37,456,000
|
|||
|
Carryforward
and AMT credits
|
831,000
|
750,000
|
|||||
|
Accrued
employment expenses
|
830,000
|
557,000
|
|||||
|
Amortization
and write-offs
|
1,418,000
|
1,336,000
|
|||||
|
Bad
debts
|
206,000
|
292,000
|
|||||
|
Deferred
R&D costs
|
3,291,000
|
3,049,000
|
|||||
|
Deferred
revenues
|
254,000
|
240,000
|
|||||
|
Depreciation
|
1,970,000
|
1,533,000
|
|||||
|
Inventoriable
costs
|
86,000
|
81,000
|
|||||
|
Inventory
reserves
|
460,000
|
567,000
|
|||||
|
Other
accruals and reserves
|
359,000
|
254,000
|
|||||
|
Gross
deferred tax asset
|
49,116,000
|
46,115,000
|
|||||
|
Less:
valuation allowance
|
(49,116,000
|
)
|
(46,115,000
|
)
|
|||
|
Net
deferred tax asset
|
$
|
-
|
$
|
-
|
|||
Benefits
that may be realized from components in the deferred tax asset that were
contributed by Acculase from periods prior to the buy-out of the minority
interest in August 2000 and that approximate $5,333,000 in benefit, or that
were
contributed by ProCyte from periods prior to the acquisition in March 2005
and
that approximate $7,204,000 in benefit will first be taken to reduce the
carrying value of goodwill and other intangibles that were recorded in the
respective transactions. Only after such values have been fully reduced will
any
remaining benefit be reflected in the Company’s Statement of Operations. It is
not expected that any material tax benefit from the ProCyte acquisition will
be
reflected in the Statement of Operations, but a benefit of $2,389,000 from
the
Acculase acquisition may be realized and reflected in the Statement of
Operations. Within the net operating loss carryforward as of December 31, 2007
are approximately $6,651,000 of tax deductions from the exercise of Company
stock options. The preponderance of these options were to employees and
therefore no book expense was recognized on their grant under APB No. 25.
Effective
January 1, 2007, the Company adopted FASB Interpretation No. 48 “Accounting for
Uncertainty in Income Taxes” (“FIN No. 48”), which clarifies the accounting for
uncertainty in income taxes recognized in the financial statement in accordance
with FASB Statement No. 109 Accounting for Income Taxes. This interpretation
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken, or expected
to be
taken, in a tax return. There were no significant matters determined to be
unrecognized tax benefits taken or expected to be taken in a tax return that
have been recorded on the Company's consolidated financial statements for
the
year ended December 31, 2007.
Additionally,
FIN No. 48 provides guidance on the recognition of interest and penalties
related to income taxes. There were no interest or penalties related to income
taxes that have been accrued or recognized as of and for the years ended
December 31, 2007, 2006 and 2005.
The
Company files corporate income tax returns in the United States, both in
the
Federal jurisdiction and in various state jurisdictions. The Company is
subject
to Federal income tax examination for calendar tax years 2005 through 2007
and
is also subject to various state income tax examinations for calendar years
2002
through 2007.
Note
14
Significant
Alliances/Agreements:
On
March
31, 2005, the Company entered into a Sales and Marketing Agreement with
GlobalMed (Asia) Technologies Co., Inc. (“GlobalMed”). Under this agreement,
GlobalMed acts as master distributor in the Pacific Rim for the Company’s XTRAC
excimer laser and for the Company’s LaserPro® diode surgical laser system. The
Company’s diode laser will be marketed for, among other things, use in a
gynecological procedure pioneered by David Matlock, MD. The
Company has engaged Dr. Matlock as a consultant to explore further business
opportunities for the Company. In connection with this engagement, Dr. Matlock
received options to purchase up to 25,000 shares of the Company’s common stock
at an exercise price which was the market value of the Company’s common stock on
the date of the grant. In July 2006, the Company broadened the territory covered
by the Sales and Marketing Agreement to include the United States and added
Innogyn, Inc., a related party of GlobalMed, as co-distributor under the
agreement.
On
March
30, 2006, the Company entered a strategic relationship with AzurTec to resume
development, and to undertake the manufacture and distribution, of AzurTec's
MetaSpex Laboratory System, a light-based system designed to detect certain
cancers of the skin. The Company issued 200,000 shares of its restricted common
stock in exchange for 6,855,141 shares of AzurTec common stock and 181,512
shares of AzurTec Class A preferred stock, which represent a 14% interest in
AzurTec on a fully diluted basis. The Company will assist
in
the development of FDA-compliant prototypes for AzurTec’s product. Continuing
development of this project requires additional investment by AzurTec, which
AzurTec has attempted to raise based on an in
vivo
application. The Company will resume development once the additional investment
has been raised, and AzurTec has settled its prior indebtedness to the Company
for development work. The Company is considering whether to grant AzurTec an
extension of time into 2008 in which to raise the additional
investment.
On
March
31, 2006, the Mount Sinai School of Medicine of New York University granted
the
Company an exclusive license, effective April 1, 2006, to use Mount Sinai's
patented methodology for utilization of ultraviolet laser light for the
treatment of vitiligo. The licensed patent is US Patent No. 6,979,327, Treatment
of Vitiligo. It was issued December 27, 2005, and the inventor is James M.
Spencer, MD, a member of the Company’s Scientific Advisory Board. The Company is
obligated to pay royalties, quarterly, over the life of the
agreement.
On
April
14, 2006, the Company entered into a Clinical Trial Agreement protocol with
the
University of California at San Francisco. The
agreement covers a protocol for a phase 4, randomized, double-blinded study
to
evaluate the safety and efficacy of the XTRAC laser system in the treatment
of
moderate to severe psoriasis. John Koo, MD, a member of our Scientific Advisory
Board, is guiding the study using our high-powered Ultra™ excimer laser. The
Company committed to contributing up to $200,000 towards the study.
In
July
2007, the Company obtained a marketing license for MD Lash Factor eyelash
conditioner. The license is for 5 years but is cancelable at yearly intervals.
The license gives the Company, among other things, exclusive rights to market
this cosmetic conditioner to physicians in the United States and other
countries. A US patent is pending on the key ingredient in the product, which
is
a unique prostaglandin analogue. The Company is obligated to pay royalties,
quarterly, over the life of the agreement.
In
September 2007, the Company entered with AngioDynamics into a three-year OEM
agreement under which the Company manufactures for AngioDynamics, on a
non-exclusive basis, a private-label, 980-nanometer diode laser system. The
system is designed for use with AngioDynamics’ NeverTouch™ VenaCure® patented
endovenous therapy for treatment of varicose veins. The OEM agreement provides
that the Company shall supply this laser on an exclusive basis to AngioDynamics,
should AngioDynamics meet certain purchase requirements. Having received from
AngioDynamics a purchase order that exceeded the minimum purchase requirement
for delivery of lasers over the first contract year, the Company will now
provide this laser exclusively to AngioDynamics for worldwide sale in the
peripheral vascular treatment field.
In
December 2007, the Company engaged Universal Business Solutions, Inc. (“UBS”) to
distribute in the United States the line of spa products of the skin care
segment. UBS will be a stocking distributor. The agreement is for 3 years.
Note
15
Significant
Customer Concentration:
No
one
customer represented 10% or more of total revenues for the year ended December
31, 2007, 2006 and 2005.
Note
16
Business
Segment and Geographic Data:
Segments
are distinguished by the Company’s management structure, products and services
offered, markets served and types of customers. The Domestic XTRAC business
derives its primary revenues from procedures performed by dermatologists in
the
United States. The International Dermatology Equipment segment, in comparison,
generates revenues from the sale of equipment to dermatologists outside the
United States through a network of distributors. The Skin Care (ProCyte) segment
generates revenues by selling skincare products and by earning royalties on
licenses for the Company’s patented copper peptide compound. The Surgical
Services segment generates revenues by providing fee-based procedures typically
using the Company’s mobile surgical laser equipment delivered and operated by a
technician at hospitals and surgery centers in the United States. The Surgical
Products segment generates revenues by selling laser products and disposables
to
hospitals and surgery centers on both a domestic and international basis. For
the years ended December 31, 2007, 2006 and 2005, the Company did not have
material revenues from any individual customer.
Unallocated
operating expenses include costs incurred for administrative and accounting
staff, general liability and other insurance, professional fees and other
similar corporate expenses. Unallocated assets include cash, prepaid expenses
and deposits. Goodwill that was carried at $2,944,423 at December 31, 2007
and 2006 has been allocated to the domestic and international XTRAC segments
based upon its fair value as of the date of the Acculase buy-out in the amounts
of $2,061,096 and $883,327, respectively. Goodwill of $13,973,385 at December
31, 2007 from the ProCyte acquisition has been entirely allocated to the Skin
Care segment. The following tables reflect results of operations from our
business segments for the periods indicated below:
|
Year Ended December 31, 2007
|
|||||||||||||||||||
|
DOMESTIC
XTRAC
|
INTERN’L
DERM.
EQUIPMENT
|
SKIN
CARE
|
SURGICAL
SERVICES
|
SURGICAL
PRODUCTS
AND OTHER
|
TOTAL
|
||||||||||||||
|
Revenues
|
$
|
9,141,857
|
3,256,505
|
$
|
13,471,973
|
$
|
7,667,174
|
$
|
5,176,108
|
$
|
38,713,617
|
||||||||
|
Costs
of revenues
|
4,654,561
|
1,646,279
|
4,208,287
|
6,581,722
|
2,977,185
|
20,068,034
|
|||||||||||||
|
Gross
profit
|
4,487,296
|
1,610,226
|
9,263,686
|
1,085,452
|
2,198,923
|
18,645,583
|
|||||||||||||
|
Allocated
operating expenses:
|
|||||||||||||||||||
|
Selling,
general and administrative
|
6,189,047
|
127,325
|
5,812,185
|
854,427
|
614,518
|
13,597,502
|
|||||||||||||
|
Engineering
and product development
|
-
|
-
|
391,928
|
-
|
407,180
|
799,108
|
|||||||||||||
|
Unallocated
operating expenses
|
-
|
-
|
-
|
-
|
-
|
9,631,774
|
|||||||||||||
|
6,189,047
|
127,325
|
6,204,113
|
854,427
|
1,021,698
|
24,028,384
|
||||||||||||||
|
Loss
from operations
|
(1,701,751
|
)
|
1,482,901
|
3,059,573
|
231,025
|
1,177,225
|
(5,382,801
|
)
|
|||||||||||
|
Refinancing
charge
|
-
|
-
|
-
|
-
|
-
|
(441,956
|
)
|
||||||||||||
|
Interest
expense, net
|
-
|
-
|
-
|
-
|
-
|
(529,489
|
)
|
||||||||||||
|
Net
loss
|
$ |
(1,701,751
|
)
|
$
|
1,482,901
|
$
|
3,059,573
|
$
|
231,025
|
$
|
1,177,225
|
$ |
(6,354,246
|
)
|
|||||
|
Segment
assets
|
$
|
13,823,060
|
$
|
2,194,876
|
$
|
21,269,256
|
$
|
3,978,773
|
$
|
4,946,011
|
$
|
46,211,976
|
|||||||
|
Capital
expenditures
|
$
|
3,324,411
|
$
|
15,679
|
$
|
6,917
|
$
|
328,934
|
$
|
72,474
|
$
|
3,748,415
|
|||||||
|
Year Ended December 31, 2006
|
|||||||||||||||||||
|
DOMESTIC
XTRAC
|
INTERN’L
DERM.
EQUIPMENT
|
SKIN
CARE
|
SURGICAL
SERVICES
|
SURGICAL
PRODUCTS
AND OTHER
|
TOTAL
|
||||||||||||||
|
Revenues
|
$
|
5,611,387
|
2,186,424
|
$
|
12,646,910
|
$
|
6,944,292
|
$
|
5,800,864
|
$
|
33,189,877
|
||||||||
|
Costs
of revenues
|
4,166,199
|
1,268,080
|
3,858,944
|
5,703,925
|
3,474,702
|
18,471,850
|
|||||||||||||
|
Gross
profit
|
1,445,188
|
918,344
|
8,787,966
|
1,240,367
|
2,326,162
|
14,718,027
|
|||||||||||||
|
Allocated
operating expenses:
|
|||||||||||||||||||
|
Selling,
general and administrative
|
4,408,753
|
77,639
|
5,580,985
|
959,848
|
552,824
|
11,580,049
|
|||||||||||||
|
Engineering
and product development
|
-
|
-
|
498,602
|
-
|
507,998
|
1,006,600
|
|||||||||||||
|
Unallocated
operating expenses
|
-
|
-
|
-
|
-
|
-
|
9,102,007
|
|||||||||||||
|
4,408,753
|
77,639
|
6,079,587
|
959,848
|
1,060,822
|
21,688,656
|
||||||||||||||
|
Loss
from operations
|
(2,963,565
|
)
|
840,705
|
2,708,379
|
280,519
|
1,265,340
|
(6,970,629
|
)
|
|||||||||||
|
Interest
expense, net
|
-
|
-
|
-
|
-
|
-
|
(521,768
|
)
|
||||||||||||
|
Net
loss
|
$ |
(2,963,565
|
)
|
$
|
840,705
|
$
|
2,708,379
|
$
|
280,519
|
$
|
1,265,340
|
$ |
(7,492,397
|
)
|
|||||
|
Segment
assets
|
$
|
11,143,750
|
$
|
1,838,558
|
$
|
21,750,716
|
$
|
4,450,302
|
$
|
4,772,302
|
$
|
43,955,628
|
|||||||
|
Capital
expenditures
|
$
|
2,933,680
|
$
|
885
|
$
|
-
|
$
|
998,541
|
$
|
70,215
|
$
|
4,003,321
|
|||||||
|
Year
Ended December 31, 2005
|
|||||||||||||||||||
|
DOMESTIC
XTRAC
|
INTERN’L
DERM.
EQUIPMENT
|
SKIN
CARE
|
SURGICAL
SERVICES
|
SURGICAL
PRODUCTS
AND OTHER
|
TOTAL
|
||||||||||||||
|
Revenues
|
$
|
3,498,235
|
$
|
1,404,096
|
$
|
10,042,133
|
$
|
7,719,529
|
$
|
5,720,513
|
$
|
28,384,506
|
|||||||
|
Costs
of revenues
|
2,691,506
|
930,574
|
3,132,532
|
5,675,787
|
3,245,106
|
15,675,505
|
|||||||||||||
|
Gross
profit
|
806,729
|
473,522
|
6,909,601
|
2,043,742
|
2,475,407
|
12,709,001
|
|||||||||||||
|
Allocated
operating expenses:
|
|||||||||||||||||||
|
Selling,
general and administrative
|
2,692,388
|
313,713
|
5,331,764
|
1,192,911
|
582,366
|
10,113,142
|
|||||||||||||
|
Engineering
and product development
|
-
|
-
|
442,367
|
-
|
685,594
|
1,127,961
|
|||||||||||||
|
Unallocated
operating expenses
|
-
|
-
|
-
|
-
|
-
|
6,364,180
|
|||||||||||||
|
2,692,388
|
313,713
|
5,774,131
|
1,192,911
|
1,267,960
|
17,605,283
|
||||||||||||||
|
Loss
from operations
|
(1,885,659
|
)
|
159,809
|
1,135,470
|
850,831
|
1,207,447
|
(4,896,282
|
)
|
|||||||||||
|
Interest
expense, net
|
-
|
-
|
-
|
-
|
-
|
(342,299
|
)
|
||||||||||||
|
Other
income, net
|
-
|
-
|
-
|
-
|
-
|
1,302,537
|
|||||||||||||
|
Net
loss
|
$ |
(1,885,659
|
)
|
$
|
159,809
|
$
|
1,135,470
|
$
|
850,831
|
$
|
1,207,447
|
$ |
(3,936,044
|
)
|
|||||
|
Segment
assets
|
$
|
8,936,793
|
$
|
2,523,953
|
$
|
22,585,592
|
$
|
4,118,909
|
$
|
4,176,741
|
$
|
42,341,988
|
|||||||
|
Capital
expenditures
|
$
|
3,391,376
|
$
|
14,327
|
$
|
-
|
$
|
216,633
|
$
|
80,552
|
$
|
3,702,888
|
|||||||
|
December 31,
|
|||||||
|
|
2007
|
2006
|
|||||
|
Assets:
|
|||||||
|
Total
assets for reportable segments
|
$
|
46,211,976
|
$
|
43,955,628
|
|||
|
Other
unallocated assets
|
10,474,727
|
13,525,893
|
|||||
|
Consolidated
total
|
$
|
56,686,703
|
$
|
57,481,521
|
|||
For
the
years ended December 31, 2007, 2006 and 2005, there were no material net
revenues attributed to an individual foreign country. Net revenues by geographic
area were as follows:
|
Year Ended December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Domestic
|
$
|
32,026,636
|
$
|
27,691,157
|
$
|
24,667,314
|
||||
|
Foreign
|
6,686,981
|
5,498,720
|
3,717,192
|
|||||||
|
$
|
38,713,617
|
$
|
33,189,877
|
$
|
28,384,506
|
|||||
Note
17
Quarterly
Financial Data (Unaudited):
|
For
the Quarter Ended
|
|||||||||||||
|
2007
|
Mar.
31
|
Jun.
30
|
Sep.
30
|
Dec.
31
|
|||||||||
|
Revenues
|
$
|
9,029,000
|
$
|
9,319,000
|
$
|
8,922,000
|
$
|
11,444,000
|
|||||
|
Gross
profit
|
4,168,000
|
4,370,000
|
4,239,000
|
5,868,000
|
|||||||||
|
Net
loss
|
(1,883,000
|
)
|
(1,836,000
|
)
|
(1,653,000
|
)
|
(982,000
|
)
|
|||||
|
Basic
and diluted net loss per share
|
$ |
(0.03
|
)
|
$ |
(0.03
|
)
|
$ |
(0.03
|
)
|
$ |
(0.01
|
)
|
|
|
Shares
used in computing basic and diluted net loss per share
|
62,536,054
|
62,709,147
|
62,956,881
|
63,032,207
|
|||||||||
|
2006
|
Mar.
31
|
Jun.
30
|
Sep.
30
|
Dec.
31
|
|||||||||
|
Revenues
|
$
|
8,081,000
|
$
|
8,224,000
|
$
|
8,292,000
|
$
|
8,593,000
|
|||||
|
Gross
profit
|
3,373,000
|
4,000,000
|
3,633,000
|
3,712,000
|
|||||||||
|
Net
loss
|
(2,350,000
|
)
|
(1,340,000
|
)
|
(1,693,000
|
)
|
(2,109,000
|
)
|
|||||
|
Basic
and diluted net loss per share
|
$ |
(0.05
|
)
|
$ |
(0.03
|
)
|
$ |
(0.03
|
)
|
$ |
(0.03
|
)
|
|
|
Shares
used in computing basic and diluted net loss per share
|
52,173,618
|
52,622,189
|
52,659,132
|
59,239,878
|
|||||||||
|
2005
|
Mar.
31
|
Jun.
30
|
Sep.
30
|
Dec.
31
|
|||||||||
|
Revenues
|
$
|
4,983,000
|
$
|
8,055,000
|
$
|
7,624,000
|
$
|
7,722,000
|
|||||
|
Gross
profit
|
2,351,000
|
3,833,000
|
3,320,000
|
3,205,000
|
|||||||||
|
Net
loss
|
(1,128,000
|
)
|
(661,000
|
)
|
(1,350,000
|
)
|
(797,000
|
)
|
|||||
|
Basic
and diluted net loss per share
|
$ |
(0.03
|
)
|
$ |
(0.01
|
)
|
$ |
(0.03
|
)
|
$ |
(0.01
|
)
|
|
|
Shares
used in computing basic and diluted net loss per share
|
41,755,950
|
50,859,562
|
51,198,095
|
51,322,000
|
|||||||||
Note
18
Valuation
and Qualifying Accounts:
|
Additions Charged to
|
||||||||||||||||
|
Description
|
Balance at
Beginning
of Period
|
Cost and
Expenses
|
Other
Accounts (1)
|
Deductions (2)
|
Balance at End
of Period
|
|||||||||||
|
For
The Year Ended December 31, 2007:
|
||||||||||||||||
|
Reserve
for Doubtful Accounts
|
$
|
508,438
|
$
|
105,796
|
$
|
-
|
$
|
71,251
|
542,983
|
|||||||
|
For
The Year Ended December 31, 2006:
|
||||||||||||||||
|
Reserve
for Doubtful Accounts
|
$
|
765,440
|
$
|
66,211
|
$
|
-
|
$
|
323,213
|
508,438
|
|||||||
|
For
The Year Ended December 31, 2005:
|
||||||||||||||||
|
Reserve
for Doubtful Accounts
|
$
|
736,505
|
$
|
373,964
|
$
|
121,633
|
$
|
466,662
|
$
|
765,440
|
||||||
|
(1)
|
Represents
allowance for doubtful accounts related to the acquisition of
ProCyte.
|
|
(2)
|
Represents
write-offs of specific accounts
receivable.
|
F-36