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Form 10-Q

United States Securities and Exchange Commission
Washington, D.C. 20549
(Mark one)


  |X| Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2002

Or


  |_| Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the Transition Period From _____ to _____

Commission File Number: 0-22340

Palomar Medical Technologies, Inc.
(Exact Name of Issuer as Specified in Its Charter)

Delaware   04-3128178  
(State of Other Jurisdiction of Incorporation or Organization)  (I.R.S. Employee Identification No.) 

82 Cambridge Street, Burlington, Massachusetts 01803
(Address of Principal Executive Offices)

(781) 993-2300
(Issuer’s Telephone Number, Including Area Code)

               Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   |X|  No  |_|

               As of October 31, 2002, 11,538,706 shares of common stock, $.01 par value per share, were outstanding.

               Transitional Small Business Disclosure Format (check one): Yes |_|  No   |X|




Palomar Medical Technologies, Inc. and Subsidiaries

Index


Part I – Financial Information    
   
      Item 1. Consolidated Financial Statements (Unaudited)  
       
            Consolidated Condensed Balance Sheets   1  
       
            Consolidated Condensed Statements of Operations   2  
       
            Consolidated Statement of Stockholders’ Equity   3  
       
            Consolidated Statements of Cash Flows   4  
       
            Notes to Condensed Consolidated Financial Statements   5  
       
      Item 2. Management’s Discussion and Analysis of Financial Condition and
                   Results of Operations		   8  
     
                   Risk Factors   12  
     
      Item 3. Quantitative and Qualitative Disclosures About Market Risk   18  
     
      Item 4. Controls and Procedures   18  
 
Part II – Other Information  
     
      Item 1. Legal Proceedings   19  
     
      Item 2. Changes in Securities   19  
     
      Item 3. Defaults Upon Senior Securities   19  
     
      Item 4. Submission of Matters to a Vote of Security Holders   19  
     
      Item 5. Other Information   19  
     
      Item 6. Exhibits and Reports on Form 8-K   20  
     
Signatures   21  
     
Certifications   22  

i




Palomar Medical Technologies, Inc. and Subsidiaries

Consolidated Condensed Balance Sheets


December 31,
2001
  September 30,
2002
 
  (Unaudited)  
               Assets      
   
Current Assets:          
        Cash and cash equivalents $     5,825,270 $     4,343,640  
        Accounts receivable, net   2,250,278   3,172,477  
        Inventories   3,706,828   3,870,164  
        Other current assets   436,752   343,676  
              Total current assets   12,219,128   11,729,957  
           
Property and Equipment, Net   649,691   538,017  
           
Other Assets   302,024   298,268  
           
    $   13,170,843   $   12,566,242  
               Liabilities and Stockholders’ Equity        
   
Current Liabilities:          
        Debenture $        500,000   —  
        Note payable to related party   1,000,000   1,000,000  
        Accounts payable   1,846,155   1,093,281  
        Accrued liabilities   4,173,989   4,314,902  
        Accrued income taxes   1,400,146   1,400,000  
        Deferred revenue   354,684   422,908  
              Total current liabilities   9,274,974   8,231,091  
Stockholders’ Equity:        
        Preferred stock, $.01 par value–              
              Authorized – 1,500,000 shares              
              Issued and outstanding – 6,000 shares at December 31, 2001              
              (Liquidation preference of $8,177,717 as of December 31, 2001)   60   —      
        Common stock, $.01 par value–            
              Authorized – 45,000,000 shares          
              Issued – 11,074,393 and 11,530,406 shares at December 31, 2001          
              and September 30, 2002, respectively   110,744   115,304  
        Additional paid-in capital   163,252,616   162,075,896  
        Accumulated deficit   (157,368,178 ) (157,856,049 )
        Less: Treasury stock – 573,031 shares at cost at December 31, 2001   (2,099,373 ) —  
              Total stockholders’ equity   3,895,869   4,335,151  
           
    $   13,170,843   $   12,566,242  

The accompanying notes are an integral part of these consolidated financial statements.

1


Palomar Medical Technologies, Inc. and Subsidiaries

Consolidated Condensed Statements of Operations

(Unaudited)



Three Months Ended
September 30,		   Nine Months Ended
September 30,		  
2001
  2002
  2001
  2002
 
Product revenues       $   2,484,521   $   6,495,295   $   8,446,458   $ 15,259,796  
Royalty revenues   717,767   858,799   4,409,324   2,691,831  
       Total Revenues   3,202,288   7,354,094   12,855,782   17,951,627  
                   
Cost of product revenues   2,248,227   3,250,074   7,093,314   8,060,541  
Cost of royalty revenues   287,107   343,520   1,763,729   1,076,732  
       Total Cost of Revenues   2,535,334   3,593,594   8,857,043   9,137,273  
       Gross Margin   666,954   3,760,500   3,998,739   8,814,354  
Operating Expenses  
                   
       Research and development   1,725,329   1,154,774   4,782,948   3,294,641  
       Sales and marketing   762,745   1,646,798   2,619,766   3,816,096  
       General and administrative   821,997   832,643   2,405,296   2,240,624  
            Total Operating Expenses   3,310,071   3,634,215   9,808,010   9,351,361  
            Income (Loss) from Operations   (2,643,117 ) 126,285   (5,809,271 ) (537,007 )
                   
Interest Income   81,265   22,143   667,526   57,323  
Interest Expense   (17,539 ) (29,172 ) (65,237 ) (86,656 )
Other Income   —   —   127,453   168,305  
       Net Income (Loss)   $(2,579,391 ) $      119,256   $(5,079,529 ) $    (398,035 )
Basic Net Income (Loss) Per Share   $         (0.25 ) $            0.01   $         (0.50 ) $         (0.04 )
Diluted Net Income (Loss) Per Share   $         (0.25 ) $            0.01   $         (0.50 ) $         (0.04 )
Basic Weighted Average Number of Shares   10,844,046   11,504,563   10,786,743   11,317,499  
Diluted Weighted Average Number of Shares   10,844,046   11,944,058   10,786,743   11,317,499  

The accompanying notes are an integral part of these consolidated financial statements.

2




Palomar Medical Technologies, Inc. and Subsidiaries

Consolidated Statement of Stockholders’ Equity
(Unaudited)


Preferred Stock Common Stock Treasury Stock Additional
Paid-in
Capital 		     Accumulated
Deficit 		    
Total Stockholders’
Equity
Number
of Shares 		       $0.01
Par Value 		       Number
of Shares 		     $0.01
Par Value 		     Number
of Shares 		       Cost
 
Balance, December 31, 2001        6,000     $     60     11,074,393   $110,744   (573,031 )   $(2,099,373 )      $163,252,616     $(157,368,178 )   $ 3,895,869  
                                                   
    Costs incurred related to the issuance of common stock   —     —     —   —   —     —     (186,250 )   —     (186,250 )
    Issuance of stock for settlement   —     —     358,547   3,585   —     —     797,553     —     801,138  
    Issuance of stock for employee stock purchase plan   —     —     15,902   159   13,617     49,839     (26,491 )   —     23,507  
    Issuance of stock for 2001 employer 401K matching contribution   —     —     —   —   148,855     545,362     (364,440 )   —     180,922  
    Issuance of stock for services   —     —     25,000   250   —     —     17,750     —     18,000  
    Conversion of convertible preferred stock   (6,000 )   (60 )   56,564   566   410,559     1,504,172     (1,504,678 )   —     —  
    Preferred stock dividends   —     —     —   —   —     —     89,836     (89,836 )   —  
    Net loss   —     —     —   —   —     —     —     (398,035 )   (398,035 )
   
 
Balance, September 30, 2002   —     $     —     11,530,406   $115,304   —     $             —     $162,075,896     $(157,856,049 )   $ 4,335,151  
   
 

The accompanying notes are an integral part of these consolidated financial statements.

3




Palomar Medical Technologies, Inc. and Subsidiaries

Consolidated Statements of Cash Flow
(Unaudited)


Nine Months Ended September 30,  
  2001
  2002
 
Cash Flows from Operating Activities:      
      Net loss   $(5,079,529 ) $  (398,035 )
           
      Adjustments to reconcile net loss          
          to net cash used in operating activities:          
          Depreciation and amortization   250,096   204,608  
          Issuance of common stock for services   —   18,000  
           Changes in assets and liabilities,          
              Accounts receivable   (427,446 ) (827,717 )
              Inventories   (743,478 ) (163,336 )
              Other current assets   (20,791 ) 93,076  
              Accounts payable   (799,394 ) (752,874 )
              Accrued liabilities   (1,097,642 ) 1,122,827  
              Deferred revenue   244,646   (26,258 )
                     Net cash used in operating activities   (7,673,538 ) (729,709 )
Cash Flows from Investing Activities:          
      Purchases of property and equipment   (48,099 ) (92,934 )
      Purchases of available-for-sale investments   (3,894,356 ) —  
      Proceeds from sale of available-for-sale investments   7,826,561   —  
      Decrease in other assets   —   3,756  
                     Net cash provided by (used in) investing activities   3,884,106   (89,178 )
Cash Flows from Financing Activities:          
      Proceeds from employee stock purchase plan   64,866   23,507  
      Costs incurred related to issuance of common stock   (189,375 ) (186,250 )
      Proceeds from the issuance of notes payable to related party   1,000,000   —  
      Payment on convertible debenture   (951,842 ) (500,000 )
                     Net cash used by financing activities   (76,351 ) (662,743 )
           
Net decrease in cash and cash equivalents   (3,865,783 ) (1,481,630 )
Cash and cash equivalents, beginning of the period   9,535,694   5,825,270  
Cash and cash equivalents, end of the period   $ 5,669,911   $ 4,343,640  
Supplemental Disclosure of Cash Flow Information: