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PMTI > SEC Filings for PMTI > Form 10-Q on 8-May-2013All Recent SEC Filings

Show all filings for PALOMAR MEDICAL TECHNOLOGIES INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for PALOMAR MEDICAL TECHNOLOGIES INC


8-May-2013

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 for the year ended December 31, 2012 filed with the Securities and Exchange Commission on March 14, 2013 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, 2012.

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 our Annual Report on Form 10-K for the year ended December 31, 2012.
There have been no material changes to our critical accounting policies as of March 31, 2013.
Recently issued accounting standards

In June 2011, the Financial Accounting Standards Board ("FASB") issued Auditing Standards Update ("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.

In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. Under this ASU, an entity is required to provide information about the amounts reclassified out of Accumulated Other Comprehensive Income ("AOCI") by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in the financial statements. ASU 2013-02 is effective for interim and annual periods beginning after December 15, 2012. The adoption of this guidance did not materially impact our financial statements or disclosures.


Overview
We are a leading researcher and developer of innovative aesthetic light-based systems for hair removal and other cosmetic procedures, including both lasers and high powered lamps. 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. We conduct business in two segments, professional medical and cosmetic products and services ("Professional Product segment") and consumer medical and cosmetic products ("Consumer Product segment").
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.
On March 18, 2013, we and Cynosure, Inc. announced the execution of a definitive agreement, pursuant to which Cynosure have agreed to acquire Palomar and Palomar stockholders will receive $6.825 per Palomar share in cash and $6.825 per Palomar share in Cynosure common stock, subject to the adjustment and collar provisions described in the definitive agreement.

The transaction has been unanimously approved by the board of directors of each of Palomar and Cynosure and is expected to close by the end of the second quarter of 2013.
The transaction is subject to customary closing conditions, including Cynosure and Palomar shareholder approval. Upon completion of the transaction, Cynosure shareholders will own approximately 77% and Palomar shareholders will own approximately 23% of the combined company. Results of operations

Professional product revenues for the first quarter of 2013 were $17.3 million, a 46% increase over the $11.9 million reported in the first quarter of 2012.
Professional product gross margins were 58% and 59% in the first quarter of 2013 and 2012, respectively. Loss from operations was $0.9 million, which included $1.2 million in expenses related to the Cynosure transaction, compared to the first quarter of 2012 loss from operations of $2.3 million. As of March 31, 2013, we had $101 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 months ended March 31, 2013 and 2012, respectively (in thousands, except for percentages):

                                       Three Months Ended March 31,
                                   2013                           2012
                                        As a % of                      As a % of
                                          Total                          Total                 Change
                          Amount         Revenue         Amount         Revenue           $              %
Revenues
  Professional product   $  17,326              75 %    $  11,897              63 %    $  5,429            46 %
revenues
  Consumer product             711               3 %          979               5 %        (268 )         (27 %)
revenues
  Service revenues           3,149              14 %        3,770              20 %        (621 )         (16 %)
  Royalty revenues           1,979               9 %        1,798               9 %         181            10 %
  Other revenues                58               0 %          556               3 %        (498 )         (90 %)
  Total revenues            23,223             100 %       19,000             100 %       4,223            22 %

Costs and expenses
  Cost of professional       7,308              31 %        4,902              26 %       2,406            49 %
product revenues
  Cost of consumer             668               3 %          834               4 %        (166 )         (20 %)
product revenues
  Cost of service            1,384               6 %        1,660               9 %        (276 )         (17 %)
revenues
  Cost of royalty              792               3 %          719               4 %          73            10 %
revenues
  Research and               2,582              11 %        3,372              18 %        (790 )         (23 %)
development
  Selling and                7,398              32 %        6,682              35 %         716            11 %
marketing
  General and                4,030              17 %        3,152              17 %         878            28 %
administrative
  Total costs and           24,162             104 %       21,321             112 %       2,841            13 %
expenses

  Loss from operations        (939 )            (4 %)      (2,321 )           (12 %)      1,382            60 %

  Interest income               77               - %           89               - %         (12 )          13 %
  Other (loss) income         (437 )            (2 %)          12               - %        (449 )        3742 %

Loss before income          (1,299 )            (6 %)      (2,220 )           (12 %)        921            41 %
taxes

(Benefit) provision           (187 )            (1 %)          72               - %        (259 )         360 %
for income taxes

Net loss                 $  (1,112 )            (5 %)   $  (2,292 )           (12 %)   $  1,180            51 %

Professional product revenues. During the three months ended March 31, 2013, our professional product revenues increased 46%, as compared to the corresponding period in the prior year, primarily due to continued strong sales of the Palomar Icon™ Aesthetic System, Vectus™ Laser, and Palomar Emerge™ Fractional Laser. During the first quarter of 2013, more than 40% of our professional product revenues were from Palomar Icon System sales and 18% were from Vectus sales. During the first quarter of 2013 as compared to the first quarter of 2012, there was a slight decrease in sales related to the StarLux System as some potential StarLux System customers opted to purchase the new Palomar Icon System. We are still in the regulatory registration process in many countries for the Palomar Icon System. We continue to gain more Palomar Icon Systems registrations throughout the world.

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


                                                Three Months Ended
                                                     March 31,
                                                2013           2012
                 North America                     47 %           57 %
                 Europe                            23 %           22 %
                 Asia/Pacific Rim                  10 %            2 %
                 Middle East                        9 %            6 %
                 Australia                          4 %            1 %
                 Japan                              4 %            5 %
                 South and Central America          3 %            7 %

                 Total                            100 %          100 %

Consumer product revenues. During the three months ended March 31, 2013 and 2012, we recognized $0.7 million and $1.0 million, respectively, of consumer product revenues. We are now actively seeking 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 seeking a consumer-based distributor, we will continue to sell the product to our existing channels. However, we substantially reduced our consumer selling and marketing expenses during the fourth quarter of 2012 and expect to continue to do so through 2013. 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.
In the three month periods ended March 31, 2013 and 2012, 86% and 85%, respectively, of our Consumer Product segment revenues were derived from sales in the United States and 14% and 15%, respectively, were from Europe.

Service revenues. Service revenues 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 months ended March 31, 2013, service revenues decreased 16%, as compared to the corresponding period in the prior year. The decrease in the three months ended March 31, 2013 was primarily due to lower sales from billable services and lower current period recognition of ongoing service contracts, partially offset by higher sales of ongoing service contracts to be recognized over future periods.

Royalty revenues. Royalty revenues increased for the three months ended March 31, 2013 by 10%, as compared to the corresponding period in the prior year. The increase for the comparable three month periods is a result of royalties from two new licensees since the first quarter of 2012 and higher on-going royalty payments from our other licensees.

Other revenues. During the three months ended March 31, 2013, other revenues decreased 90%, as compared to the corresponding period 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 our license agreement with P&G (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 were being recognized ratably through the expected launch term. Starting in the third quarter of 2012 and going forward, P&G has made and will continue to make post-launch technology transfer payments 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 March 31, 2013, other revenues consisted of $0.1 million in post-launch TTPs. During the three months ended March 31, 2012, other revenues consisted of the recognition of the $0.6 million related to payments received under an amendment to the License Agreement with P&G which was signed in the fourth quarter of 2010. The payments under the amended License Agreement were being recognized ratably through the expected launch term.


Cost of professional product revenues. The cost of professional product revenues increased by $2.4 million and as a percentage of professional product revenues to 42% for the three months ended March 31, 2013, from 41% for the three months ended March 31, 2012. The increase in absolute dollars was attributable to higher professional product revenues and the increase as a percentage of professional product revenues was due to geographical shift in professional product revenues toward international distributors where we typically sell at lower prices and away from North American sales where we sell our products at higher prices through a direct sales force. 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 months ended March 31, 2013 and 2012, cost of consumer product revenues was $0.7 million and $1.0 million, respectively or 94% and 85% of consumer product revenues, respectively. This decline was primarily due to less absorption of overhead during the quarter due to lower revenue volume.
Cost of service revenues. For the three months ended March 31, 2013 and 2012, the cost of service revenues decreased in absolute dollars and remained consistent as a percentage of service revenues at 44%. The decrease in absolute dollars was primarily due to lower sales from billable services.

Cost of royalty revenues. Cost of royalty revenues increased for the three months ended March 31, 2013 by 10%, as compared to the corresponding period in the prior year. The increase was a result of royalties from two new licensees since the first quarter of 2012 and higher on-going royalty payments from our other licensees. As a percentage of royalty revenues, the cost of royalty revenues for both the three months ended March 31, 2013 and 2012 was 40%.

Research and development expense. Research and development expense decreased by $0.8 million and as a percentage of total revenues to 11% from 18% for the three months ended March 31, 2013 over the corresponding period in 2012. 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 19%, for the three months ended March 31, 2013, as compared to the corresponding period in 2012. 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 93%, for the three months ended March 31, 2013, as compared to the corresponding period in 2012. The decrease in research and development expense related to our Consumer Product segment includes decreases in payroll and payroll related expenses, materials, consultants, and other overhead expenses related directly to our consumer products as compared to 2012.
For each of the three months ended March 31, 2013 and 2012, research and development expense included $0.2 million of stock-based compensation expense.

Selling and marketing expense. Selling and marketing expense increased by $0.7 million, but decreased as a percentage of total revenues to 32% from 35%, for the three months ended March 31, 2013 over the corresponding period in 2012.
Selling and marketing expenses relating to our Professional Product segment increased by $1.3 million during the three months ended March 31, 2013 as compared to corresponding period in 2012. The increase for the three months ended March 31, 2013 was primarily driven by an increase of $0.7 million in payroll and payroll related expenses and a $0.3 million increase in commissions due to higher product sales. Selling and marketing expenses related to our Consumer Product segment decreased by $0.6 million in the three months ended March 31, 2013 as compared to corresponding period in 2012. We substantially reduced our consumer selling and marketing expenses during the fourth quarter of 2012 and expect to continue to do so throughout 2013 while we are seeking a consumer-based distributor for our PaloVia laser.


For each of the three months ended March 31, 2013 and 2012, selling and marketing expense included $0.2 million of stock-based compensation expense.

General and administrative expense. General and administrative expense increased by $0.9 million, but remained consistent as a percentage of total revenues at 17%, for the three months ended March 31, 2013 over the corresponding period in 2012. The increase in general and administrative expense for the three months ended March 31, 2013 was primarily due to $1.2 million of expenses related to the Cynosure acquisition.

For the three months ended March 31, 2013 and 2012, general and administrative expense included $0.2 million and $0.1 million, respectively, of stock-based compensation expense.

Interest income. Interest income for the three months ended March 31, 2013 decreased by 13%, as compared to the corresponding period in 2012 as a result of lower average interest rates on our cash, cash equivalents, short-term investments, and marketable securities and other investments balances.

Other (loss) income . Other (loss) income for the three months ended March 31, 2013 and 2012 included the foreign exchange transaction (losses) gains resulting from foreign currency remeasurements related to intercompany balances outstanding, mainly denominated in Japanese Yen and the Euro at our foreign subsidiaries.

Provision for income taxes. Our effective tax rate for the three months ended March 31, 2013 and 2012 was 14.4% and (3.2%), respectively. In 2013, our rate consisted of a decrease in uncertain liabilities reserves. In 2012, our effective tax rate primarily consisted of state non-income taxes and additional reserves for uncertain tax positions. Our 2013 and 2012 effective tax rate was less than the statutory rate primarily due to the fact that we continue to maintain a full valuation allowance in all jurisdictions.

Liquidity and capital resources
The following table sets forth, for the periods indicated, a year over year comparison of key components of our liquidity and capital resources (in thousands):

                                        March 31,        March 31,               Change
                                           2013             2012             $              %
Cash flows from (used in) operating    $      1,134     $     (8,856 )       9,990           113 %
activities
Cash flows from investing activities          1,496            5,719        (4,223 )         (74 %)
Cash flows from (used in) financing             123               (8 )        (131 )      (1,638 %)
activities
Capital expenditures                             80               31            49           158 %

Additionally, our cash and cash equivalents, short-term investments, accounts receivable, inventories, marketable securities and other investments, and working capital are shown below for the periods indicated (in thousands).

                              March 31,        December 31,                              Change
                                 2013              2012                             $            %
Cash and cash equivalents    $     57,823     $       55,116                       2,707           5 %
Short-term investments             29,010             33,058                      (4,048 )       (12 %)
Accounts receivable, net           12,090             10,559                       1,531          14 %
Inventories                        20,643             21,585                        (942 )        (4 %)
Marketable securities and          13,986             11,533                       2,453          21 %
other investments
Working capital                   104,620            106,951                      (2,331 )        (2 %)

As of March 31, 2013, we had $100.8 million in cash, cash equivalents, short-term investments, and marketable securities and other investments. We believe that our current cash balances and expected future cash flows will be sufficient to meet our anticipated cash needs for working capital, capital expenditures, and other activities for at least the next twelve months. As of March 31, 2013, we had no debt outstanding.


At March 31, 2013, we held $0.9 million in auction-rate securities ("ARS") all of which were preferred municipal securities. The ARS in which we have invested are high quality securities, none of which are mortgage-backed. Beginning in February 2008, our securities failed at auction due to a decline in liquidity in the ARS and other capital markets. We will not be able to access our investments in ARS until future auctions are successful, ARS are called for redemption by the issuers, or until sold in a secondary market. As our investments in ARS currently lack short-term liquidity, we have classified these investments as non-current as of March 31, 2013. During the three months ended March 31, 2013 and 2012, we sold $0.1 million and $0 of our ARS at par, respectively.
We have determined that the fair value of our ARS was temporarily impaired as of March 31, 2013 and 2012. For the three months ended March 31, 2013 and 2012, we marked to market our ARS and recorded an unrealized gain of $18,000 and an unrealized loss of $23,000, respectively, net of taxes in accumulated other comprehensive income (loss) in stockholder's equity to reflect the temporary impairment of our ARS. The recovery of these investments is based upon market factors which are not within our control. As of March 31, 2013, we do not intend to sell the ARS and it is not more likely than not that we will be required to sell the ARS before recovery of their amortized cost bases, which may be at maturity.
Cash from (used in) from operating activities increased $10.0 million for the period ended March 31, 2013 as compared to the corresponding period in 2012. This increase primarily reflects the effects of a smaller net loss position and lower working capital requirements. Cash from investing activities decreased $4.2 million during the period ended March 31, 2013 as compared to the corresponding period in 2012. These amounts primarily reflect more purchases of and less cash proceeds from the sale of short-term investments and marketable securities. Cash from (used in) financing activities increased $0.1 million for period ended March 31, 2013 as compared to the corresponding period in 2012. This change was primarily due to increases in the proceeds from the exercise of stock options.
We anticipate that capital expenditures for 2013 will total approximately $1.1 million, consisting primarily of expenditures for the purchase of information technology equipment, furniture and fixtures, software, and machinery. We expect to finance these expenditures with cash on hand. . . .
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