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PMTI > SEC Filings for PMTI > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for PALOMAR MEDICAL TECHNOLOGIES INC

Form 10-Q for PALOMAR MEDICAL TECHNOLOGIES INC


8-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth previously under the caption "Risk Factors" in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 12, 2012 and those included in Item 1A below. This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2011.

Critical accounting policies

Management's discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, related disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical of which are those related to revenue recognition, available for sale and marketable securities valuation, accounts receivable valuation, inventory valuation, warranty provision, stock-based compensation, fair value measurements, income tax valuation, and contingencies. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known. A discussion of our critical accounting policies and the related judgments and estimates affecting the preparation of our consolidated financial statements is included in the Annual Report on our Form 10-K fiscal year 2011. There have been no material changes to our critical accounting policies as of September 30, 2012.

Recently issued accounting standards

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The amendments intend to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. The guidance changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. The new amendments are effective for interim and annual periods beginning after December 15, 2011. The adoption of this guidance did not materially impact our financial statements or disclosures.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. In this ASU, the FASB amended its guidance on the presentation of comprehensive income in financial statements to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items that are recorded in other comprehensive income. The new accounting guidance requires entities to report components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements. The provisions of this new guidance are effective for interim and annual periods beginning after December 15, 2011. We retroactively adopted this guidance during the third quarter of 2011 and the impact on our financial statements was not material. ASU 2011-05 addresses the presentation of comprehensive income (loss) in consolidated financial statements and footnotes. The adoption impacts presentation only and had no effect on the Company's financial condition, results of operations and comprehensive (loss) income or cash flows. The Company did not adopt the provisions of the reclassification requirements, which were deferred by ASU 2011-12, Comprehensive Income: Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, in December 2011.

Overview

We are a global leader in laser and other light-based systems for aesthetic treatments. Since our inception, we have been able to develop a differentiated product mix of light-based systems for various treatments through our research and development as well as with our partnerships throughout the world. We are continually developing and testing new indications to further the advancement in light-based treatments.


Our corporate headquarters and United States operations are located in Burlington, Massachusetts, where we conduct our manufacturing, warehousing, research and development, regulatory, sales, customer service, marketing and administrative activities. In the United States, Australia, Canada, Japan, Germany, and Spain, we market, sell, and service our products primarily through our direct sales force and customer service employees. In the rest of the world, sales are generally made through our worldwide distribution network which encompasses over 70 countries.

Results of operations

Professional product revenues for the quarter ended September 30, 2012 were $13.0 million, a 25 percent increase over the $10.4 million reported in the third quarter of 2011. Professional product gross margins were 59% in both the third quarter of 2012 and 2011. Professional income from operations was $69,000 compared to the third quarter of 2011 income from operations of $19.5 million which included a positive effect of $25.3 million related to the patent litigation settlement with Candela and Syneron in September 2011. Consumer cost of products sold for the quarter ended September 30, 2012 includes a $3.8 million inventory charge to reduce our consumer product inventory to its estimated net realizable amounts. As of September 30, 2012, the balance sheet continues to be strong with $94 million in cash, cash equivalents, short-term investments, and marketable securities and other investments with no borrowings.


The following table contains selected income statement information, which serves as the basis of the discussion of our results of operations for the three and nine months ended September 30, 2012 and 2011, respectively (in thousands, except for percentages):

                                     Three Months Ended September 30,
                                   2012                            2011
                                        As a % of                       As a % of
                                          Total                           Total                 Change
                          Amount         Revenue         Amount          Revenue          $               %
Revenues
  Professional
product revenues        $   12,983              70 %    $  10,414             23 %    $   2,569            25 %
  Consumer product
revenues                       306               2 %            -              - %          306            N/ A
  Service revenues           3,198              17 %        3,446              7 %         (248 )          (7 %)
  Royalty revenues           1,945              11 %       31,638             69 %      (29,693 )         (94 %)
  Other revenues                43               - %          556              1 %         (513 )         (92 %)
  Total revenues            18,475             100 %       46,054            100 %      (27,579 )         (60 %)

Costs and expenses
  Cost of
professional product
revenues                     5,357              29 %        4,300              9 %        1,057            25 %
  Cost of consumer
product revenues             4,105              22 %            7              - %        4,098            N/ A
  Cost of service
revenues                     1,450               8 %        1,557              3 %         (107 )          (7 %)
  Cost of royalty
revenues                       778               4 %       11,836             26 %      (11,058 )         (93 %)
  Research and
development                  1,872              10 %        4,271              9 %       (2,399 )         (56 %)
  Selling and
marketing                    6,790              37 %        6,680             15 %          110             2 %
  General and
administrative               2,780              15 %       (1,117 )           (2 %)       3,897          (349 %)
  Total costs and
expenses                    23,132             125 %       27,534             60 %       (4,402 )         (16 %)

  (Loss) income from
operations                  (4,657 )           (25 %)      18,520             40 %      (23,177 )         125 %

  Interest income               91               - %          811              2 %         (720 )         (89 %)
  Other income (loss)          250               1 %         (212 )            - %          462           218 %

(Loss) income before
income taxes                (4,316 )           (23 %)      19,119             42 %      (23,435 )        (123 %)

Provision for income
taxes                          359               2 %        3,861              8 %       (3,502 )         (91 %)

Net (loss) income       $   (4,675 )           (25 %)   $  15,258             33 %    $ (19,933 )         131 %


                                      Nine Months Ended September 30,
                                   2012                            2011
                                        As a % of                      As a % of
                                          Total                          Total                Change
                          Amount         Revenue         Amount         Revenue           $                %
Revenues
  Professional
product revenues        $   37,910              66 %    $  31,014              39 %   $   6,896            22 %
  Consumer product
revenues                     2,185               4 %            -               - %       2,185            N/ A
  Service revenues          10,514              18 %       11,189              14 %        (675 )          (6 %)
  Royalty revenues           5,271               9 %       36,605              45 %     (31,334 )         (86 %)
  Other revenues             1,265               2 %        1,667               2 %        (402 )         (24 %)
  Total revenues            57,145             100 %       80,475             100 %     (23,330 )         (29 %)

Costs and expenses
  Cost of
professional product
revenues                    15,303              27 %       12,574              16 %       2,729            22 %
  Cost of consumer
product revenues             5,716              10 %           63               - %       5,653            N/ A
  Cost of service
revenues                     4,764               8 %        5,013               6 %        (249 )          (5 %)
  Cost of royalty
revenues                     2,108               4 %       13,823              17 %     (11,715 )         (85 %)
  Research and
development                  8,081              14 %       11,800              15 %      (3,719 )         (32 %)
  Selling and
marketing                   20,546              36 %       18,571              23 %       1,975            11 %
  General and
administrative               8,873              16 %        6,151               8 %       2,722            44 %
  Total costs and
expenses                    65,391             114 %       67,995              84 %      (2,604 )          (4 %)

  (Loss) income from
operations                  (8,246 )           (14 %)      12,480              16 %     (20,726 )         166 %

  Interest income              266               - %        1,014               1 %        (748 )         (74 %)
  Other loss                    (9 )             - %         (172 )             - %         163           (95 %)

(Loss) income before
income taxes                (7,989 )           (14 %)      13,322              17 %     (21,311 )         160 %

Provision for income
taxes                          449               1 %        3,957               5 %      (3,508 )         (89 %)

Net (loss) income       $   (8,438 )           (15 %)   $   9,365              12 %   $ (17,803 )         190 %

Professional product revenues. During the three and nine months ended September 30, 2012, our professional product revenues increased 25% and 22%, respectively, as compared to the corresponding periods in the prior year, primarily due to the Palomar Icon™ Aesthetic System, our new flagship platform, which we launched during the second half of 2011. More than 50% of our professional product revenues in the three and nine months ended September 30, 2012 were from Icon System sales. We are still in the regulatory registration process for many countries and will continue to sell the StarLux 500® Laser and ILP system until we have registrations for Palomar Icon Systems in all areas around the world. In the three and nine months ended September 30, 2012, as compared to the corresponding periods in 2011, professional product revenues were favorably impacted by the Palomar Icon System as well as the introduction of the Palomar Emerge™ Fractional Laser and Vectus™ Laser in the first quarter of 2012. This impact was partially offset by a decrease in sales related to the StarLux System as some potential StarLux System customers opted to purchase the new Palomar Icon System.

Consumer product revenues. During the fourth quarter of 2010, we launched the PaloVia® Skin Renewing Laser® -- our first consumer product. Since we were selling the PaloVia laser through retail channels with which we had no history and were unable to estimate the customer return rates and the expected warranty accrual needed on sales of our consumer product, we deferred substantially all of our consumer product revenues from the PaloVia laser until the fourth quarter of 2011. During the fourth quarter of 2011, we determined that we had sufficient history to be able to estimate our customer return rates and the expected warranty accrual needed on sales of our consumer product. In the fourth quarter of 2011, we recognized $3.5 million of consumer product revenues related to the PaloVia laser. During the three and nine months ended September 30, 2012, we recognized $0.3 million and $2.2 million, respectively, of consumer product revenues. We are now looking to align ourselves with a worldwide consumer based distributor. We have engaged an investment banker to assist us in identifying and negotiating an arrangement with a distributor that has the network and skills to market and distribute our consumer technology. While we are looking for a consumer based distributor, we will continue to sell the product to our existing channels, however, we will substantially reduce our consumer selling and marketing expenses starting in the fourth quarter of 2012. If we do not find a consumer based distributor, we will be unable to achieve substantial revenue or continue to sell the PaloVia laser. As a result during the third quarter of 2012, we recognized a $3.8 million charge to reduce our consumer product inventory to its estimated net realizable amounts.


Service revenues. Service revenues are primarily comprised of revenue generated from our service organization to provide ongoing service, sales of replacement handpieces, sales of consumables and accessories, and billable repairs of our professional products. During the three and nine months ended September 30, 2012, service revenues decreased 7% and 6%, respectively, as compared to the corresponding periods in the prior year. The decrease in the three and nine months ended September 30, 2012 was primarily due to lower sales from ongoing service contracts and billable services.

The following table sets forth, for the periods indicated, information about our total Professional Product segment's product and service revenues, by geographic region:

                                       Three Months Ended          Nine Months Ended
                                          September 30,              September 30,
                                      2012            2011         2012          2011
        North America                     60 %           56 %         56 %         56 %
        Europe                            21 %           15 %         20 %         15 %
        Middle East                        2 %            8 %          6 %          8 %
        Japan                              4 %            4 %          5 %          4 %
        South and Central America          4 %            6 %          5 %          6 %
        Australia                          3 %            6 %          4 %          6 %
        Asia/Pacific Rim                   6 %            5 %          4 %          5 %

        Total                            100 %          100 %        100 %        100 %

In the three and nine month periods ended September 30, 2012, 100% and 93%, respectively, of our Consumer Product segment revenues were derived from sales in the United States and 0% and 7%, respectively, were from Europe.

Royalty revenues. Royalty revenues decreased for the three and nine months ended September 30, 2012 by 94% and 86%, respectively, as compared to the corresponding periods in the prior year. The decrease is mainly attributed to the $29.8 million in royalty revenues received from Candela/Syneron as a result of the resolution of the patent infringement lawsuits against Synron, Inc., Syneron Medical Ltd., and Candela Corporation in the third quarter of 2011. The $29.8 million was compensation for back-owed royalties for sales of professional laser- and lamp-based systems beginning with Candela and Syneron's sales in August 2000 through September 30, 2011 plus estimated future royalties owed through the expiration of the Anderson Patents in February 2015. Excluding the $29.8 million, for the three and nine months ended September 30, 2012, royalty revenues increased 4% and decreased 23%, respectively as compared to the corresponding periods in the prior year. We believe that the use of this non-GAAP revenues disclosure enhances our ability to conduct period-to-period analyses of our results. The increase for the comparable three month periods is a result of royalties from two new licensees in the third quarter of 2012. The decrease for the comparable nine month periods is a result of lower on-going royalty payments from our licensees and a $1.1 million back-owed royalty payment received in the first quarter of 2011 for which there was no comparable license revenue in 2012.


Other revenues. During the three and nine months ended September 30, 2012, other revenues decreased 92% and 24%, respectively, as compared to the corresponding periods in the prior year.

During the second quarter of 2012, P&G launched a light-based hair removal product and paid us an Additional TTP Quarterly Payment (as defined in the License Agreement) of $1.0 million. This Additional TTP Quarterly Payment resulted in $0.7 million in other revenues during the second quarter of 2012 after being netted with the receivable from P&G as payments under the amended License Agreement which were being recognized ratably through the expected launch term. Starting in the third quarter of 2012 and going forward, P&G will make post-launch technology transfer payments ("TTPs") based on a percentage of net sales of its light-based hair removal product which we will recognize in the period received. During the three months ended September 30, 2012, other revenues consists of $43,000 of post-launch TTPs based on a percentage of net sales of P&G's light-based hair removal product. During the nine months ended September 30, 2012, other revenues consists of $0.6 million related to TTP Quarterly Payments received under the amended License Agreement which were being recognized ratably through the expected launch term, the $0.7 million previously mentioned, and the $43,000 in post-launch TTPs described above. For the three and nine months ended September 30, 2011, other revenues consisted of the recognition of $0.6 million and $1.7 million, respectively, related to TTP Quarterly Payments received under the amended License Agreement. The TTP Quarterly Payments under the amended License Agreement were being recognized ratably through the expected launch term.

Cost of professional product revenues. For the three months ended September 30, 2012 and 2011, the cost of professional product revenues increased in absolute dollars, but remained consistent as a percentage of professional product revenues at 41%. For the nine months ended September 30, 2012 and 2011, the cost of professional product revenues increased in absolute dollars, but decreased as a percentage of professional product revenues to 40% from 41%, respectively. The increase in absolute dollars was attributable to higher product revenues. Our cost of professional product revenues consists primarily of material, labor and manufacturing overhead expenses. Cost of professional product revenues also includes royalties incurred on certain products sold, warranty expenses, as well as payroll and payroll-related expenses, including stock-based compensation, and quality control.

Cost of consumer product revenues. The cost of consumer product revenues relates to the PaloVia® Skin Renewing Laser®. For the three and nine months ended September 30, 2012, cost of consumer product revenues was $4.1 million and $5.7 million, respectively or 1,340% and 262% of consumer product revenues, respectively. Since we were selling the PaloVia laser through retail channels with which we had no history and were unable to estimate the customer return rates and the expected warranty accrual needed on sales of our consumer product, we deferred substantially all of our consumer product revenues from the PaloVia laser until the fourth quarter of 2011. During the fourth quarter of 2011, we determined that we had sufficient history to be able to estimate our customer return rates and the expected warranty accrual needed on sales of our consumer product. In the fourth quarter of 2011, we recognized $3.5 million of consumer product revenues related to the PaloVia laser and the related expenses. During the third quarter of 2012, we recognized a $3.8 million charge to reduce our consumer product inventory to its estimated net realizable amounts.

Cost of service revenues. For the three and nine months ended September 30, 2012 and 2011, the cost of service revenues decreased in absolute dollars and remained consistent as a percentage of service revenues at 45%. The decrease in absolute dollars was primarily due to lower sales from ongoing service contracts and billable services.

Cost of royalty revenues. Cost of royalty revenues decreased for the three and nine months ended September 30, 2012 by 93% and 85%, respectively, as compared to the corresponding periods in the prior year. The decrease is mainly attributed to the royalty revenues received from Candela/Syneron as a result of the resolution of the patent infringement lawsuits against Syneron, Inc., Syneron Medical Ltd., and Candela Corporate in the third quarter of 2011. We believe that the use of this non-GAAP cost of royalty revenues disclosure enhances our ability to conduct period-to-period analyses of our results. Excluding the $29.8 million of royalty revenues from Candela/Syneron, for the three months ended September 30, 2012, cost of royalty revenues increased by 4% as compared to the corresponding period in the prior year as a result of royalties from two new licensees in the third quarter of 2012. For the nine months ended September 30, 2012, cost of royalty revenues decreased by 23% as compared to the corresponding period in the prior year as a result of lower on-going royalty payments from our licensees and a $1.1 million back-owed royalty payment received in the first quarter of 2011. As a percentage of royalty revenues, the cost of royalty revenues for the three months ended September 30, 2012 and 2011 were 40% and 37%, respectively. As a percentage of royalty revenues, the cost of royalty revenues for the nine months ended September 30, 2012 and 2011 were 40% and 38%, respectively.


Research and development expense. Research and development expense decreased by $2.4 million, or 56%, for the three months ended September 30, 2012 over the corresponding period in 2011. Research and development expense decreased by $3.7 million, or 32%, for the nine months ended September 30, 2012 over the corresponding period in 2011. The decrease in research and development expense was due to reorganizing these departments while maintaining our continued commitment to introducing new products and enhancing our current family of products through our continued substantial investment in research and development.

Research and development expenses relating to our Professional Product segment decreased by 56% and 32%, respectively, for the three and nine months ended September 30, 2012, as compared to the corresponding periods in 2011. Research expenses relating to our Professional Product segment include internal research and development projects relating to the introduction of new professional products and enhancements to our current line of professional products. Research and development expense relating to our Consumer Product segment decreased by 52% and 18%, respectively for the three and nine months ended September 30, 2012, as compared to the corresponding periods in 2011.

For the three months ended September 30, 2012 and 2011, research and development expense included $0.2 million and $0.3 million, respectively, of stock-based compensation expense. For the nine months ended September 30, 2012 and 2011, research and development expense included $0.7 million and $1.2 million, respectively, of stock-based compensation expense.

Selling and marketing expense. Selling and marketing expense increased by $0.1 million, or 2%, for the three months ended September 30, 2012 over the corresponding period in 2011. Selling and marketing expense increased by $2.0 million, or 11%, for the nine months ended September 30, 2012 over the corresponding period in 2011. Selling and marketing expenses relating to our Professional Product segment remained consistent during the three months ended September 30, 2012 as compared to corresponding period in 2011 and increased by 8% in the nine months ended September 30, 2012 as compared to corresponding periods in 2011. The increase for the nine months ended September 30, 2012 was primarily driven by an increase of $0.8 million from our foreign subsidiaries in Germany and Spain that we established in 2011. Selling and marketing expenses related to our Consumer Product segment increased by 16% and 34%, respectively, in the three and nine months ended September 30, 2012 as compared to corresponding periods in 2011. The increase for the three and nine months ended September 30, 2012 was primarily driven by increases of $0.1 million and $0.5 million, respectively in direct marketing expenses.

For both the three months ended September 30, 2012 and 2011, selling and marketing expense included $0.2 million of stock-based compensation expense. For the nine months ended September 30, 2012 and 2011, selling and marketing expense included $0.6 million and $0.8 million, respectively, of stock-based compensation expense.

General and administrative expense. General and administrative expense increased by $3.9 million, or 349%, for the three months ended September 30, . . .

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