Product
revenues
. Sales of the StarLux Laser and Pulsed Light Systems, including a base unit and multiple,
optional handpieces were the leading contributor to our product revenues for the three and nine months
ended September 30, 2008 and 2007. During the quarter ended September 30, 2008, we launched and began
shipping our newest platform system, the Aspire with the laser lipolysis SlimLipo body sculpting system.
Product revenues for the three months ended September 30, 2008 decreased by approximately $3.9 million
as compared to the same period in 2007 due to the current economic conditions delaying the buying
decisions of our customer base, including the tightening of the credit market, offset by an increase of
25% in customer service revenue in comparison to the same period in 2007. Product revenues for the nine
months ended September 30, 2008 decreased by approximately $22.6 million as compared to the same period
in 2007 due to the current economic conditions delaying the buying decisions of our customer base,
including the tightening of the credit market, offset by an increase of 34% in customer service revenue
in comparison to the same period in 2007.
Product revenues for the three and nine months ended September 30, 2008 consisted of 63% and
67%, respectively, to North America customers where we sell through a direct sales force and 37% and
33%, respectively, outside of North America where we sell through our foreign subsidiary and
distributors. In the same three and nine month period in 2007, product revenues consisted of 66% and
70%, respectively, to North America customers and 34% and 30%, respectively, outside of North America.
Royalty
revenues
. Royalty revenues decreased for the three and nine months ended
September 30, 2008 in comparison to the same periods in 2007. For the three months ended
September 30, 2008, the decrease is mainly attributed to $3.1 million in back-owed
royalties received in the third quarter of 2007. For the nine months ended September 30,
2008, the decrease is mainly attributed to the recognition of $3.1 million in back-owed
royalties received in the third quarter of 2007 offset by $682,000 in back-owed royalties
from a patent settlement agreement executed in 2007 as this amount was determinable based
on the completion of an audit by an independent accounting firm during the first quarter
of 2008 (see Note 12).
20
Funded
product development revenues
. Funded product development revenues decreased
for the three and nine months ended September 30, 2008, in comparison to the same periods
in 2007. Funded product development revenues were generated from the development
agreements with Johnson & Johnson Consumer Companies, Inc., Procter & Gamble (and
its wholly owned subsidiary The Gillette Company), and the United States Department of the
Army.
For the three months ended September 30, 2008 and 2007, we recognized $18,000 and $958,000,
respectively, of funded product development revenues from Procter & Gamble (and its wholly owned
subsidiary The Gillette Company). For the nine months ended September 30, 2008 and 2007, we recognized
$216,000 and $3.0 million, respectively, of funded product development revenues from Procter & Gamble.
Funded product development revenue from Procter & Gamble decreased over the same periods in 2007 due to
(i) a $2.5 million payment received December 8, 2006, which was recognized over a twelve month period as
we were obligated to perform additional services and remain exclusive to Gillette, and (ii) a February
21, 2007 amendment to our agreement with Gillette to include the development of a second light-based
hair removal device for home-use, which resulted in a payment which was recognized over an eleven month
period as costs were incurred and services were provided, ending January 13, 2008. As of September 30,
2008 and December 31, 2007, $0 and $48,000, respectively, of advance payments received from Procter &
Gamble for which services were not yet provided were included in deferred revenue.
For the three months ended September 30, 2008 and 2007, we recognized $937,000 and $568,000,
respectively, of funded product development revenues from Johnson & Johnson. For the nine months ended
September 30, 2008 and 2007, we recognized $1.7 million and $2.1 million, respectively, of funded
product development revenues from Johnson & Johnson. The funded product development revenues from
Johnson & Johnson in the nine months ending September 30, 2008 and 2007 consist of (i) an amendment to
our agreement with Johnson & Johnson which resulted in a payment to be recognized over a six month
period as costs are incurred and services are provided, ending August 15, 2007, (ii) an amendment signed
in August 2007 with Johnson & Johnson to provide for additional development funding for certain
development activities, and (iii) a study to test consumer perception of a home-use product which was
completed in the third quarter of 2008. Johnson & Johnson will provide us with quarterly payments of
$448,000 for development activities related to the August 2007 agreement. These payments will be
recognized as revenue as costs are incurred and services are provided. As of September 30, 2008 and
December 31, 2007, $736,000 and $477,000, respectively, of advance payments received from Johnson &
Johnson for which services were not yet provided were included in deferred revenue.
We
provided services under a $3.8 million research contract with the United States Department
of the Army to develop a light-based self-treatment device for Pseudofolliculitis Barbae
or PFB. Since February 2004, the contract was extended on multiple occasions, the last of
which was through March 31, 2008. The contract was a cost plus fee arrangement whereby we
are reimbursed for the expenses incurred in connection with PFB research plus an 8% fee.
Revenue was recognized under the contract as the costs were incurred and the services were
rendered. For the three months ended September 30, 2008 and 2007, we recognized $0 and
$59,000, respectively, of funded product development revenues from the United States
Department of the Army. For the nine months ended September 30, 2008 and 2007, we
recognized $0 and $309,000, respectively, of funded product development revenues from the
United States Department of the Army.
21
Other
revenues.
For the three and nine months ended September 30, 2008, we recognized $1.25 million and $4.0
million, respectively, of other revenues consisting of quarterly payments relating to a new License
Agreement with The Procter & Gamble Company of $1.25 million (see Note 9) and the recognition of the
remaining portion of trade dress infringement fees associated with the Alma Lasers, Ltd. settlement
agreement of $250,000 (see Note 12). For the three and nine months ended September 30, 2007, we
recognized $0 and $894,000, respectively, of other revenues consisting of trade dress infringement fees
associated with the Alma settlement agreement. As of September 30, 2008 and December 31, 2007, $1.25
million and $0, respectively, of advance payments received from Procter & Gamble for which services were
not yet provided were included in deferred revenue.
Cost of product revenues
. For the three months ended September 30, 2008 and 2007, the cost of product revenues as a
percentage of total revenues was 28% and 25%, respectively. For the nine months ended September 30,
2008 and 2007, the cost of product revenues as a percentage of total revenues was 28% for both periods.
The increase in cost of product revenues as a percentage of total revenues for the three months ended
September 30, 2008 and 2007, can be attributed to a change in product mix and a shift from product sales
within North America where we sell directly to the customer to product sales to outside North America
where we sell our products at lower, fixed transfer prices. The consistency in the cost of product
revenues as a percentage of total revenues for the nine months ended September 30, 2008 and 2007, is due
to a change in product mix offset by a shift in product sales to outside North America where we sell at
lower, fixed transfer prices to product sales within North America.
Cost
of royalty revenues
.
The cost of royalty revenues
decreased for the three and nine months ended September 30, 2008 in comparison to the same
periods in 2007. For the three months ended September 30, 2008, the decrease is mainly
attributed to the recognition of $3.1 million in back-owed royalties received in the third
quarter of 2007 offset by $682,000 in back-owed royalties from a patent settlement
agreement executed in 2007 as this amount was determinable based on the completion of an
audit by an independent accounting firm during the first quarter of 2008 (see Note 12). As
a percentage of royalty revenues, the cost of royalty revenues was consistent at 40% in
accordance with our license agreement with Massachusetts General Hospital in comparison to
the same periods in 2007.
Research
and development expense
. Research and development expense is a direct
result of our spending related to our continued commitment of introducing new technology
as well as enhancing our current family of products.
Expenses
relating to the Development and License Agreement with Gillette (see Note 9) decreased
during the three and nine months ended September 30, 2008 by $441,000 and $1.3 million,
respectively, as compared to the same periods in 2007. The decrease for the three and nine
months ended September 30, 2008 was due to the termination of the Development and License
Agreement with Gillette on February 29, 2008.
Expenses relating to the Johnson & Johnson Joint Development and License Agreement (see Note
10) decreased during the three months ended September 30, 2008 by $11,000 and increased for the nine
months ended September 30, 2008 by $690,000, respectively, as compared to the same periods in 2007. The
decrease for the three months ended September 30, 2008 was mainly due to decreases of $238,000 for
material costs, offset by increases of $86,000 for general overhead expenses, $71,000 for clinical
expenses, and $62,000 for additional labor hours worked. The increase for the nine months ended
September 30, 2008 was mainly due to increases of $516,000 for additional labor hours worked, $99,000
for general overhead expenses, and $66,000 for material costs.
For
the three and nine months ended September 30, 2008, expenses relating to our Research
Agreement with the United States Department of the Army (see Note 11) decreased by
approximately $54,000 and $284,000 as compared to the same periods in 2007. The decrease
was due to the completion of the work under the contract in the fourth quarter of 2007.
22
Expenses
for research and development projects relating to home-use, light-based products, which
are funded internally increased by $419,000 and $1.2 million, respectively, for the three
and nine months ended September 30, 2008 as compared to the same periods in 2007.
Expenses
for internal research and development projects relating to the introduction of new
products, enhancements made to the current family of products, and research and
development overhead increased by $120,000 and $1.6 million, respectively, for the three
and nine months ended September 30, 2008 as compared to the same periods in 2007.
For
the three and nine months ended September 30, 2008, research and development expense
increased by $483,000 and $2.4 million, respectively, as compared to the same periods
in 2007, as a result of SFAS 123R compensation expense.
Selling
and marketing expense
. For the three months ended September 30, 2008, selling and marketing expense remained
consistent with the comparable period in 2007. For the nine months ended September 30, 2008, selling
and marketing expense decreased by $235,000, or 1%, over the comparable period in 2007. For the nine
months ended September 30, 2008, factors driving the decrease in selling and marketing expense were
decreases of $1.3 million from commission expense, $522,000 from various overhead expenses, offset by an
increase of $1.5 million from payroll and payroll related expenses which was primarily driven by a $1.0
million increase in SFAS 123R compensation expense as compared to the same period in 2007.
General
and administrative expense
.
For the three months
ended September 30, 2008, general and administrative expenses increased by $1.6 million
over the comparable period in 2007. For the quarter ended September 30, 2008, factors
driving the increase in general and administrative expense were increases of $2.2 million
from legal expenses related to patent litigation, $449,000 from payroll and payroll
related expenses which includes a $203,000 increase in SFAS 123R compensation expense and
$331,000 from general overhead expenses, offset by decreases of $1.0 million from
incentive compensation and $662,000 from bad debt expense as compared to the same period
in 2007. For the nine months ended September 30, 2008, general and administrative expenses
increased by $5.6 million over the comparable period in 2007. For the nine months ended
September 30, 2008, factors driving the increase in general and administrative expense
were increases of $6.6 million from legal expenses related to patent litigation, $2.3
million from payroll and payroll related expenses which includes a $1.3 million increase
in SFAS 123R compensation expense, $1.0 million from an investment banking fee related to
our entry into an international distribution agreement with Q-MED, offset by decreases of
$3.8 million from incentive compensation and $863,000 from general overhead expenses as
compared to the same period in 2007.
Interest
income
.
Interest income decreased for the three and nine months ended September 30, 2008 over the
comparable periods in 2007 due to lower interest rates and a more conservative investment strategy,
offset by an increase in cash and $52,000 and $259,000 of interest received in 2008 and 2007,
respectively, on back-owed royalty revenues related to the new patent license agreement with Alma
Lasers, Ltd. (see Note 12).
Other
(expense) income.
Other (expense) income for the three and nine months
ended September 30, 2008, includes the foreign exchange loss as a result of transactions
in currencies other than the U.S. dollar while other income for the nine months ended
September 30, 2007, includes cash received related to the expiration of a standstill
agreement.
Provision
for income taxes
. We file income tax returns in the U.S. federal
jurisdiction, and various state and foreign jurisdictions. Effective January 1, 2007,
the Company adopted FIN No. 48,
Accounting for Uncertainty in Income Taxes
. Our
effective tax rate for the three months ended September 30, 2008 and 2007 was 37% and 38%,
respectively. Our effective tax rate for the nine months ended September 30, 2008 and 2007
was 35% and 38%, respectively.
23
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):
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