UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10 - Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2016

 

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 0-11365

PHOTOMEDEX, INC.

(Exact name of registrant as specified in its charter)

 

 

Nevada

(State or other jurisdiction

of incorporation or organization)

 

59-2058100

(I.R.S.  Employer

Identification No.)

 

 

40 Ramland Road South, Suite 200, Orangeburg, NY 10962

(Address of principal executive offices, including zip code)

 

(845) 848-2831

(Registrant's telephone number, including area code)

 

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 ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

 

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 ¨ Accelerated filer ¨
     
  Non-accelerated filer ¨

Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)

Yes ¨ No x

 

The number of shares outstanding of the issuer's common stock as of August 11, 2016 was 21,805,468 shares.

 

 

 

 

PHOTOMEDEX, INC.

 

INDEX TO FORM 10-Q

 

PAGE
       
Part I. Financial Information:  
       
  ITEM 1.  Financial Statements:  
  a. Condensed Consolidated Balance Sheets as of June 30, 2016 (unaudited) and December 31, 2015 3
       
  b. Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended June 30, 2016 and 2015 (unaudited) 4
       
  c. Condensed Consolidated Statements of Comprehensive Loss for the six months ended June 30, 2016 and 2015 (unaudited) 5
       
  d. Condensed Consolidated Statement of Changes in Equity for the six months ended June 30, 2016 (unaudited) 6
       
  e. Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015 (unaudited) 7
       
  f. Notes to Unaudited Condensed Consolidated Financial Statements 9
       
  ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations 29
       
  ITEM 3.  Quantitative and Qualitative Disclosure about Market Risk 41
       
  ITEM 4.  Controls and Procedures 41
       
Part II. Other Information:  
       
  ITEM 1.  Legal Proceedings 42
       
  ITEM 1A.  Risk Factors 44
       
  ITEM 2.  Unregistered Sales of Equity Securities and Use of Proceeds 44
       
  ITEM 3.  Defaults Upon Senior Securities 44
       
  ITEM 4.  Mine Safety Disclosures 44
       
  ITEM 5.   Other Information 44
       
  ITEM 6.  Exhibits 44
       
    Signatures 45
       
    Certifications E-31.1

 

2

 

 

PART I – Financial Information

ITEM 1. Financial Statements

PHOTOMEDEX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

    June 30, 2016     December 31, 2015  
    (unaudited)        
ASSETS                
Current assets:                
Cash and cash equivalents   $ 1,094     $ 3,302  
Restricted cash     606       724  
Accounts receivable, net of allowance for doubtful accounts of $14,983 and $14,959, respectively     5,860       8,469  
Inventories, net     9,690       11,735  
Deferred tax asset, net     484       470  
Prepaid expenses and other current assets     4,014       2,795  
Total current assets     21,748       27,495  
                 
Property and equipment, net     1,216       1,306  
Patents and licensed technologies, net     1,518       1,613  
Other intangible assets, net     221       241  
Goodwill, net     3,338       3,581  
Other assets, net     133       138  
Total assets   $ 28,174     $ 34,374  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                
Current liabilities:                
Notes payable (See Note 10)   $ 1,494     $ 490  
Accounts payable     7,732       7,216  
Accrued compensation and related expenses     3,362       2,917  
Other accrued liabilities     8,281       8,565  
Current portion of deferred revenues     1,323       1,847  
Total current liabilities     22,192       21,035  
                 
Long-term liabilities:                
Deferred revenues, net of current portion     418       642  
Total liabilities     22,610       21,677  
                 
Commitments and contingencies (Note 12)                
                 
Stockholders' equity:                
Preferred Stock, $.01 par value, 5,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2016 and December 31, 2015     -       -  
Common Stock, $.01 par value, 50,000,000 shares authorized; 21,805,468 and 21,991,718 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively     221       221  
Additional paid-in-capital     117,476       116,616  
Accumulated deficit     (109,606 )     (102,371 )
Accumulated other comprehensive loss     (2,527 )     (1,769 )
Total stockholders' equity     5,564       12,697  
Total liabilities and stockholders’ equity   $ 28,174     $ 34,374  

 

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

 

3

 

 

PHOTOMEDEX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands, except share and per share amounts)

(unaudited)

 

    For the Three Months Ended June 30,  
    2016     2015  
             
Revenues   $ 11,243     $ 19,924  
                 
Cost of revenues     3,354       4,915  
                 
Gross profit     7,889       15,009  
                 
Operating expenses:                
Engineering and product development     343       389  
Selling and marketing     6,425       16,161  
General and administrative     2,932       4,971  
      9,700       21,521  
Loss from continuing operations before interest and other financing expense, net     (1,811 )     (6,512 )
                 
Interest and other financing income (expense), net     (292 )     56  
Loss from continuing operations before income taxes     (2,103 )     (6,456 )
                 
Income tax benefit (expense)     (135 )     3,941  
                 
Loss from continuing operations     (2,238 )     (2,515 )
                 
Discontinued operations:                
Loss from discontinued operations, net of taxes     (125 )     (2,058 )
Gain on sale of discontinued operations, net of taxes     -       10,634  
                 
Net income (loss)   $ (2,363 )   $ 6,061  
                 
Basic and diluted net income (loss) per share:                
Continuing operations   $ (0.10 )   $ (0.12 )
    Discontinued operations   $ (0.01 )     0.40  
    $ (0.11 )   $ 0.28  
                 
Shares used in computing basic and diluted net income (loss) per share     20,768,571       21,488,832  
                 
Other comprehensive  income (loss):                
Foreign currency translation adjustments   $ (670 )   $ 1,386  
Comprehensive income  (loss)   $ (3,033 )   $ 7,447  

 

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

 

4

 

 

PHOTOMEDEX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands, except share and per share amounts)

(unaudited)

 

    For the Six Months Ended June 30,  
    2016     2015  
             
Revenues   $ 22,476     $ 40,598  
                 
Cost of revenues     6,108       9,573  
                 
Gross profit     16,368       31,025  
                 
Operating expenses:                
Engineering and product development     657       727  
Selling and marketing     14,228       32,094  
General and administrative     6,897       9,014  
Loss on sale of assets     843          
      22,625       41,835  
Loss from continuing operations before interest and other financing expense, net     (6,257 )     (10,810 )
                 
Interest and other financing expense, net     (625 )     (604 )
Loss from continuing operations before income taxes     (6,882 )     (11,414 )
                 
Income tax benefit (expense)     (228 )     3,577  
                 
Loss from continuing operations     (7,110 )     (7,837 )
                 
Discontinued operations:                
Loss from discontinued operations, net of taxes     (125 )     (6,709 )
Gain on sale of discontinued operations, net of taxes     -       10,593  
                 
Net loss   $ (7,235 )   $ (3,953 )
                 
Basic and diluted net loss per share:                
Continuing operations   $ (0.35 )   $ (0.39 )
    Discontinued operations     -       (0.19 )
    $ (0.35 )   $ (0.20 )
                 
Shares used in computing basic and diluted net loss per share     20,837,998       20,308,391  
                 
Other comprehensive (loss) income:                
Foreign currency translation adjustments   $ (758 )   $ 176  
Comprehensive loss   $ (7,993 )   $ (3,469 )

 

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

 

5

 

  

PHOTOMEDEX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2016

(In thousands, except share and per share amounts )

(Unaudited)

 

    Common Stock     Additional
Paid-In
    Accumulated     Accumulated
Other
Comprehensive
       
    Shares     Amount     Capital     Deficit     Loss     Total  
BALANCE, JANUARY 1, 2016     21,991,718     $ 221     $ 116,616     $ (102,371 )   $ (1,769 )   $ 12,697  
Stock-based compensation related to stock options and restricted stock             -       860       -       -       860  
Restricted stock canceled     (186,250 )     -               -       -          
Other comprehensive income     -       -       -       -       (758 )     (758 )
Net loss for the six months ended June 30, 2016             -       -       (7,235 )     -       (7,235 )
BALANCE, JUNE 30, 2016     21,805,468     $ 221     $ 117,476     $ (109,606 )   $ (2,527 )   $ 5,564  

 

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

 

6

 

 

PHOTOMEDEX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

 

    For the Six Months Ended
June 30,
 
    2016     2015  
Cash Flows From Operating Activities:                
Net loss   $ (7,235 )   $ (3,953 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     285       984  
Provision for doubtful accounts     24       938  
Deferred income taxes     (14 )     (5 )
Stock-based compensation     860       1,351  
Loss on sale of assets     843       73  
Financing expense     -       1,250  
Changes in operating assets and liabilities:                
Accounts receivable     2,297       6,147  
Inventories     745       1,993  
Prepaid expenses and other assets     (1,048 )     3,467  
Accounts payable     585       (4,346 )
Accrued compensation and related expenses     447       264  
Other accrued liabilities (see Note 9)     (22 )     (2,989 )
Other liabilities     -       1  
Deferred revenues     (738 )     (1,712 )
Adjustments related to continued operations     4,264       7,416  
Adjustments related to discontinued operations             5,687  
Net cash provided by (used in) operating activities     (2,971 )     9,150  
                 
Cash Flows From Investing Activities:                
Decrease in restricted cash     118          
Purchases of property and equipment     (76 )     (124 )
Proceeds from (investments in) short-term deposit             87  
Proceeds on sale of property and equipment     110       -  
Net cash provided by (used in) investing activities – continuing operations     152       (37 )
Net cash provided by investing activities – discontinued operations     -       61,296  
Net cash provided by (used in) investing activities     152       61,259  

 

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

 

7

 

  

PHOTOMEDEX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited )

 

    For the Six Months Ended
June 30,
 
    2016     2015  
             
Cash Flows From Financing Activities:                
Registration costs     -       (84 )
Proceeds from notes payable     5,460          
Repayment of debt             (76,500 )
Payments on notes payable     (4,649 )     (390 )
Net cash provided by (used in) financing activities – continuing operations     811       (76,974 )
Net cash used in financing activities – discontinued operations     -       (92 )
Net cash provided by (used in) financing activities     811       (77,066 )
                 
Effect of exchange rate changes on cash     (200 )     (73 )
Net decrease in cash and cash equivalents     (2,208 )     (6,730 )
Cash and cash equivalents, beginning of period     3,302       10,349  
                 
Cash and cash equivalents, end of period   $ 1,094     $ 3,619  
                 
Supplemental information:                
                 
Cash paid for income taxes   $ 61     $ 364  
Cash paid for interest   $ 232     $ 2,071  

 

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

 

8

 

 

PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Note 1

 

The Company:

 

Background

 

PhotoMedex, Inc. (and its subsidiaries) (the “Company”) is a Global Skin Health company providing integrated disease management and aesthetic solutions to dermatologists, professional aestheticians and consumers. The Company provides proprietary products and services that address skin diseases and conditions including acne, photo damage and unwanted hair. Our experience in the physician market provides the platform to expand our skin health solutions to spa markets, as well as traditional retail, online and infomercial outlets for home-use products. Through our subsidiary Radiancy, Inc., which was merged into PhotoMedex in 2011, we’ve added a range of home-use devices under the no!no!® brand, for various indications including hair removal, acne treatment, skin rejuvenation, and lower back pain. In addition, our professional product line increased its offerings for acne clearance, skin tightening, psoriasis care and hair removal sold to physician clinics and spas.

 

Starting in August 2014, the Company began to restructure its operations and redirect its efforts in a manner that management expected would result in improved results of operations and address certain defaults in its commercial bank loan covenants. As part of such redirected efforts, management continues comprehensive efforts to minimize the Company’s operational costs and capital expenditures. During this time the Company has also sold off certain business units and product lines to support this restructuring.

 

Liquidity and Going Concern

 

As of June 30, 2016, the Company had an accumulated deficit of $109,606. To date, the Company has dedicated most of its financial resources to sales and marketing, general and administrative expenses and research and development.

 

Cash and cash equivalents as of June 30, 2016 were $1,700, including restricted cash of $606. The Company has historically financed its activities with cash from operations, the private placement of equity and debt securities, borrowings under lines of credit and in the most recent periods with sale of certain assets and business units. The Company will be required to obtain additional liquidity resources in order to support its operations. The Company is addressing its liquidity needs by seeking additional funding from lenders as well as selling certain of its product lines to a third party. There are no assurances, however, that the Company will be able to obtain an adequate level of financial resources required for the short and long-term support of its operations. In light of the Company’s recent operating losses and negative cash flows, the termination of the pending merger agreement (see Acquisitions and Dispositions below) and the uncertainty of completing further sales of its product lines, there is no assurance that the Company will be able to continue as a going concern.

 

These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on recoverability and classification of liabilities that may result from the outcome of this uncertainty.

 

On January 6, 2016, PhotoMedex, Inc. received an advance of $4 million, less a $40 financing fee (the “January 2016 Advance”), from CC Funding, a division of Credit Cash NJ, LLC, (the "Lender"), pursuant to a Credit Card Receivables Advance Agreement (the "Advance Agreement"), dated December 21, 2015.  The Company’s domestic subsidiaries, Radiancy, Inc.; PTECH; and Lumiere, Inc., are also parties to the Advance Agreement (collectively with the Company, the “Borrowers”). Each Advance was secured by security interest in defined collateral representing substantially all the assets of the Company. Concurrent with the funding of the loan agreement, the Company established a $500 cash reserve account in favor of the lender to be used to make loan payments in the event that weekly remittances, net of sales return credits and other bank charges or offsets, are insufficient to cover the weekly repayment amount due the lender. The balance in the reserve account was $396 as of June 30, 2016 (which was presented within the balance “restricted cash”). The advance was paid in full on July 29, 2016 and the security interest in the defined collateral was released from lien.

 

9

 

 

PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

 

Subject to the terms and conditions of the Advance Agreement, the Lender will make periodic advances to the Company (collectively with the January 2016 Advance and the April 2016 Advance described below, the “Advances”). The proceeds can be used for general corporate purposes.

 

All outstanding Advances will be repaid through the Company’s existing and future credit card receivables and other rights to payment arising out of our acceptance or other use of any credit or charge card (collectively, “Credit Card Receivables”) generated by activities based in the United States.

 

On April 29, 2016, the Company received an advance of $1 million, less a $10 financing fee (the “April 2016 Advance”), from the Lender pursuant to the Advance Agreement.

 

On June 17, 2016, the Company received an advance of $550, less a $50 financing fee (the “June 2016 Advance”), from the Lender pursuant to the Advance Agreement.

 

Additionally the Company gained access to previously restricted cash amounts of $724 that was held in escrow as of the one year anniversary of the sale of the XTRAC and VTRAC business on June 22, 2015 from which $125 was paid to MELA Science. In addition to the $396 reserve account, restricted cash as of June 30, 2016 also includes $119 which reflects amounts collected by the Lender awaiting remittance to the Company which were received after June 30, 2016. Restricted cash also includes $91 reflecting certain commitments connected to our leased office facilities in Israel.

 

Acquisitions and Dispositions (See also Note 2, Discontinued Operations)

 

On May 12, 2014, PhotoMedex completed the acquisition of 100% of the shares of LCA-Vision Inc. ("LCA-Vision" or "LCA"); the Company sold 100% of the shares of LCA for $40 million in cash effective January 31, 2015. The results of operations of LCA-Vision have been included into the Company's consolidated financial statements for the three and six months periods ended June 30, 2015 as a discontinued operation. See Note 2, Discontinued Operations, in the Company’s Form 10-K for the year ending December 31, 2015 for information regarding these transactions as well as the $85 million senior secured credit facilities entered into with JP Morgan Chase as part of the acquisition of LCA.

 

On March 31, 2016 we completed the sale to The Lotus Global Group, Inc. of all of the tangible and intangible assets of the Omnilux product line for $220 ($110 was received as a refundable deposit during December 2015 in advance and $110 was received in April 2015), pursuant to the Agreement for Sale of Assets dated March 31, 2016. Management does not believe that the sale of the Omnilux product line represents a strategic shift for the company. As a result, the above transaction has not been reflected in the accompanying consolidated financial statements as discontinued operations. The Company recorded a loss on the disposal of those assets in the amount of $843 for the six months ended June 30, 2016.

 

TERMINATION of PENDING TRANSACTION

 

On February 19, 2016, PhotoMedex, Inc., Radiancy, Inc., a wholly-owned subsidiary of the Company (“Radiancy”), DS Healthcare Group, Inc. (“DSKX”) and PHMD Consumer Acquisition Corp., a wholly-owned subsidiary of DSKX (“Merger Sub A”), entered into an Agreement and Plan of Merger and Reorganization (the “Radiancy Merger Agreement”) pursuant to which Radiancy will merge with Merger Sub A, with Radiancy as the surviving corporation in such merger (the “Radiancy Merger”). Concurrently, PHMD, PTECH, DSKX, and PHMD Professional Acquisition Corp., a wholly-owned subsidiary of DSKX (“Merger Sub B”), entered into an Agreement and Plan of Merger and Reorganization (the “P-Tech Merger Agreement” and together with the Radiancy Merger Agreement, the “Merger Agreements”) pursuant to which PTECH will merge with Merger Sub B, with PTECH as the surviving corporation in such merger (the “P-Tech Merger” and together with the Radiancy Merger, the “Mergers”). As a result of the Mergers, DSKX would become the holding company for Radiancy and PTECH. The Mergers are expected to qualify as tax-free transfers of property to DSKX for federal income tax purposes.

 

10

 

 

PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

 

On March 23, 2016, DSKX filed a Current Report on Form 8-K (the “DSKX March 23 Form 8-K”) with the SEC reporting its audit committee, after discussion with its independent registered public accounting firm, concluded that the unaudited condensed consolidated financial statements of DSKX for the two fiscal quarters ended June 30, 2015 and September 30, 2015 should no longer be relied upon because of certain errors in such financial statements. To the knowledge of DSKX’s audit committee, the facts underlying its conclusion include that revenues recognized related to certain customers of DSKX did not meet revenue recognition criteria in the two fiscal quarters ended June 30, 2015 and September 30, 2015. Additionally, certain equity transactions in the two fiscal quarters ended June 30, 2015 and September 30, 2015 were not properly recorded in accordance with United States Generally Accepted Accounting Principles and also were not properly disclosed.

 

DSKX reported in the DSKX March 23 Form 8-K that, on March 17, 2016, all members of DSKX’s board of directors other than Mr. Khesin, terminated the employment of Mr. Khesin, as its president and as an employee of DSKX, and also terminated Mr. Khesin’s employment agreement, dated December 16, 2013. DSKX reported in the DSKX March 23 Form 8-K that all members of DSKX’s board of directors other than Mr. Khesin terminated both Mr. Khesin’s employment and employment agreement for cause. In addition, DSKX reported in the DSKX March 23 Form 8-K that all members of DSKX’s board of directors other than Mr. Khesin unanimously removed Mr. Khesin as Chairman and a member of DSKX’s board of directors, also for cause. DSKX reported in the DSKX March 23 Form 8-K that DSKX’s board terminated Mr. Khesin for cause from both his employment and board positions because DSKX’s board believes, based on the results of the investigation as of the date of the DSKX March 23 Form 8-K, that there is sufficient evidence to conclude that Mr. Khesin violated his fiduciary duty to DSKX and its subsidiaries.

 

The Company was not advised of this investigation during its negotiations with DSKX or after signing the Merger Agreements until the evening of March 21, 2016. On April 12, 2016, the Company sent a Reservation of Rights letter to DSKX. The Notice states that, based upon the disclosures set forth in DSKX’s Current Report on Form 8-K filed on March 23, 2016 and subsequent press releases and filings by DSKX with the United States Securities and Exchange Commission (collectively, the “DSKX Public Disclosure”), DSKX is in material breach of various representations, warranties, covenants and agreements set forth in the Agreements; had failed to provide to the Company the information contained in the DSKX Public Disclosures during the discussions relating to the negotiation and execution of the Agreements; and continues to be in material breach under the Agreements. As a result, the conditions precedent to the closing of these transactions as set forth in the Agreements may not be able to occur.

 

On May 27, 2016, PHMD, Radiancy, and P-Tech, terminated both Agreements and Plans of Merger and Reorganization, among PhotoMedex and its affiliates and DS Healthcare Group and given the material breaches identified in PHMD’s notice to DSKX, PHMD has initiated litigation seeking to recover a termination fee of $3.0 million, an expense reimbursement of up to $750,000 and its liabilities and damages suffered as a result of DSKX’s failures and breaches in connection with each of the Merger Agreements. On May 27, 2016, PHMD, Radiancy and P-Tech filed a complaint in the U.S. District Court for the Southern District of New York alleging breaches of the Merger Agreements by DSKX and seeking the damages described in the foregoing sentence.

 

See Note 1, Pending Transactions in the Company’s Form 10-K for the year ending December 31, 2015 for additional information.

 

11

 

 

PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

 

Basis of Presentation :

 

Accounting Principles

 

The accompanying condensed consolidated financial statements and related notes should be read in conjunction with our consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (“fiscal 2015”). The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) related to interim financial statements. As permitted under those rules, certain information and footnote disclosures normally required or included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted. The financial information contained herein is unaudited; however, management believes all adjustments have been made that are considered necessary to present fairly the results of the Company’s financial position and operating results for the interim periods. All such adjustments are of a normal recurring nature.

 

The results for the six months ended June 30, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016 or for any other interim period or for any future period.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and the wholly- and majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Held for Sale Classification and Discontinued Operations

 

A disposal group is reported as held for sale when management has approved or received approval to sell and is committed to a formal plan, the disposal group is available for immediate sale, the business is being actively marketed, the sale is anticipated to occur during the next 12 months and certain other specified criteria are met. A disposal group classified as held for sale is recorded at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying value of the business exceeds its estimated fair value less cost to sell, a loss is recognized. However, when disposal group meets the held for sale criteria, the Company first evaluates whether the carrying amounts of the assets not covered by ASC 360-10 included in the disposal group (such as goodwill) are required to be adjusted in accordance with other applicable GAAP before measuring the disposal group at fair value less cost to sell.

 

Assets and liabilities related to a disposal group classified as held for sale are segregated in the consolidated balance sheet in the period in which the disposal group is classified as held for sale.

 

Until December 31, 2014, in accordance with previous US GAAP, operations of a disposal group were reported as discontinued operations if the disposal group is classified as held for sale, the operations and cash flows of the business have been or will be eliminated from the ongoing operations as a result of a disposal transaction and when the Company will not have any significant continuing involvement in the operations of the disposal group after the disposal transaction. See below regarding change to the criteria for reporting discontinued operations.

 

Accordingly, the disposal of LCA-Vision was presented as discontinued operations, commencing with the financial statements for the year ended December 31, 2014.

 

Commencing January 1, 2015 (the effective date of the ASU 2014-08), only disposal of a component of an entity or a group of components of an entity that represents a strategic shift that has or will have a major effect on an entity's operations and financial results shall be reported as discontinued operations. The revised guidance did not change the criteria required to qualify for held for sale presentation. The revised guidance includes several new disclosures and among others, required to reclassify the assets and liabilities of discontinued operations to separate line items in the balance sheets for all periods presented (including comparatives). Accordingly, following the sale of XTRAC and VTRAC business which were determined to represent a strategic shift that will have a major effect on the Company, the assets and liabilities of the XTRAC and VTRAC as of December 31, 2014 were reclassified and presented as assets and liabilities held for sale (without changing their classification as current or non-current). Also, the results of the operations of LCA operating segment and the XTRAC and VTRAC business were presented as discontinued operations in the consolidated statements of comprehensive loss (see also Note 2, Discontinued operations ).

 

12

 

 

PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

 

The results of discontinued operations are reported in discontinued operations in the consolidated statement of comprehensive loss for current and prior periods commencing in the period in which the business meets the criteria of a discontinued operation, and include any gain or loss recognized on closing or adjustment of the carrying amount to fair value less cost to sell. Depreciation is not recorded on assets of a business while it is classified as held for sale.

 

Revenue Recognition

 

The Company recognizes revenues from product sales when the following four criteria have been met: (i) the product has been delivered 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 reasonably assured. Revenues from product sales are recorded net of provisions for estimated chargebacks, rebates, expected returns and cash discounts.

 

The Company ships most of its products FOB shipping point, although from time to time certain customers, for example governmental customers, will be granted FOB destination terms. Among the factors the Company takes into account when determining the proper time at which to recognize revenue are (i) when title to the goods transfers and (ii) 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 fully assured and included in deferred revenues until that time.

 

For revenue arrangements with multiple deliverables within a single, contractually binding arrangement (usually sales of products with separately priced extended warranty), each element of the contract is accounted for as a separate unit of accounting when it provides the customer value on a stand-alone basis and there is objective evidence of the fair value of the related unit.

 

With respect to sales arrangements under which the buyer has a right to return the related product, revenue is recognized only if all the following conditions are met: the price is fixed or determinable at the date of sale; the buyer has paid, or is obligated to pay and the obligation is not contingent on resale of the product; the buyer's obligation would not be changed in the event of theft or physical destruction or damage of the product; the buyer has economic substance; the Company does not have significant obligations for future performance to directly bring about resale of the product by the buyer; and the amount of future returns can be reasonably estimated.

 

The Company provides a provision for product returns based on the experience with historical sales returns, in accordance with ASC Topic 605-15 with respect to sales of product when a right of return exists. Reported revenues are shown net of the returns provision. Such allowance for sales returns is included in Other Accrued Liabilities . (See Note 9 ).

 

Deferred revenue includes amounts received with respect to extended warranty maintenance, repairs and other billable services and amounts not yet recognized as revenues. Revenues with respect to such activities are deferred and recognized on a straight-line basis over the duration of the warranty period, the service period or when service is provided, as applicable to each service.

 

Functional Currency

 

The currency of the primary economic environment in which the operations of the Company, its U.S. subsidiaries and Radiancy Ltd., its subsidiary in Israel, are conducted is the US dollar ("$" or "dollars"). Thus, the functional currency of the Company and its subsidiaries (other than the foreign subsidiaries mentioned below) is the dollar (which is also the reporting currency of the Group). The operations of the other foreign subsidiaries are each conducted in the local currency of the subsidiary. These currencies include: Great Britain Pounds (GBP) and Hong Kong Dollar (HKD). Substantially all of the Group's revenues are derived in dollars or in other currencies linked to the dollar. Purchases of most materials and components are carried out in, or linked to the dollar.

 

13

 

 

PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

 

Balances denominated in, or linked to, foreign currencies are stated on the basis of the exchange rates prevailing at the balance sheet date. For foreign currency transactions included in the statement of comprehensive income (loss), the exchange rates applicable to the relevant transaction dates are used. Transaction gains or losses arising from changes in the exchange rates used in the translation of such balances are carried to financing income or expenses.

 

Assets and liabilities of foreign subsidiaries, whose functional currency is their local currency, are translated from their respective functional currency to U.S. dollars at the balance sheet date exchange rates. Income and expense items are translated at the average rates of exchange prevailing during the year. Translation adjustments are reflected in the consolidated balance sheets as a component of accumulated other comprehensive income (loss). Deferred taxes are not provided on translation adjustments as the earnings of the subsidiaries are considered to be permanently reinvested .

 

Fair Value Measurements

 

The Company measures and discloses fair value in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 820, Fair Value Measurements and Disclosures (“ASC Topic 820”). ASC Topic 820 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions there exists a three-tier fair-value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1 – unadjusted quoted prices are available in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date.
Level 2 – pricing inputs are other than quoted prices in active markets that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.
Level 3 – pricing inputs are unobservable for the non-financial asset or liability and only used when there is little, if any, market activity for the non-financial asset or liability at the measurement date. The inputs into the determination of fair value require significant management judgment or estimation. Fair value is determined using comparable market transactions and other valuation methodologies, adjusted as appropriate for liquidity, credit, market and/or other risk factors

 

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

 

The fair value of cash and cash equivalents and restricted cash are based on its demand value, which is equal to its carrying value. The estimated fair values of notes payable which are based on borrowing rates that are available to the Company for loans with similar terms, collateral and maturity 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.

 

Derivative financial instruments are measured at fair value, on a recurring basis. The fair value of derivatives generally reflects the estimated amounts that the Group would receive or pay to terminate the contracts at the reporting dates, based on the prevailing currency prices and the relevant interest rates. Such measurement is classified within Level 2.

 

14

 

 

PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

 

In addition to items that are measured at fair value on a recurring basis, there are also assets and liabilities that are measured at fair value on a nonrecurring basis. Assets and liabilities that are measured at fair value on a nonrecurring basis include certain long-lived assets, including goodwill. As such, we have determined that each of these fair value measurements reside within Level 3 of the fair value hierarchy.

 

Derivatives

 

The Company applies the provisions of Accounting Standards Codification ("ASC") Topic 815, Derivatives and Hedging . In accordance with ASC Topic 815, all the derivative financial instruments are recognized as either financial assets or financial liabilities on the balance sheet at fair value. The accounting for changes in the fair value of a derivative financial instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For derivative financial instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation.

 

From time to time the Company carries out transactions involving foreign exchange derivative financial instruments (mainly forward exchange contracts) which are expected to be paid with respect to forecasted expenses of the Israeli subsidiary (Radiancy) denominated in Israeli local currency (NIS) which is different than its functional currency.

 

Such derivatives were not designated as hedging instruments, and accordingly they were recognized in the balance sheet at their fair value, with changes in the fair value carried to the Statement of Comprehensive Income (Loss) and included in interest and other financing expenses, net.

 

At June 30, 2016, the balance of such derivative instruments amounted to approximately $0 in assets and approximately $0 were recognized as financing income in the Statement of Comprehensive (Loss) Income during the three and six month periods ended that date.

 

The nominal amounts of foreign currency derivatives as of June 30, 2016 consist of forward transactions for the exchange of $0 into NIS as of June 30, 2016.

 

Accrued Warranty Costs

 

The Company offers a standard warranty on product sales generally for a one to two-year period. The Company provides for the estimated cost of the future warranty claims on the date the product is sold. Total accrued warranty is included in Other Accrued Liabilities on the balance sheet. The activity in the warranty accrual during the six months ended June 30, 2016 and 2015 (with respect to the continuing operations) is summarized as follows:

 

    June 30,  
    2016     2015  
    (unaudited)     (unaudited)  
Accrual at beginning of year   $ 330     $ 529  
Additions charged to warranty expense     61       79  
Expiring warranties     (135 )     (22 )
Claims satisfied     (93 )     (206 )
Total   $ 163     $ 380  

 

For extended warranty on the consumer products, see Revenue Recognition above.

 

15

 

 

PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

 

Earnings Per Share

 

Basic and diluted earnings per common share were calculated using the following weighted-average shares outstanding:

 

    For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
    2016     2015     2016     2015  
Weighted-average number of common and common equivalent shares outstanding:                                
Basic number of common shares outstanding     20,768,571       21,488,832       20,837,998       20,308,391  
Dilutive effect of stock options and warrants     -       -       -       -  
Diluted number of common and common stock equivalent shares outstanding     20,768,571       21,488,832       20,837,998       20,308,391  

 

Diluted earnings per share for the three and six months ended June 30, 2016, exclude the impact of common stock options and warrants, totaling 1,046,988 shares, as the effect of their inclusion would be anti-dilutive, due to the loss from continuing operations for the periods. Diluted earnings per share for the three and six months ended June 30, 2015, excluded the impact of common stock options and warrants, totaling 1,046,988 shares, as the effect of their inclusion would be anti-dilutive, due to the loss from continuing operations for the periods.

 

Adoption of New Accounting Standards

 

Effective January 1, 2016, the Company adopted Accounting Standard ASU No. 2015-16, " Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. " The amendments in ASU 2015-16 require that an acquirer recognize adjustments to estimated amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, rather than retrospectively adjusting amounts previously reported. The amendments require that the acquirer record, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the estimated amounts, calculated as if the accounting had been completed at the acquisition date.

 

ASU 2015-16 became effective for public business entities for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments is required be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued.

 

The adoption of this ASU did not have a significant impact on the condensed consolidated financial statements

 

Recently Issued Accounting Standards

 

In May 2014, The FASB issued Accounting Standard Update 2014-09 , Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09").

 

ASU 2014-09 outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 also requires entities to disclose sufficient information, both quantitative and qualitative, to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

 

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

 

During 2016, the FASB issued several Accounting Standard Updates that focuses on certain implementation issues of the new revenue recognition guidance including Narrow-Scope Improvements and Practical Expedients, Principal versus Agent Considerations and Identifying Performance Obligations and Licensing.

 

An entity should apply the amendments in this ASU using one of the following two methods: 1. Retrospectively to each prior reporting period presented with a possibility to elect certain practical expedients, or, 2. Retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. If an entity elects the latter transition method, it also should provide certain additional disclosures.

 

For a public entity, the amendments in ASU 2014-09 (including the amendments introduced through recent ASU's) are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period (the first quarter of fiscal year 2018 for the Company). Early application is not permitted. The Company is in the process of assessing the impact, if any, of ASU 2014-09 on its consolidated financial statements.

 

In July, 2015, The FASB issued Accounting Standards Update No. 2015-11 , Simplifying the Measurement of Inventory (Topic 330) ("ASU 2015-11"). ASU 2015-11 outlines that inventory within the scope of its guidance be measured at the lower of cost and net realizable value. Inventory measured using last-in, first-out (LIFO) are not impacted by the new guidance. Prior to the issuance of ASU 2015-11, inventory was measured at the lower of cost or market (where market was defined as replacement cost, with a ceiling of net realizable value and floor of net realizable value less a normal profit margin). For a public entity, the amendments in ASU 2015-11 are effective, in a prospective manner, for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period (the first quarter of fiscal year 2017 for the Company). Early adoption is permitted as of the beginning of an interim or annual reporting period. The Company is in the process of assessing the impact, if any, of ASU 2015-11 on its consolidated financial statements.

 

In September 2015, the FASB issued ASU No. 2015-16, " Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. " The amendments in ASU 2015-16 require that an acquirer recognize adjustments to estimated amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, rather than retrospectively adjusting amounts previously reported. The amendments require that the acquirer record, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the estimated amounts, calculated as if the accounting had been completed at the acquisition date. Effective for public business entities for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued. The Company does not believe the adoption of this ASU will have a significant impact on the condensed consolidated financial statements.

 

In November 2015, the FASB has issued Accounting Standards Update (ASU) No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which changes how deferred taxes are classified on organizations’ balance sheet. The ASU eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, all deferred tax assets and liabilities will be required to be classified as noncurrent . The amendments apply to all organizations that present a classified balance sheet. For public companies, the amendments are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods (i.e., in the first quarter of 2017 for calendar year-end companies).Early adoption is permitted for all entities as of the beginning of an interim or annual reporting period . The guidance may be applied either prospectively, for all deferred tax assets and liabilities, or retrospectively (i.e., by reclassifying the comparative balance sheet). If applied prospectively, entities are required to include a statement that prior periods were not retrospectively adjusted. If applied retrospectively, entities are also required to include quantitative information about the effects of the change on prior periods. The Company does not believe this ASU will have a significant impact on its consolidated financial statements.

 

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

 

In March 2016, the FASB has issued Accounting Standards Update (ASU) No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments are intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees.

 

Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The amendments also simplify two areas specific to private companies.

 

For public companies, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted in any interim or annual period periods (i.e., in the first quarter of 2017 for calendar year-end companies).

 

Note 2

 

Discontinued Operations:

 

LCA, acquired by the Company on May 12, 2014, is a provider of fixed-site laser vision corrections services at its LasikP lus ® vision centers. The vision centers provide the staff, facilities, equipment and support services for performing laser vision correction that employs advanced laser technologies to help correct nearsightedness, farsightedness and astigmatism. The vision centers are supported by independent ophthalmologists and credentialed optometrists, as well as other healthcare professionals. Substantially all of LCA’s revenues are derived from the delivery of laser vision correction procedures performed in the vision centers. After preliminary investigations and discussions, the Board of Directors of the Company, with the aid of its investment banker, had reached a formal decision during December 2014 to enter into, substantive, confidential discussions with potential third-party buyers and began to develop plans for implementing a disposal of the assets and operations of the business. The Company accordingly previously classified this former segment as held for sale and discontinued operations in accordance with ASC Topic 360. On February 2, 2015, the Company closed on sale transaction of 100% of the shares of LCA for $40 million in cash. Excluding estimated working capital adjustments and direct expenses (professional fees to third parties), the Company realized net proceeds of approximately $36.5 million which amount is considered as the fair value less cost to sell of LCA. The sale was effective January 31, 2015.

 

The accompanying condensed consolidated financial statements reflect the operating results of the discontinued operations separately from continuing operations. Revenues from LCA, reported as discontinued operations, for the six months ended June 30, 2015 was $9,158. Loss from LCA, reported as discontinued operations, for the six months ended June 30, 2015 was $1,667, which includes stock compensation of $2,363 related to the contractual acceleration of vesting of awards then outstanding to employees from LCA, included as a result of acceleration of vesting periods, due to the sale of LCA.

 

On June 22, 2015, the Company closed on the asset sale of the XTRAC and VTRAC business for $42.5 million in cash. The Company realized net proceeds of approximately $41 million. The sale was effective June 22, 2015. The domestic XTRAC business was considered a recurring revenue stream given its pay-per-use model, where the machines are provided to professionals who then paid us based on the number of treatments administered with the device. The domestic revenues from this business have historically been reported in our Physician Recurring business segment. Internationally, we sold our XTRAC-Velocity and VTRAC equipment to distributors which sales have been historically reported in our Professional Equipment segment. As this business was a substantial business unit of the Company, and as such the sale brings a strategic shift in focus of management. The Company accordingly classified this former business as held for sale and discontinued operations in accordance with ASC Topic 360. The XTRAX and VTRAC business met the criteria for presentation as a discontinued operation during the quarter ended June 30, 2015. As a result, the accompanying condensed consolidated statement of comprehensive loss for the three months ended June 30, 2015 presented the XTRAC and VTRAC business as a discontinued operation.

 

Revenues from the XTRAC and VTRAC business, reported as discontinued operations, for the three and six months ended June 30, 2015 was $7,476 and $14,699, respectively. Loss from XTRAC and VTRAC, reported as discontinued operations, for the three and six months ended June 30, 2015 was $1,088 and $5,042, respectively, which includes stock compensation of $74 and $2,289 respectively, related to the contractual acceleration of vesting of awards then outstanding to employees from LCA, included as a result of acceleration of vesting periods, due to the sale of XTRAC and VTRAC.

 

18

 

 

PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

 

Note 3

 

Acquisition:

 

See Pending Transactions in Note 1 for a discussion of the proposed DSKX transaction.

 

Note 4

 

Inventories:

 

    June 30, 2016     December 31, 2015  
    (unaudited)        
Raw materials and work in progress   $ 3,691     $ 4,236  
Finished goods     5,999       7,499  
Total inventories   $ 9,690     $ 11,735  

 

Work-in-process is immaterial, given the Company’s typically short manufacturing cycle, and therefore is disclosed in conjunction with raw materials.

 

Note 5

 

Property and Equipment, net:

 

    June 30, 2016     December 31, 2015  
    (unaudited)        
Equipment, computer hardware and software   $ 5,124     $ 5,147  
Furniture and fixtures     433       424  
Leasehold improvements     441       443  
      5,998       6,014  
Accumulated depreciation and amortization     (4,782 )     (4,708 )
Property and equipment, net   $ 1,216     $ 1,306  

 

Depreciation and related amortization expense was $149 and $157 for the six months ended June 30, 2016 and 2015, respectively.

 

Note 6

 

Patents and Licensed Technologies, net:

 

    June 30, 2016     December 31, 2015  
    (unaudited)        
Gross amount beginning of period   $ 3,376     $ 7,027  
Additions     74       (177 )
Translation differences     (20 )     30  
Gross amount end of period     3,430       6,880  
                 
Accumulated amortization     (1,912 )     (3,843 )
Impairment (See Note 7 below)     -       (1,424 )
                 
Patents and licensed technologies, net   $ 1,518     $ 1,613  

 

19

 

 

PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

 

Related amortization expense was $116 and $412 for the six months ended June 30, 2015 and 2015, respectively.

  

Estimated amortization expense for amortizable patents and licensed technologies assets for the future periods is as follows:

 

Last six months of 2016   $ 145  
2017     212  
2018     202  
2019     187  
2020     175  
Thereafter     597  
Total   $ 1,518  

 

Note 7

 

Goodwill and Other Intangible Assets:

 

As part of the purchase price allocation for the reverse acquisition of Radiancy, Inc. in 2011, the Company recorded goodwill in the amount of $24,005 and definite-lived intangibles in the amount of $12,000. Goodwill reflects the value or premium of the acquisition price in excess of the fair values assigned to specific tangible and intangible assets. Goodwill has an indefinite useful life and therefore is not amortized as an expense, but is reviewed annually for impairment of its fair value to the Company.

 

During the fourth quarter of 2015, we recorded goodwill and other intangible asset impairment charges of $21,481, as we determined that a portion of the value of our goodwill and other intangible assets was impaired in connection with our annual impairment test. See Note 7 to the annual audited 2015 consolidated financial statements.

 

Set forth below is a detailed listing of Goodwill:

 

Balance at January 1, 2016   $ 3,581  
Translation differences     (243 )
Balance at June 30, 2016   $ 3,338  

  

Set forth below is a detailed listing of other finite-lived intangible assets:

 

    June 30, 2016     December 31, 2015  
    (unaudited)                    
    Trademarks     Customer
Relationships
    Total     Trademarks     Customer
Relationships
    Total  
Gross amount beginning of period   $ 405     $ -     $ 405     $ 3,925     $ 4,356     $ 8,281  
Translation differences     -       -       -       (32 )     (67 )     (99 )
Gross amount end of period     405       -       405       3,893       4,289       8,182  
                                                 
Disposal                             (531 )     (587 )     (1,118 )
Accumulated amortization     (184 )     -       (184 )     (1,358 )     (1,938 )     (3,296 )
Impairment                             (1,763 )     (1,764 )     (3,527 )
                                                 
Net Book Value   $ 221     $ -     $ 221     $ 241     $ 0     $ 241  

 

20

 

 

PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

 

Related amortization expense was $20 and $415 for the six months ended June 30, 2016 and 2015, respectively.

 

Customer Relationships embody the value to the Company of relationships that PhotoMedex had formed with its customers. Trademarks include the tradenames and various trademarks associated with PhotoMedex products (e.g. “Neova” “Omnilux” and “Lumiere”).

 

Estimated amortization expense for the above amortizable intangible assets for the future periods is as follows:

 

Last six months of 2016   $ 20  
2017     40  
2018     40  
2019     40  
2020     40  
Thereafter     41  
Total   $ 221  

 

Note 8

 

Accrued Compensation and related expenses:

 

    June 30, 2016     December 31, 2015  
    (unaudited)        
Accrued payroll and related taxes   $ 289     $ 403  
Accrued vacation     132       94  
Accrued commissions and bonuses     2,941       2,420  
Total accrued compensation and related expense   $ 3,362     $ 2,917  

 

Note 9

 

Other Accrued Liabilities:

 

    June 30, 2016     December 31, 2015  
    (unaudited)        
Accrued warranty, current, see Note 1   $ 163     $ 330  
Accrued taxes, net     1,806       1,135  
Accrued sales returns (1)     1,973       4,179  
Other accrued liabilities     4,339       2,921  
Total other accrued liabilities   $ 8,281     $ 8,565  

 

(1) The activity in the accrued sales returns liability account was as follows:

 

    Six Months Ended June 30,  
    2016     2015  
    (unaudited)     (unaudited)  
Balance at beginning of year   $ 4,179     $ 7,651  
Additions that reduce net sales     4,976       10,510  
Deductions from reserves     (7,182 )     (13,802 )
Balance at end of period   $ 1,973     $ 4,359  

 

21

 

 

PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

 

Note 10

 

Long-term Debt:

 

On January 6, 2016, PhotoMedex, Inc. received an advance of $4 million, less a $40 financing fee (the “January 2016 Advance”), from CC Funding, a division of Credit Cash NJ, LLC, (the "Lender"), pursuant to a Credit Card Receivables Advance Agreement (the "Advance Agreement"), dated December 21, 2015.  The Company’s domestic subsidiaries, Radiancy, Inc.; PTECH; and Lumiere, Inc., are also parties to the Advance Agreement (collectively with the Company, the “Borrowers”). Each Advance was secured by security interest in defined collateral representing substantially all the assets of the Company. Concurrent with the funding of the loan agreement, the Company established a $500 cash reserve account in favor of the lender to be used to make loan payments in the event that weekly remittances, net of sales return credits and other bank charges or offsets, are insufficient to cover the weekly repayment amount due the lender. The balance in the reserve account was $396 as of June 30, 2016. The advance was paid in full on July 29, 2016 and the security interest in the defined collateral was released from lien.

 

Subject to the terms and conditions of the Advance Agreement, the Lender will make periodic advances to the Company (collectively with the January 2016 Advance and the April 2016 Advance described below, the “Advances”). The proceeds can be used for general corporate purposes.

 

All outstanding Advances will be repaid through the Company’s existing and future credit card receivables and other rights to payment arising out of our acceptance or other use of any credit or charge card (collectively, “Credit Card Receivables”) generated by activities based in the United States.

 

On April 29, 2016 the Company received an additional advance of $1 million, less a $10 financing fee (the “April 2016 Advance”), from the Lender pursuant to the Advance Agreement

 

On June 17, 2016, the Company received an advance of $550, less a $50 financing fee (the “June 2016 Advance”), from the Lender pursuant to the Advance Agreement.

 

The outstanding balance under the Advance Agreement as of June 30, 2016 was $1.1 million, and is included in Notes payable in the accompanying condensed consolidated balance sheet.

 

Additionally the Company gained access to previously restricted cash amounts of $724 that was held in escrow as of the one year anniversary of the sale of the XTRAC and VTRAC business on June 22, 2015 from which $125 was paid to MELA Science. In addition to the $396 reserve account, restricted cash as of June 30, 2016 also includes $119 which reflects amounts collected by the Lender awaiting remittance to the Company which were received after June 30, 2016. Restricted cash also includes $91 reflecting certain commitments connected to our leased office facilities in Israel.

 

On May 12, 2014, the Company entered into an $85 million senior secured credit facilities (“the Facilities”) with JP Morgan Chase as part of its acquisition of LCA-Vision. This loan was paid in full and all liens released on June 23, 2015. See Item 1, The Company, and Note 10, Long-Term Debt, in the Company’s Form 10-K for the year ending December 31, 2015 for further information on this transaction.

 

Note 11

 

Income Taxes:

 

The Company's tax expense includes federal, state and foreign income taxes at statutory rates and the effects of various permanent differences.

 

The difference between the Company's effective tax rates for the three and six month period ended June 30, 2016 and the U.S. Federal statutory rate (34%) resulted primarily from current federal and state losses for which no tax benefit is provided due to the 100% valuation allowance for those jurisdictions. In addition, the Israeli and UK subsidiaries’ earnings are taxed at rates lower than the U.S. federal statutory rate (Israel 25% standard corporation tax rate and in the UK 20%).

 

During the three and six months ended June 30, 2016, the Company had no material changes to liabilities for uncertain tax positions. PhotoMedex 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 years 2012 through 2015 and is also generally subject to various State income tax examinations for calendar years 2012 through 2015. Photo Therapeutics Limited files in the United Kingdom. Radiancy (Israel) Limited files in Israel. The Israeli subsidiary is subject to tax examination for calendar years 2011 through 2015.

 

22

 

 

PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

 

Note 12

 

Commitments and contingencies:

 

See Note 11, Commitment and Contingencies in the Company’s Form 10-K for the year ending December 31, 2015 for additional information. Below are updates on the company litigation since this report.

 

On April 25, 2014, a putative class action lawsuit was filed in the United States District Court for the District of Columbia against the Company’s subsidiary, Radiancy, Inc. and Dolev Rafaeli, Radiancy’s President. The suit was filed by Jan Mouzon and twelve other customers residing in ten different states who purchased Radiancy’s no!no! Hair products. It alleges various violations of state business and consumer protection codes including false and misleading advertising, unfair trade practices, and breach of express and implied warranties. The complaint seeks certification of the putative class, or, alternatively, certification as subclasses of plaintiffs residing in those specific states. The complaint also seeks an unspecified amount of monetary damages, pre-and post-judgment interest and attorneys’ fees, expert witness fees and other costs. Dr. Rafaeli was served with the Complaint on May 5, 2014; to date, Radiancy, has not been served. A mediation was scheduled in this matter for November 24, 2014, but no settlement was reached. On March 30, 2015, the Court dismissed this action in its entirety for failure to state a claim. The Court specifically dismissed with prejudice the claims pursuant to New York General Business Law §349-50 and the implied warranty of fitness for a particular purpose; the other counts against Radiancy were dismissed without prejudice. The Court also granted Dr. Rafaeli's motion to dismiss the actions against him for lack of personal jurisdiction over him by the Court. The Court denied the plaintiffs request for jurisdictional discovery with respect to Dr. Rafaeli and plaintiffs request to amend the complaint. Radiancy and its officers intend to continue to vigorously defend themselves against any attempts to continue this lawsuit.

 

On July 17, 2014, plaintiffs’ attorneys refiled their putative class action lawsuit in the United States District Court for the District of Columbia against only the Company’s subsidiary, Radiancy, Inc. The claims of the suit are virtually identical to the claims originally considered, and dismissed without prejudice, by the same Court. A companion suit was filed in the United States District Court for the Southern District of New York, raising the same claims on behalf of plaintiffs from New York and West Virginia against Radiancy and its President, Dr. Dolev Rafaeli. That New York case was removed to the D.C. Court and the cases were consolidated into one action. The Company filed a Motion to Dismiss the complaint against Dr. Rafaeli and Radiancy; on August 1, 2016, the D.C. Court granted the dismissal of the case against Dr. Rafaeli, with prejudice, and decided to allow the action against Radiancy to proceed. The Company intends to defend itself vigorously against this suit. At this time, the amount of any loss, or range of loss, cannot be reasonably estimated as the case has only been initiated and no discovery has been conducted to determine the validity of any claim or claims made by plaintiffs. Therefore, the Company has not recorded any reserve or contingent liability related to these particular legal matters. However, in the future, as the cases progress, the Company may be required to record a contingent liability or reserve for these matters.

 

On June 30, 2014, the Company’s subsidiary, Radiancy, Inc., was served with a class action lawsuit filed in the Superior Court in the State of California, County of Kern. The suit was filed by April Cantley, who purchased Radiancy’s no!no! hair products. It alleges various violations of state business and consumer protection codes including false and misleading advertising, breach of express and implied warranties and breach of the California Legal Remedies Act. The complaint seeks certification of the class, which consists of customers in the State of California who purchased the no!no! hair devices. The complaint also seeks an unspecified amount of monetary damages, pre-and post-judgment interest and attorneys’ fees, expert witness fees and other costs. Radiancy has filed an Answer to this Complaint; the case is now in the discovery phase. On October 30, 2015, Radiancy filed to remove this action to the United States District Court for the Southern District of California; as a result of that filing, all discovery in this case has now been stayed. That removal was granted, and the Company has now filed to remove this case to the U.S. District Court for the District of Columbia, the district with jurisdiction over Jan Mouzon v. Radiancy, Inc. and Dolev Rafaeli, President. The suit was filed by Jan Mouzon and twelve other customers residing in ten different states, including California, who purchased Radiancy’s no!no! hair products and alleges various violations of state business and consumer protection codes including false and misleading advertising, unfair trade practices, and breach of express and implied warranties. The complaint seeks certification of the putative class, or, alternatively, certification as subclasses of plaintiffs residing in those specific states. The Company’s Motion to Remove the Cantley case had been stayed pending resolution of the Mouzon litigation: now that the Court in Mouzon has issued its opinion regarding the Company’s Motion to Dismiss, the California Court has granted the Company’s Motion to Remove the Cantley case to the Federal Court for the District of Columbia. Radiancy and its officers intend to vigorously defend themselves against this lawsuit. Discovery has now commenced in this action. At this time, the amount of any loss, or range of loss, cannot be reasonably estimated as the case has only been initiated and no discovery has been conducted to determine the validity of any claim or claims made by plaintiffs. Therefore, the Company has not recorded any reserve or contingent liability related to these particular legal matters. However, in the future, as the cases progress, the Company may be required to record a contingent liability or reserve for these matters.

 

On February 19, 2016, the Company and its subsidiaries entered into Agreements and Plans of Merger and Reorganization with DS Healthcare Group, Inc. and its subsidiaries (“DSKX”), under which DSKX would acquire the Company’s subsidiaries Radiancy, Inc. and PhotoMedex Technology, Inc. in exchange for shares of stock in DSKX as well as cash payments and notes for future cash payments.  Subsequent to the signing of those Agreements, on March 23, 2016, DSKX filed a Current Report on Form 8-K (the “DSKX March 23 Form 8-K”) with the SEC reporting its audit committee, after discussion with its independent registered public accounting firm, concluded that the unaudited condensed consolidated financial statements of DSKX for the two fiscal quarters ended June 30, 2015 and September 30, 2015 should no longer be relied upon because of certain errors in such financial statements. Also, DSKX reported that its audit committee, consisting of all members of its board of directors other than Daniel Khesin (at the time DSKX’s President and Chairman of the Board and a member of its board of directors), had engaged independent counsel to conduct an investigation regarding certain transactions involving Mr. Khesin and other individuals; the committee’s investigation had begun earlier in February.  The board also reported that it had terminated the employment of Mr. Khesin as DSKX’s president and as an employee of DSKX, and also terminated Mr. Khesin’s employment agreement, dated December 16, 2013, for cause.

 

The Company was not advised of this investigation during its negotiations with DSKX or after signing the Merger Agreements until the evening of March 21, 2016. On April 12, 2016, the Company sent a Reservation of Rights letter to DSKX. The Notice states that, based upon the disclosures set forth in DSKX’s Current Report on Form 8-K filed on March 23, 2016 and subsequent press releases and filings by DSKX with the United States Securities and Exchange Commission (collectively, the “DSKX Public Disclosure”), DSKX is in material breach of various representations, warranties, covenants and agreements set forth in the Agreements; had failed to provide to the Company the information contained in the DSKX Public Disclosures during the discussions relating to the negotiation and execution of the Agreements; and continues to be in material breach under the Agreements. As a result, the conditions precedent to the closing of these transactions as set forth in the Agreements may not be able to occur. The Notice also declares that the Company reserves all its rights and remedies under the Agreements, including, without limitation, the right to terminate the Agreements and collect a termination fee from DSKX of $3.0 million. The Notice further asserts that the Company regards certain provisions of the Agreements to have been waived by DSKX and to no longer be in effect, including the non-solicitation and no-shop provisions, negative covenants, and termination events, as applicable solely to the PHMD Group, as well as the payment of any termination fee by PHMD to DSKX. Finally, the Notice provided that the Company has the right to terminate the Agreements to pursue, consider and enter into any acquisition proposal or other transaction without the payment of fees and expenses to DSKX. 

 

On May 27, 2016, the Company and its subsidiaries Radiancy, Inc., an indirectly wholly-owned subsidiary of the Company (“Radiancy”), and Photomedex Technology, Inc., a wholly-owned subsidiary of the Company (“P-Tech”), terminated: (a) the Agreement and Plan of Merger and Reorganization, dated as of February 19, 2016 (the “Radiancy Merger Agreement”), among the Company, Radiancy, DS Healthcare Group, Inc. (“DSKX”) and PHMD Consumer Acquisition Corp., a wholly-owned subsidiary of DSKX (“Merger Sub A”), and (b) the Agreement and Plan of Merger and Reorganization, dated as of February 19, 2016 (the “P-Tech Merger Agreement” and together with the Radiancy Merger Agreement, the “Merger Agreements”), among the Company, P-Tech, DSKX, and PHMD Professional Acquisition Corp., a wholly-owned subsidiary of DSKX (“Merger Sub B”). Pursuant to the Merger Agreements, Radiancy was to merge with Merger Sub A, with Radiancy as the surviving corporation in such merger, P-Tech was to merge with Merger Sub B, with P-Tech as the surviving corporation in such merger, and DSKX was to become the holding company for Radiancy and P-Tech.

 

23

 

 

PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

  

Given the material breaches identified in the Company’s notice to DSKX, and other disclosures and communications by DSKX, in connection with the Company’s termination of the Merger Agreements and pursuant to their terms, the Company is seeking to recover a termination fee of $3.0 million, an expense reimbursement of up to $750,000 and its liabilities and damages suffered as a result of DSKX’s failures and breaches in connection with each of the Merger Agreements. On May 27, 2016, the Company, Radiancy and P-Tech filed a complaint in the U.S. District Court for the Southern District of New York alleging breaches of the Merger Agreements by DSKX and seeking the damages described in the foregoing sentence.  On August 1, 2016, DSKX filed its answer to the complaint, denying the allegations stated in the complaint and alleging its own counterclaims including, among others, the Company’s alleged failure to disclose the Mouzon and Cantley cases filed against Radiancy.

 

At this time, the amount of any loss, or range of loss, cannot be reasonably estimated as the case has only been initiated and no discovery has been conducted to determine the validity of any claim or claims made by plaintiffs. Therefore, the Company has not recorded any reserve or contingent liability related to these particular legal matters. However, in the future, as the cases progress, the Company may be required to record a contingent liability or reserve for these matters.  For additional information regarding these matters, see the Pending Transactions disclosures in the Company’s Form 10-K for the year ending December 31, 2015, and the Company’s Form 10-Q for the period ending March 31, 2016.

 

Note 13

 

Employee Stock Benefit Plans:

 

Post-Reverse Merger

 

The Company has a Non-Employee Director Stock Option Plan. This plan has authorized 370,000 shares; of which 7,000 shares had been issued or were reserved for issuance as awards of shares of common stock, and 10,413 shares were reserved for outstanding stock options. The number of shares available for future issuance pursuant to this plan is 348,362 as of June 30, 2016.

 

In addition, the Company has a 2005 Equity Compensation Plan (“2005 Equity Plan”). The 2005 Equity Plan has authorized 6,000,000 shares, of which 2,574,723 shares had been issued or were reserved for issuance as awards of shares of common stock, and 724,488 shares were reserved for outstanding options as of June 30, 2016. The number of shares available for future issuance pursuant to this plan is 2,882,862 as of June 30, 2016.

 

Stock option activity under all of the Company’s share-based compensation plans for the six months ended June 30, 2016 was as follows:

 

    Number of
Options
    Weighted
Average
Exercise Price
 
Outstanding, January 1, 2016     750,586     $ 16.98  
Granted     -       -  
Exercised     -       -  
Cancelled     (26,098 )     18.98  
Outstanding, June 30, 2016     724,488     $ 16.91  
Options exercisable at June 30, 2016     566,438     $ 16.81  

 

At June 30, 2016, there was $2,817 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 2.36 years. The intrinsic value of options outstanding and exercisable at June 30, 2016 was not significant. The Company calculates expected volatility for share-based grants based on historic daily stock price observations of its common stock. For estimating the expected term of share-based grants, the Company has adopted the simplified method. The Company has used historical data to estimate expected employee behaviors related to option exercises and forfeitures and included these expected forfeitures as a part of the estimate of expense as of the grant date.

 

24

 

 

PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

 

The Company uses the Black-Scholes option-pricing model to estimate fair value of grants of stock options. With respect to grants of options, the risk-free rate of interest is based on the U.S. Treasury rates appropriate for the expected term of the grant or award.

 

On February 26, 2015, the Company issued 1,495,000 restricted stock units to a number of employees. The restricted shares have a purchase price of $0.01 per share and vest, and cease to be subject to the Company’s right of repurchase, over a four-year period. The Company determined the fair value of the awards to be the quoted market price of the Company’s common stock units on the date of issuance less the value paid for the award. The aggregate fair value of these restricted stock units issued was $2,766.

 

Restricted stock vests ratably over a three-to-five year period, depending upon the terms of the grant. Employees must remain employed by the Company on each vesting date in order to have unrestricted ownership in these shares; employees who leave before a vesting date forfeit the shares in which they have not yet vested and the issuance of those shares is cancelled. For the three and six months ended June 30, 2016, 110,000 and 186,250 shares had been cancelled due to forfeiture by employees.

 

On October 29, 2015, the Company issued 5,000 shares of common stock to a non-employee director for an aggregate fair value of $3.

 

Total stock based compensation expense was $860, and $2,556, including $2,437 that is included in discontinued operations, for the six months ended June 30, 2016 and 2015 respectively including amounts relating to consultants.

 

Note 14

 

Business Segments and Geographic Data:

 

The Company has organized its business into three operating segments to align its organization based upon the Company’s management structure, products and services offered, markets served and types of customers, as follows: The Consumer segment derives its revenues from the design, development, manufacturing and selling of long-term hair reduction and acne consumer products. The Physician Recurring segment derives its revenues mainly from the sales of skincare products. The Professional segment generates revenues from the sale of equipment, such as medical and esthetic light and heat based products. Management reviews financial information presented on an operating segment basis for the purposes of making certain operating decisions and assessing financial performance. Unallocated operating expenses include costs that are not specific to a particular segment but are general to the group; included are expenses incurred for administrative and accounting staff, general liability and other insurance, professional fees and other similar corporate expenses. Interest and other financing income (expense), net is also not allocated to the operating segments. Unallocated assets include cash and cash equivalents, prepaid expenses and deposits.

 

25

 

 

PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

 

The following tables reflect results of operations from our business segments for the periods indicated below:

 

Three Months Ended June 30, 2016 (unaudited) 

    CONSUMER     PHYSICIAN
RECURRING
    PROFESSIONAL     TOTAL  
Revenues   $ 9,660     $ 1,254     $ 329     $ 11,243  
Costs of revenues     2,284       926       144       3,354  
Gross profit     7,376       328       185       7,889  
Gross profit %     76.4 %     26.2 %     56.2 %     70.2 %
                                 
Allocated operating expenses:                                
Engineering and product development     264       79       -       343  
Selling and marketing expenses     5,795       625       5       6,425  
                                 
Unallocated operating expenses     -       -       -       2,932  
      6,059       704       5       9,700  
Income (loss) from continuing operations     1,317       (376 )     180       (1,811 )
                                 
Interest  and other financing income, net     -       -       -       (292 )
                                 
Income (loss) from continuing operations before income taxes   $ 1,317     $ (376 )   $ 180     $ (2,103 )

 

Three Months Ended June 30, 2015 (unaudited)

    CONSUMER     PHYSICIAN
RECURRING
    PROFESSIONAL     TOTAL  
Revenues   $ 17,538     $ 1,695     $ 691     $ 19,924  
Costs of revenues     4,079       652       184       4,915  
Gross profit     13,459       1,043       507       15,009  
Gross profit %     76.7 %     61.5 %     73.4 %     75.3 %
                                 
Allocated operating expenses:                                
Engineering and product development     301       39       49       389  
Selling and marketing expenses     15,104       986       71       16,161  
                                 
Unallocated operating expenses     -       -       -       4,971  
      15,405       1,025       120       21,521  
Income (loss) from continuing operations     (1,946 )     18       387       (6,512 )
                                 
Interest and other financing expense, net     -       -       -       56  
                                 
Income (loss) from continuing operations before income taxes   $ (1,946 )   $ 18     $ 387     $ (6,456 )

 

26

 

 

PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

 

Six Months Ended June 30, 2016 (unaudited)

    CONSUMER     PHYSICIAN
RECURRING
    PROFESSIONAL     TOTAL  
Revenues   $ 19,582     $ 2,462     $ 432     $ 22,476  
Costs of revenues     4,503       1,392       213       6,108  
Gross profit     15,079       1,070       219       16,368  
Gross profit %     77.0 %     43.5 %     50.7 %     72.8 %
                                 
Allocated operating expenses:                                
Engineering and product development     536       121       -       657  
Selling and marketing expenses     12,756       1,454       18       14,228  
Loss on sale of assets                     843       843  
Unallocated operating expenses     -       -       -       6,897  
      13,292       1,575       861       22,625  
Income (loss) from continuing operations     1,787       (505 )     (642 )     (6,257 )
                                 
Interest  and other financing expense, net     -       -       -       (625 )
                                 
Income (loss) from continuing operations before income taxes   $ 1,787     $ (505 )   $ (642 )   $ (6,882 )

 

Six Months Ended June 30, 2015 (unaudited)

    CONSUMER     PHYSICIAN
RECURRING
    PROFESSIONAL     TOTAL  
Revenues   $ 35,666     $ 3,427     $ 1,505     $ 40,598  
Costs of revenues     7,576       1,281       716       9,573  
Gross profit     28,090       2,146       789       31,025  
Gross profit %     78.8 %     62.6 %     52.4 %     76.4 %
                                 
Allocated operating expenses:                                
Engineering and product development     629       57       41       727  
Selling and marketing expenses     29,826       2,090       178       32,094  
                                 
Unallocated operating expenses     -       -       -       9,014  
      30,455       2,147       219       41,835  
Income (loss) from continuing operations     (2,365 )     (1 )     570       (10,810 )
                                 
Interest and other financing expense, net     -       -       -       (604 )
                                 
Income (loss) from continuing operations before income taxes   $ (2,365 )   $ (1 )   $ 570     $ (11,414 )

 

27

 

 

PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

  

For the three and six months ended June 30, 2016 and 2015 (unaudited), net revenues by geographic area were as follows:

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2016     2015     2016     2015  
North America 1   $ 6,806     $ 13,506     $ 14,119     $ 28,725  
Asia Pacific 2     922       1,579       1,436       2,256  
Europe (including Israel)     3,510       4,760       6,901       9,423  
South America     5       79       20       194  
    $ 11,243     $ 19,924     $ 22,476     $ 40,598  
                                 
1 United States   $ 5,783     $ 11,995     $ 11,877     $ 25,126  
1 Canada   $ 534     $ 1,511     $ 1,229     $ 3,573  
2   Japan     -     $ 104       -     $ 195  

 

As of June 30, 2016 and December 31, 2015, long-lived assets by geographic area were as follows:

 

    June 30, 2016     December 31, 2015  
    (unaudited)        
North America   $ 194     $ 169  
Asia Pacific     36       41  
Europe (including Israel)     986       1,096  
    $ 1,216     $ 1,306  

 

The Company discusses segmental details in its Management Discussion and Analysis found elsewhere in this Quarterly Report on Form 10-Q.

 

Note 15

 

Significant Customer Concentration:

 

No single customer accounted for more than 10% of total company revenues for either of the three or six months ended June 30, 2016 or 2015.

 

28

 

 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and notes to condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. These forward-looking statements include, but are not limited to, statements about the plans, objectives, expectations and intentions of PhotoMedex, Inc., a Nevada corporation (referred to in this Report as “we,” “us,” “our,” “PhotoMedex,” or “registrant”) and other statements contained in this Report that are not historical facts. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that characterize our business. In particular, we encourage you to review the risks and uncertainties described in Item 1A “Risk Factors” included elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2015. These risks and uncertainties could cause actual results to differ materially from those projected in forward-looking statements contained in this report or implied by past results and trends. Forward-looking statements are statements that attempt to forecast or anticipate future developments in our business, financial condition or results of operations and statements — see “Cautionary Note Regarding Forward-Looking Statements” that appears at the end of this discussion. These statements, like all statements in this report, speak only as of their date (unless another date is indicated), and we undertake no obligation to update or revise these statements in light of future developments.

 

The following financial data, in this narrative, are expressed in thousands, except for the earnings per share.

 

Introduction, Outlook and Overview of Business Operations

 

PhotoMedex, Inc., re-incorporated in Nevada on December 30, 2010, originally formed in Delaware in 1980, is a Global Health products and services company providing integrated disease management and aesthetic solutions to dermatologists, professional aestheticians and consumers. We provide proprietary products and services that address skin diseases and conditions including acne and photo damage. Our experience in the physician market provides the platform to expand our skin health solutions to spa markets, as well as traditional retail, online and infomercial outlets for home-use products. Through our subsidiary Radiancy, Inc., which was merged into PhotoMedex in 2011, we’ve added a range of home-use devices under the no!no!® brand, for various indications including hair removal, acne treatment, skin rejuvenation, and lower back pain. In addition, our professional product line increased its offerings for acne clearance, skin tightening, psoriasis care and hair removal sold to physician clinics and spas.

 

After a period of significant growth and profitability following the PhotoMedex-Radiancy merger and concurrent with entering into the Chase Credit Agreement and the merger with LCA-Vision, Inc., the Company began to face a number of factors that caused the operating profitability of its consumer business to suffer. These factors included competition from consumer device companies claiming similar product functionality, the inability to purchase cost effective advertising to promote our consumer product portfolio, and the inability to effectively expand operations into foreign markets. Furthermore, after satisfying on June 23, 2015 the bank covenant defaults of our senior credit facility, we continued to face a challenging media environment to purchase cost effective advertisement in the USA, our largest product distribution market. Coupled with our inability to attract sufficient financial resources to quickly increase our advertisement to overcome the market confusion created by competitors and quickly ramp new and innovative product launches in the second half of the 2015, the company entertained a variety of inquiries to sell-off the remainder of its assets culminating in the February 2016 announcement of a proposed transaction with DSKX whereby PhotoMedex, thru multiple concurrent merger transactions will sell to DSKX substantially all of its remaining operations. On May 27, 2016, the pending merger transactions with DSKX were terminated and PhotoMedex commenced litigation to recover its expenses and damages. See ITEM 1. Business – Our Company in the Company’s Form 10-K for the year ended December 31, 2015. Subject to sale of certain business units or product lines, the current strategic focus is built upon three components

 

Skilled direct sales force to target Physician and Professional Segments;

 

Expertise in global consumer marketing;

 

A full product life cycle model representing the ability to develop and commercialize innovative products from concept through regulatory and physician acceptance, and ultimately marketed directly to the consumer as dictated by normal product life-cycle evolution;

 

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We believe that we are one of only a few aesthetic companies to have developed professional technologies geared toward physicians and med spas and adapting them for the home-use market and have successfully sold millions of these products to consumers. Our professional- and consumer-use products are listed below, noting that this is not an exhaustive listing of our product portfolio but represents our current key areas of focus. The Company has historically financed its activities with cash from operations, the private placement of equity and debt securities, borrowings under lines of credit and in the most recent periods with sale of certain assets and business units. The Company will be required to obtain additional liquidity resources in order to support its operations. The Company is addressing its liquidity needs by seeking additional funding from lenders as well as selling certain of its product lines to a third party. There are no assurances, however, that the Company will be able to obtain an adequate level of financial resources required for the short and long-term support of its operations. In light of the Company’s recent operating losses and negative cash flows, the termination of the pending merger agreement (see Acquisitions and Dispositions below) and the uncertainty of completing further sales of its product lines, there is no assurance that the Company will be able to continue as a going concern.

 

These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on recoverability and classification of liabilities that may result from the outcome of this uncertainty.

 

Key Technology Platforms

 

Thermicon® brand Heat Transfer Technology . In this technique, a patented thermodynamic wire gently singes and burns off the hair above the skin’s surface. It conducts heat pulses, which enable longer-lasting hair removal. This technology drives our home-use no!no! Hair Removal 8800™ device, which is designed to reduce hair growth. Product variations include devices designed for men and for sensitive, small areas such as the face, among other versions including the recently launched no!no! Hair Removal PRO which introduces patented pulsed Thermicon technology producing 35% more energy aimed at removing more hair in less time.

 

LHE® brand Technology. LHE® combines direct heat and a full-spectrum light source to give a greater treatment advantage for psoriasis and acne care, skin tightening, skin rejuvenation, wrinkle reduction, collagen renewal, vascular and pigmented lesion treatments, and hair removal. Using LHE®, the Mistral intelligent phototherapy medical device can treat a larger spot size than a laser with less discomfort. In addition, our research finds that LHE offers meaningful results for thin, light hair. The technology is used in the no!no! Skin™, a handheld consumer product sold worldwide under the no!no!® brand. The no!no! Skin™ is a 510(k)-cleared product that has been clinically shown to reduce acne by 81% over 24 hours. The technology is also used in the no!no! Glow™, which is a 510(k)-cleared device and is a miniaturized LHE device also delivering ant-aging benefits for the at-home consumer in a hand-held size.

 

Kyrobak® . Kyrobak uses clinically proven, proprietary technology to treat unspecified, lower back pain. The unique combination of Continuous Passive Motion (CPM) and Oscillation therapy is a non-invasive, relaxing method for long lasting relief of back pain. Used for better than 3 decades in professional rehabilitation and chiropractic settings, CPM has been proven to increase mobility of the joints, draw more oxygen and blood flow to the area, allowing the muscles to relax and release pressure between the vertebrae allowing the spine to open up and decompress.

 

NEOVA®. This line of topical formulations is designed to prevent premature skin aging due to UV-induced DNA damage. The therapy seeks to repair photo-damaged skin using a novel combination of two key ingredients: DNA repair enzymes and our Copper Peptide Complex®. The NEOVA line includes DNA Damage Control SILC SHEER SPF 45, an award-winning tinted sunscreen. The DNA repair enzymes of this sunscreen are clinically shown to reduce UV damage by 45% and increase UV protection by 300% in one hour.

 

Clear Touch ® is a LHE brand technology and a handheld consumer product sold for the treatment of nail fungus.  Developed by Radiancy, LHE advances the principles of selective photothermolysis by utilizing the dual energy pathways of light and heat to gain the greatest advantage of the light/heat relationship. Patented internal filters protect the skin and proprietary algorithms take full advantage of the skins thermal absorption characteristics. These innovations create the exact balance of light and heat necessary to achieve clinical efficacy in a variety of clinical applications

 

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Our revenue generation is categorized as Consumer, Physician Recurring or Professional. Each of our segments benefit from the combination of our proprietary global consumer marketing engine with our direct sales force for U.S. physicians, and are described below:

 

Consumer

 

The global consumer market is our largest business unit due to our success at bringing professional technologies into the home-use arena. Cumulatively, we have sold more than 5 million no!no!® products to consumers, the majority of whom have been in North America, Japan and Europe.

 

We continue to develop and add to our marketing programs (in types of creative, languages, and media formats including print, online, radio, and TV) to effectively reach the large population groups where we have expanded our sales efforts, including: the United States, Japan, United Kingdom, Canada, Australia, and Hong Kong.

 

Our consumer marketing platform is built upon a proprietary direct-to-consumer sales engine and creative marketing programs that drive brand awareness. It is highly dependent upon the ability to procure cost effective advertising media to reach our targeted customer, particularly short-form TV advertising.

 

Sales Channels

 

Our multi-channel marketing and distribution model consists of television, online, print and radio direct-response advertising, as well as high-end retailers. We believe that this marketing and distribution model, through which each channel complements and supports the others, provides:

 

  greater brand awareness across channels;
     
  cost-effective consumer acquisition and education;
     
  premium brand building; and
     
  improved convenience for consumers.

 

Direct to Consumer . Our direct-to-consumer channel consists of sales generated through infomercials, commercials, websites and call centers. We utilize several forms of advertising to drive our direct-to-consumer sales and brand awareness, including print, online, television and radio.

 

Retailers and Home Shopping Channels . Our retailers and home shopping channels enable us to provide additional points of contact to educate consumers about our solutions, expand our presence beyond our direct to consumer activity and further strengthen and enhance our brand image.

 

Distributors . In some territories, we operate through exclusive distribution agreements with leading distribution companies that are dominant in their respective market and have the ability to promote our products through their existing retail and home shopping networks.

 

Markets

 

North America. Our consumer distribution segment in North America had sales of approximately $7 million and $12 million for the three months ended June 30, 2016 and 2015, respectively. Our consumer distribution segment in North America had sales of approximately $15 million and $25 million for the six months ended June 30, 2016 and 2015, respectively. We use a mix of direct-to-consumer advertising that includes infomercials, commercials, catalog, print, radio and internet-based marketing campaigns, coupled with select retail resellers, such as Planet Beauty, Bed, Bath & Beyond and others; home shopping channels such as HSN; and online retailers such as Dermadoctor.com and Drugstore.com. We believe these channels complement each other, as consumers that have seen our direct-to-consumer advertising may purchase at our retailers, and those who have seen our solutions demonstrated at our retailers may purchase solutions through our websites or call centers.

 

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International (excluding North America). In the international consumer segment, sales were approximately $3 million and $6 million for the three months ended June 30, 2016 and 2015, respectively. In the international consumer segment, sales were approximately $5 million and $11 million for the six months ended June 30, 2016 and 2015, respectively. We utilize various sales and marketing methods including sales by direct-to-consumer, sales to retailers and home shopping channels. Our main international targeted markets include Asia Pacific, Europe and South America.

 

Physician Recurring

 

Physician recurring sales primarily include those generated from our NEOVA® skin care product line. NEOVA® skin care is a topical therapy combining DNA repair enzymes and copper peptide complexes to prevent premature skin aging. NEOVA represents a recurring revenue stream with significant market opportunities. In addition, our expertise in direct-to-consumer advertising and innovative marketing programs is anticipated to drive greater brand awareness and adoption for NEOVA products.

 

NEOVA®

 

Sales of the NEOVA skin care products at present are driven by physicians, who act as spokespersons to their patients in support of the NEOVA line. We have historically marketed to physicians in the dermatology and plastic surgery field, but plan to supplement these efforts with a direct-to-consumer approach to lead consumers into those physician practices. NEOVA addresses a sizeable global market for anti-aging skin care products. In addition, we have increased marketing exposure to NEOVA by offering an introduction to the product line as an added-value purchase to consumers responding to our no!no! brand advertising.

 

Professional

 

Sales under the professional business segment are mainly generated from capital equipment, namely our LHE® brand products.

 

We have a 9 person sales and marketing team calling directly on a network of approximately 2,000 physician locations in the U.S. In addition to representing our NEOVA dispensed skin care line, we distribute through this direct sales force the LHE-based professional products. We view this fully trained sales staff as a resource in expanding the Professional segment of our revenues. For markets outside the United States, we rely upon medical device distributors to promote our products to these markets.

 

The LHE® brand Technology combines direct heat and a full-spectrum light source to give a greater treatment advantage for acne care, skin tightening, skin rejuvenation, wrinkle reduction, collagen renewal, vascular and pigmented lesion treatments, and hair removal. Using LHE®, the Mistral intelligent phototherapy medical device can treat a larger spot size than a laser with less discomfort. In addition, our research finds that LHE offers meaningful results for thin, light hair. The technology is also used in the no!no! Skin™, a handheld consumer product sold worldwide under the no!no!® brand. The no!no! Skin™ is a 510(k)-cleared product that has been clinically shown to reduce acne by 81% over 24 hours.

 

Sales and Marketing

 

As of June 30, 2016, our sales and marketing personnel consisted of 23 full-time positions.

 

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Critical Accounting Policies and Estimates

 

Critical accounting policies and the significant estimates made in accordance with them are regularly discussed with our Audit Committee. Those policies are discussed under “Critical Accounting Policies” in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015. In Note 1 to the consolidated financial statements for the three and six months ended June 30, 2016 we have updated our critical accounting policies and estimates to reflect conditions that raise doubt about the Company’s ability to continue as a going concern and that the accompanying financial statements do not include any adjustments to reflect possible future effects on recoverability and classification of liabilities that may result from the outcome of this uncertainty.

 

Results of Operations (The following financial data, in this narrative, are expressed in thousands, except for the earnings per share.)

 

Revenues

 

The following table presents revenues from our three business segments for the periods indicated below:

 

    For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
    2016     2015     2016     2015  
Consumer   $ 9,660     $ 17,538     $ 19,582     $ 35,666  
Physician Recurring     1,254       1,695       2,462       3,427  
Professional     329       691       432       1,505  
                                 
Total Revenues   $ 11,243     $ 19,924     $ 22,476     $ 40,598  

 

Consumer Segment

 

The following table illustrates the key changes in the revenues of the Consumer segment, by sales channel, for the periods reflected below:

 

    For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
    2016     2015     2016     2015  
Direct-to-consumer   $ 4,432     $ 12,097     $ 10,478     $ 25,870  
Distributors     364       556       465       651  
Retailers and home shopping channels     4,864       4,885       8,639       9,145  
                                 
Total Consumer Revenues   $ 9,660     $ 17,538     $ 19,582     $ 35,666  

 

For the three months ended June 30, 2016, consumer products revenues were $9,660 compared to $17,538 in the three months ended June 30, 2015. For the six months ended June 30, 2016, consumer products revenues were $19,582 compared to $35,666 in the six months ended June 30, 2015.The decrease of 44.9% and 45.1% during the periods, respectively, was mainly due to the following reasons:

 

Direct to Consumer. Revenues for the three months ended June 30, 2016 were $4,432 compared to $12,097 for the same period in 2015. Revenues for the six months ended June 30, 2016 were $10,478 compared to $25,870 for the same period in 2015. The decrease of 63% and 59%, respectively, was due to management’s decision to significantly reduce amounts spent on short-form TV advertising during the period due to highly irregular response rates from this format as well as limited availability of relevant media at attractive cost-effective pricing. The decrease in revenue also has an impact on the total amount of sales returns liability as reflected in Note 9 of the financial statement footnotes. The methodology used to determine both the expense and the accrued liability has been consistently applied across all periods presented.

 

  Retailers and Home Shopping Channels. Revenues for the three months ended June 30, 2016 were $4,864 compared to $4,885 for the same period in 2015. Revenues for the six months ended June 30, 2016 were $8,639 compared to $9,145 for the same period in 2015. There was relatively no change for the three months ended June 30, 2016 and a 6% change for the six months ended June 30, 2016 that was mainly due to the timing of specials on the various home shopping channel customers, mainly in the United States (“US”) and the UK. Furthermore, reduced levels of advertising in the Direct to Consumer channel negatively impacts sales at the retail level.

 

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  Distributors Channels. Revenues for the three months ended June 30, 2016 were $364 compared to $556 for the same period in 2015. Revenues for the six months ended June 30, 2016 were $465 compared to $651 for the same period in 2015. The decrease in revenues of 35% and 29%, respectively, was generally due to the timing of purchase orders from our distributors.

 

The following table illustrates the key changes in the revenues of the Consumer segment, by markets, for the periods reflected below:

 

    For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
    2016     2015     2016     2015  
North America   $ 5,553     $ 11,802     $ 11,631     $ 25,127  
International     4,107       5,736       7,951       10,539  
                                 
Total Consumer Revenues   $ 9,660     $ 17,538     $ 19,582     $ 35,666  

 

Physician Recurring Segment

 

The following table illustrates the key changes in the revenues of the Physician Recurring segment for the periods reflected below:

 

    For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
    2016     2015     2016     2015  
Neova skincare   $ 1,254     $ 1,384     $ 2,462     $ 2,711  
Surgical products     -       281       -       653  
Other     -       30       -       63  
                                 
Total Physician Recurring Revenues   $ 1,254     $ 1,695     $ 2,462     $ 3,427  

 

NEOVA skincare

 

For the three months ended June 30, 2016, revenues were $1,254 compared to $1,384 for the three months ended June 30, 2015. For the six months ended June 30, 2016, revenues were $2,462 compared to $2,711 for the six months ended June 30, 2015. These revenues are generated from the sale of various skin, hair, and wound care products to physicians in both the domestic and international markets. The decrease in revenues in the three and six month periods is generally due to increased levels of competition in the market and varying levels of the numbers of our sales force at any point in time.

 

Surgical products

 

For the three months ended June 30, 2016 and 2015, revenues were $0 and $281, respectively. For the six months ended June 30, 2016 and 2015, revenues were $0 and $653, respectively. Effective September 1, 2015, PhotoMedex, Inc. and its subsidiary, PTECH, entered into an asset purchase agreement and a supplemental agreement (together, the “SLT Asset Purchase Agreement”) with DaLian JiKang Medical Systems Import & Export Co., LTD, (“JIKANG”).  Under the SLT Asset Purchase Agreement, JIKANG acquired the SLT® surgical laser business (the “Transferred Business”) from PTECH, for a total purchase price of $1.5 million (the “Purchase Price”).  The Company received net approximately $1.2 million after payment of closing and ancillary costs.

 

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The following table illustrates the key changes in the revenues of the Physicians Recurring segment, by markets, for the periods reflected below:

 

    For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
    2016     2015     2016     2015  
North America   $ 1,177     $ 1,106     $ 2,332     $ 2,313  
International     77       589       130       1,114  
                                 
Total Physicians Recurring Revenues   $ 1,254     $ 1,695     $ 2,462     $ 3,427  

 

Professional Segment

 

The following table illustrates the key changes in the revenues of the Professional segment for the periods reflected below:

 

    For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
    2016     2015     2016     2015  
LHE equipment     329       341       432       778  
Omnilux equipment     -       350       -       589  
Surgical Lasers     -       -       -       138  
                                 
Total Professional Revenues   $ 329     $ 691     $ 432     $ 1,505  

 

LHE® brand products

 

LHE® brand products revenues include revenues derived from the sales of mainly Mistral™, Kona™, FSD™, SpaTouch Elite™ and accessories. These devices are sold to physicians, spas and beauty salons.

 

For the three months ended June 30, 2016 and 2015, LHE® brand products revenues were $329 and $341, respectively. For the six months ended June 30, 2016 and 2015, LHE® brand products revenues were $432 and $778 respectively.

 

Omnilux/Lumiere equipment

 

For the three months ended June 30, 2016 and 2015, Omnilux/Lumiere equipment revenues were $0 and $350, respectively. For the six months ended June 30, 2016 and 2015, Omnilux/Lumiere equipment revenues were $0 and $589, respectively. These revenues are generated from the sale of LED devices. On June 30, 2016 the Company completed the sale to The Lotus Global Group, Inc. of all of the tangible and intangible assets of the Omnilux product line.

 

Surgical lasers

 

Surgical lasers revenues include revenues derived from the sales of surgical laser systems. For the three months ended June 30, 2016 and 2015, surgical laser revenues were $0 and $0, representing two laser systems for the 2015 period. For the six months ended June 30 2016 and 2015, surgical laser revenues were $0, representing five laser systems and $138, representing five laser systems, respectively. This product line was sold to JIKANG in the fourth quarter of 2015, consequently there were no sales of this product line in the six months ended June 30, 2016.

 

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The following table illustrates the key changes in the revenues of the Professional segment, by markets, for the periods reflected below:

 

    For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
    2016     2015     2016     2015  
North America   $ 76     $ 224     $ 156     $ 640  
International     253       467       276       865  
                                 
Total Professional Revenues   $ 329     $ 691     $ 432     $ 1,505  

 

Cost of Revenues: all segments

 

The following table illustrates cost of revenues from our three business segments for the periods listed below:

 

    For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
    2016     2015     2016     2015  
Consumer   $ 2,284     $ 4,079     $ 4,503     $ 7,576  
Physician Recurring     926       652       1,392       1,281  
Professional     144       184       213       716  
                                 
Total Cost of Revenues   $ 3,354     $ 4,915     $ 6,108     $ 9,573  

 

Overall, cost of revenues has decreased in the segments due to the related decrease in the revenues.

 

Gross Profit Analysis

 

Gross profit decreased to $7,889 for the three months ended June 30, 2016 from $15,009 during the same period in 2015. As a percentage of revenues, the gross margin was 70.2% for the three months ended June 30, 2016 from 75.3% during the same period in 2015. Gross profit decreased to $16,368 for the six months ended June 30, 2016 from $31,025 during the same period in 2015. As a percentage of revenues, the gross margin was 72.8% for the six months ended June 30, 2016 from 76.4% during the same period in 2015.

 

The following table analyzes changes in our gross margin for the periods presented below:

 

Company Profit Analysis   For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
    2016     2015     2016     2015  
Revenues   $ 11,243     $ 19,924     $ 22,476     $ 40,598  
Percent decrease     (43.6 )%             (44.6 )%        
Cost of revenues     3,354       4,915       6,108       9,573  
Percent decrease     (31.7 )%             (36.2 )%        
Gross profit   $ 7,889     $ 15,009     $ 16,368     $ 31,025  
Gross margin percentage     70.2 %     75.3 %     72.8 %     76.4 %

 

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The primary reasons for the changes in gross profit for the three and six months ended June 30, 2016, compared to the same period in 2015, were due mainly to decreases in direct response revenues as well as home shopping and retailers within the Consumer segment. Furthermore, the mix of revenues among Direct Response versus Retail Consumer revenues and Physician Recurring revenues contributes to the variability of gross margin percentage. Direct Response Revenues represent sales directly to the consumer at retail prices (higher gross margin percent) and Retail prices reflect whole unit prices to the retailers. As the mix changes to a higher percent of retail revenues combined with physician recurring revenues versus Direct Response revenues, the gross margin percentage will trend lower.

 

The following table analyzes the gross profit for our Consumer segment for the periods presented below:

 

Consumer Segment   For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
    2016     2015     2016     2015  
Revenues   $ 9,660     $ 17,538     $ 19,582     $ 35,666  
Percent decrease     (44.9 )%             (45.1 )%        
Cost of revenues     2,284       4,079       4,503       7,576  
Percent decrease     (44.0 )%             (40.6 )%        
Gross profit   $ 7,376     $ 13,459     $ 15,079     $ 28,090  
Gross margin percentage     76.4 %     76.7 %     77.0 %     78.8 %

 

Gross profit for the three and six months ended June 30, 2016 decreased by $6,083 and $13,011 from the comparable periods in 2015. The key factor for these decreases were the decrease in all channels of consumer revenues particularly the direct-to-consumer channel which typically generated higher gross margins than the other consumer channels.

 

The following table analyzes the gross profit for our Physician Recurring segment for the periods presented below:

 

Physician Recurring
Segment
  For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
    2016     2015     2016     2015  
Revenues   $ 1,254     $ 1,695     $ 2,462     $ 3,427  
Percent decrease     (26.0 )%             (28.2 )%        
Cost of revenues     926       652       1,392       1,281  
Percent increase (decrease)     42.0 %             (8.7 )%        
Gross profit   $ 328     $ 1,043     $ 1,070     $ 2,146  
Gross margin percentage     26.2 %     61.5 %     43.5 %     62.6 %

 

Gross profit for the three and six months ended June 30, 2016 decreased by $715 and $1,076, respectively from the comparable periods in 2015. The primary reason for the changes in gross profit and gross margin is due to charging to expense approximately $340 of excess and obsolete inventory primarily related to our Omnilux and LHE brands.

 

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The following table analyzes the gross profit for our Professional segment for the periods presented below:

 

Professional Segment   For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
    2016     2015     2016     2015  
Revenues   $ 329     $ 691     $ 432     $ 1,505  
Percent decrease     (52.4 )%             (71.3 )%        
Cost of revenues     144       184       213       716  
Percent decrease     (21.7 )%             (70.3 )%        
Gross profit   $ 185     $ 507     $ 219     $ 789  
Gross margin percentage     56.2 %     73.4 %     50.7 %     52.4 %

 

Gross profit for the three and six months ended June 30, 2016 decreased by $322 and $570 respectively. The primary reason for the decreased gross margin is the decrease in marketing for this segment. The gross margin reflects changes in product mix as well as price discounting to encourage increase sales of existing LHE inventory.

 

Engineering and Product Development

 

Engineering and product development expenses for the three months ended June 30, 2016 decreased to $343 from $389 for the three months ended June 30, 2016. Engineering and product development expenses for the six months ended June 30, 2016 decreased to $657 from $727 for the six months ended June 30, 2016. The majority of this expense relates to the salaries of our worldwide engineering and product development team and is in line with the prior year.

 

Selling and Marketing Expenses

 

For the three months ended June 30, 2016, selling and marketing expenses decreased to $6,425 from $16,161 for the three months ended June 30, 2015. The decrease was primarily for the following reasons:

 

  We decreased no!no! Hair Removal direct to consumer activities in North America due to management’s decision to significantly reduce amounts spent on short-form TV advertising during the period as a result of highly irregular response rates from this format. We continuously monitor the performance on all of our media avenues and when results are not as expected, we reduce and/or change the affected areas of our media.

 

  Overall, Media buying and advertising expenses in the three months ended June 30, 2016 were 27.9% of total revenues compared to 40.9% of total revenues in the three months ended June 30, 2015. Although there was a change in the mix of revenues toward business channels and segments that are less dependent upon the level of advertising investment, certain fixed costs and variable response rates of customers to advertising can cause fluctuations in advertising expenses as a percent of relevant revenues. Direct to consumer revenues are 39.0% of total revenues for the three months ended June 30, 2016 compared to 60.7% of total revenues for the three months ended June 30, 2015.

 

For the six months ended June 30, 2016, selling and marketing expenses decreased to $14,228 from $32,094 for the six months ended June 30, 2015. The decrease was primarily for the following reasons:

 

  We decreased no!no! Hair Removal direct to consumer activities in North America due to management’s decision to significantly reduce amounts spent on short-form TV advertising during the period as a result of highly irregular response rates from this format. We continuously monitor the performance on all of our media avenues and when results are not as expected, we reduce and/or change the affected areas of our media.

 

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Overall, Media buying and advertising expenses in the six months ended June 30, 2016 were 31.3% of total revenues compared to 39.9% of total revenues in the six months ended June 30, 2015. Although there was a change in the mix of revenues toward business channels and segments that are less dependent upon the level of advertising investment, certain fixed costs and variable response rates of customers to advertising can cause fluctuations in advertising expenses as a percent of relevant revenues. Direct to consumer revenues are 46.6% of total revenues for the six months ended June 30, 2016 compared to 63.7% of total revenues for the six months ended June 30, 2015.

 

General and Administrative Expenses

 

For the three months ended June 30, 2016, general and administrative expenses decreased to $2,932 from $4,971 for the three months ended June 30, 2015. The decrease was due to the following reasons:

 

  In the three months ended June 30, 2016, we had recorded a decrease in depreciation and amortization expenses of $357, a decrease in bank related loan fees of $220, and a decrease in bad debt expenses of $437.

 

For the six months ended June 30, 2016, general and administrative expenses decreased to $6,897 from $9,014 for the six months ended June 30, 2015. The decrease was due to the following reasons:

 

  In the six months ended June 30, 2016, we had recorded a decrease in depreciation and amortization expenses of $699, a decrease in bank related loan fees of $220, and a decrease in bad debt expenses of $914 and a decrease in stock based compensation expenses of $491.

 

Interest and Other Financing Expense, Net

 

Net interest and other financing expense for the three months ended June 30, 2016 increased to $292 income, net from $56 income, net for the three months ended June 30, 2015. The increase of $236 is mainly due to currency fluctuation of the U.S. Dollar versus the New Israeli Shekel, the Euro, the GBP and the Australian Dollar. The functional currency of all U.S. members of the group, as well as Radiancy Ltd. (Israel), is the U.S. Dollar. The other foreign subsidiaries’ functional currency is the each subsidiaries’ respective local currency.

 

Net interest and other financing expense for the six months ended June 30, 2016 increased to $625 from $604 for the six months ended June 30, 2015. The increase of $21 is mainly due to an increase in interest expense related to the Credit Cash loan outstanding during the most recent six month period.

 

Taxes on Income, Net

 

For the three months ended June 30, 2016, the net tax expense amounted to $135 as compared to a tax benefit of $3,941 for the three months ended June 30, 2015. For the six months ended June 30, 2016, the net tax expense amounted to $228 as compared to a tax benefit of $3,577 for the six months ended June 30, 2015.

 

Net Loss

 

The factors described above resulted in net loss, including discontinued operations, of $2,363 during the three months ended June 30, 2016, as compared to a net loss of $6,061 during the three months ended June 30, 2015, a decrease of 61%. The factors described above resulted in net loss, including discontinued operations, of $7,235 during the six months ended June 30, 2016, as compared to a net loss of $3,953 during the six months ended June 30, 2015, an increase of 83%.

 

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Liquidity and Capital Resources

 

At June 30, 2016, our current ratio was 0.98 compared to 1.31 at December 31, 2015. As of June 30, 2016 we had a deficit of $533 in working capital compared to $6,460 surplus as of December 31, 2015. Cash and cash equivalents were $1,700, including restricted cash of $606, as of June 30, 2016, as compared to $4,026 as of December 31, 2015 including restricted cash of $724.

 

On January 6, 2016, PhotoMedex, Inc. (the “Company”) received an advance of $4 million, less a $40 financing fee (the “January 2016 Advance”) from CC Funding, a division of Credit Cash NJ, LLC, (the "Lender"), pursuant to a Credit Card Receivables Advance Agreement (the "Advance Agreement"), dated December 21, 2015.  The Company’s domestic subsidiaries, Radiancy, Inc.; PhotoMedex Technology, Inc.; and Lumiere, Inc., are also parties to the Advance Agreement (collectively with the Company, the “Borrowers”). Each Advance was secured by security interest in defined collateral representing substantially all the assets of the Company. Concurrent with the funding of the loan agreement, the Company established a $500 cash reserve account in favor of the lender to be used to make loan payments in the event that weekly remittances, net of sales return credits and other bank charges or offsets, are insufficient to cover the weekly repayment amount due the lender. The balance in the reserve account was $396 as of June 30, 2016. The advance was paid in full on July 29, 2016 and the security interest in the defined collateral was released from lien.

 

On April 29, 2016, the Company received an additional credit card receivable advance of $1 million under substantially the same terms as the January 6, 2016 Advance.

 

On June 17, 2016, the Company received an advance of $550, less a $50 financing fee (the “June 2016 Advance”), from the Lender pursuant to the Advance Agreement

 

The Company will be required to obtain additional liquidity resources in order to support its operations. The Company is addressing its liquidity needs by seeking additional funding from lenders as well as selling certain of its product lines to a third party. There are no assurances, however, that the Company will be able to obtain an adequate level of financial resources required for the short and long-term support of its operations. In light of the Company’s recent operating losses and negative cash flows, the termination of the pending merger agreement (see Acquisitions and Dispositions below) and the uncertainty of completing further sales of its product lines, there is no assurance that the Company will be able to finance its ongoing operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

 

Net cash and cash equivalents used in operating activities was $2,971 for the six months ended June 30, 2016 compared to cash provided by operating activities of $9,150 for the six months ended June 30, 2015. The primary reason for the change was the sales of XTRAC and VTRAC business and LCA-Vision during the six months ended June 30, 2015.

 

Net cash and cash equivalents provided by investing activities was $152 for the six months ended June 30, 2016 compared to cash provided by investing activities of $61,259 for the six months ended June 30, 2015. The primary reason for the change was the sales of XTRAC and VTRAC business and LCA-Vision during the six months ended June 30, 2015.

 

Net cash and cash equivalents provided by financing activities was $811 for the six months ended June 30, 2016 compared to cash used in financing activities of $77,066 for the six months ended June 30, 2015. In the six months ended June 30, 2015, we had payments on credit facilities of $76,500 and $390 for certain notes payable.

 

Commitments and Contingencies

 

There were no items that significantly impacted our commitments and contingencies as discussed in the notes to our 2015 annual financial statements included in our Annual Report on Form 10-K.

 

Off-Balance Sheet Arrangements

 

At June 30, 2016, we had no off-balance sheet arrangements.

 

40

 

 

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.

 

Cautionary Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “intend,” “potential” and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in our Annual Report on Form 10-K for the year ended December 31, 2015, and in this Quarterly Report on Form 10-Q in greater detail under Item 1A. “Risk Factors.” Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by our cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

 

ITEM 3. Quantitative and Qualitative Disclosure about Market Risk

 

Foreign Exchange Risk

 

During the three and six months ended June 30, 2016, there were no material changes to our market risk disclosures as set forth in Part II Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” in the Annual Report on Form 10-K that we filed for the year ended December 31, 2015.

 

ITEM 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures, (as such term is defined in Rules 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)), as of June 30, 2016. Based on that evaluation, management has concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level described below.

 

Limitations on the Effectiveness of Controls.

 

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within an organization have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were effective to provide reasonable assurance that the objectives of our disclosure control system were met.

 

Changes in Internal Control over Financial Reporting

 

There has been no change in our internal control over financial reporting in our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - Other Information

 

ITEM 1. Legal Proceedings

 

On April 25, 2014, a putative class action lawsuit was filed in the United States District Court for the District of Columbia against the Company’s subsidiary, Radiancy, Inc. and Dolev Rafaeli, Radiancy’s President. The suit was filed by Jan Mouzon and twelve other customers residing in ten different states who purchased Radiancy’s no!no! Hair products. It alleges various violations of state business and consumer protection codes including false and misleading advertising, unfair trade practices, and breach of express and implied warranties. The complaint seeks certification of the putative class, or, alternatively, certification as subclasses of plaintiffs residing in those specific states. The complaint also seeks an unspecified amount of monetary damages, pre-and post-judgment interest and attorneys’ fees, expert witness fees and other costs. Dr. Rafaeli was served with the Complaint on May 5, 2014; to date, Radiancy, has not been served. A mediation was scheduled in this matter for November 24, 2014, but no settlement was reached. On March 30, 2015, the Court dismissed this action in its entirety for failure to state a claim. The Court specifically dismissed with prejudice the claims pursuant to New York General Business Law §349-50 and the implied warranty of fitness for a particular purpose; the other counts against Radiancy were dismissed without prejudice. The Court also granted Dr. Rafaeli's motion to dismiss the actions against him for lack of personal jurisdiction over him by the Court. The Court denied the plaintiffs request for jurisdictional discovery with respect to Dr. Rafaeli and plaintiffs request to amend the complaint. Radiancy and its officers intend to continue to vigorously defend themselves against any attempts to continue this lawsuit.

 

On July 17, 2014, plaintiffs’ attorneys refiled their putative class action lawsuit in the United States District Court for the District of Columbia against only the Company’s subsidiary, Radiancy, Inc. The claims of the suit are virtually identical to the claims originally considered, and dismissed without prejudice, by the same Court. A companion suit was filed in the United States District Court for the Southern District of New York, raising the same claims on behalf of plaintiffs from New York and West Virginia against Radiancy and its President, Dr. Dolev Rafaeli. That New York case was removed to the D.C. Court and the cases were consolidated into one action. The Company filed a Motion to Dismiss the complaint against Dr. Rafaeli and Radiancy; on August 1, 2016, the D.C. Court granted the dismissal of the case against Dr. Rafaeli, with prejudice, and decided to allow the action against Radiancy to proceed. The Company intends to defend itself vigorously against this suit. At this time, the amount of any loss, or range of loss, cannot be reasonably estimated as the case has only been initiated and no discovery has been conducted to determine the validity of any claim or claims made by plaintiffs. Therefore, the Company has not recorded any reserve or contingent liability related to these particular legal matters. However, in the future, as the cases progress, the Company may be required to record a contingent liability or reserve for these matters.

 

On June 30, 2014, the Company’s subsidiary, Radiancy, Inc., was served with a class action lawsuit filed in the Superior Court in the State of California, County of Kern. The suit was filed by April Cantley, who purchased Radiancy’s no!no! hair products. It alleges various violations of state business and consumer protection codes including false and misleading advertising, breach of express and implied warranties and breach of the California Legal Remedies Act. The complaint seeks certification of the class, which consists of customers in the State of California who purchased the no!no! hair devices. The complaint also seeks an unspecified amount of monetary damages, pre-and post-judgment interest and attorneys’ fees, expert witness fees and other costs. Radiancy has filed an Answer to this Complaint; the case is now in the discovery phase. On October 30, 2015, Radiancy filed to remove this action to the United States District Court for the Southern District of California; as a result of that filing, all discovery in this case has now been stayed. That removal was granted, and the Company has now filed to remove this case to the U.S. District Court for the District of Columbia, the district with jurisdiction over Jan Mouzon v. Radiancy, Inc. and Dolev Rafaeli, President. The suit was filed by Jan Mouzon and twelve other customers residing in ten different states, including California, who purchased Radiancy’s no!no! hair products and alleges various violations of state business and consumer protection codes including false and misleading advertising, unfair trade practices, and breach of express and implied warranties. The complaint seeks certification of the putative class, or, alternatively, certification as subclasses of plaintiffs residing in those specific states... The Company’s Motion to Remove the Cantley case had been stayed pending resolution of the Mouzon litigation; now that the Court in Mouzon has issued its opinion regarding the Company’s Motion to Dismiss, the California Court has granted the Company’s Motion to Remove the Cantley case to the Federal Court for the District of Columbia. Radiancy and its officers intend to vigorously defend themselves against this lawsuit. Discovery has now commenced in this action. At this time, the amount of any loss, or range of loss, cannot be reasonably estimated as the case has only been initiated and no discovery has been conducted to determine the validity of any claim or claims made by plaintiffs. Therefore, the Company has not recorded any reserve or contingent liability related to these particular legal matters. However, in the future, as the cases progress, the Company may be required to record a contingent liability or reserve for these matters.

 

42

 

 

On February 19, 2016, the Company and its subsidiaries entered into Agreements and Plans of Merger and Reorganization with DS Healthcare Group, Inc. and its subsidiaries (“DSKX”), under which DSKX would acquire the Company’s subsidiaries Radiancy, Inc. and PhotoMedex Technology, Inc. in exchange for shares of stock in DSKX as well as cash payments and notes for future cash payments.  Subsequent to the signing of those Agreements, on March 23, 2016, DSKX filed a Current Report on Form 8-K (the “DSKX March 23 Form 8-K”) with the SEC reporting its audit committee, after discussion with its independent registered public accounting firm, concluded that the unaudited condensed consolidated financial statements of DSKX for the two fiscal quarters ended June 30, 2015 and September 30, 2015 should no longer be relied upon because of certain errors in such financial statements. Also, DSKX reported that its audit committee, consisting of all members of its board of directors other than Daniel Khesin (at the time DSKX’s President and Chairman of the Board and a member of its board of directors), had engaged independent counsel to conduct an investigation regarding certain transactions involving Mr. Khesin and other individuals; the committee’s investigation had begun earlier in February.  The board also reported that it had terminated the employment of Mr. Khesin as DSKX’s president and as an employee of DSKX, and also terminated Mr. Khesin’s employment agreement, dated December 16, 2013, for cause.

 

The Company was not advised of this investigation during its negotiations with DSKX or after signing the Merger Agreements until the evening of March 21, 2016. On April 12, 2016, the Company sent a Reservation of Rights letter to DSKX. The Notice states that, based upon the disclosures set forth in DSKX’s Current Report on Form 8-K filed on March 23, 2016 and subsequent press releases and filings by DSKX with the United States Securities and Exchange Commission (collectively, the “DSKX Public Disclosure”), DSKX is in material breach of various representations, warranties, covenants and agreements set forth in the Agreements; had failed to provide to the Company the information contained in the DSKX Public Disclosures during the discussions relating to the negotiation and execution of the Agreements; and continues to be in material breach under the Agreements. As a result, the conditions precedent to the closing of these transactions as set forth in the Agreements may not be able to occur. The Notice also declares that the Company reserves all its rights and remedies under the Agreements, including, without limitation, the right to terminate the Agreements and collect a termination fee from DSKX of $3.0 million. The Notice further asserts that the Company regards certain provisions of the Agreements to have been waived by DSKX and to no longer be in effect, including the non-solicitation and no-shop provisions, negative covenants, and termination events, as applicable solely to the PHMD Group, as well as the payment of any termination fee by PHMD to DSKX. Finally, the Notice provided that the Company has the right to terminate the Agreements to pursue, consider and enter into any acquisition proposal or other transaction without the payment of fees and expenses to DSKX. 

 

On May 27, 2016, the Company and its subsidiaries Radiancy, Inc., an indirectly wholly-owned subsidiary of the Company (“Radiancy”), and Photomedex Technology, Inc., a wholly-owned subsidiary of the Company (“P-Tech”), terminated: (a) the Agreement and Plan of Merger and Reorganization, dated as of February 19, 2016 (the “Radiancy Merger Agreement”), among the Company, Radiancy, DS Healthcare Group, Inc. (“DSKX”) and PHMD Consumer Acquisition Corp., a wholly-owned subsidiary of DSKX (“Merger Sub A”), and (b) the Agreement and Plan of Merger and Reorganization, dated as of February 19, 2016 (the “P-Tech Merger Agreement” and together with the Radiancy Merger Agreement, the “Merger Agreements”), among the Company, P-Tech, DSKX, and PHMD Professional Acquisition Corp., a wholly-owned subsidiary of DSKX (“Merger Sub B”). Pursuant to the Merger Agreements, Radiancy was to merge with Merger Sub A, with Radiancy as the surviving corporation in such merger, P-Tech was to merge with Merger Sub B, with P-Tech as the surviving corporation in such merger, and DSKX was to become the holding company for Radiancy and P-Tech.

 

Given the material breaches identified in the Company’s notice to DSKX, and other disclosures and communications by DSKX, in connection with the Company’s termination of the Merger Agreements and pursuant to their terms, the Company is seeking to recover a termination fee of $3.0 million, an expense reimbursement of up to $750,000 and its liabilities and damages suffered as a result of DSKX’s failures and breaches in connection with each of the Merger Agreements. On May 27, 2016, the Company, Radiancy and P-Tech filed a complaint in the U.S. District Court for the Southern District of New York alleging breaches of the Merger Agreements by DSKX and seeking the damages described in the foregoing sentence.  On August 1, 2016, DSKX filed its answer to the complaint, denying the allegations stated in the complaint and alleging its own counterclaims including, among others, the Company’s alleged failure to disclose the Mouzon and Cantley cases filed against Radiancy.

 

At this time, the amount of any loss, or range of loss, cannot be reasonably estimated as the case has only been initiated and no discovery has been conducted to determine the validity of any claim or claims made by plaintiffs. Therefore, the Company has not recorded any reserve or contingent liability related to these particular legal matters. However, in the future, as the cases progress, the Company may be required to record a contingent liability or reserve for these matters.  For additional information regarding these matters, see the Pending Transactions disclosures in the Company’s Form 10-K for the year ending December 31, 2015, and the Company’s Form 10-Q for the period ending March 31, 2016.

 

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See Item 3, Legal Proceedings, in the Company’s Form 10-K for the year ending December 31, 2015 for further information on pending legal actions involving the Company and its subsidiaries.

 

ITEM 1A. Risk Factors

 

As of June 30, 2016, our risk factors have not changed materially from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

ITEM 2. Unregistered sales of equity securities and use of proceeds

 

None.

 

ITEM 3. Defaults upon senior securities

 

None.

 

ITEM 4. Mine Safety Disclosures

 

None.

 

ITEM 5. Other Information

 

None.

 

ITEM 6. Exhibits

 

2.1 Amended and Restated Agreement and Plan of Merger, dated as of October 31, 2011, by and among Radiancy, Inc., PhotoMedex, Inc. and PHMD Merger Sub, Inc., including the Form of Warrant. (23 )

2.2

 

Agreement and Plan of Merger by and among PhotoMedex, Inc., Gatorade Acquisition Corp. and LCA-Vision Inc., dated as of February 13, 2014 (34)

3.1 Amended and Restated Articles of Incorporation of PhotoMedex, Inc. a Nevada corporation, filed on December 12, 2011 with the Secretary of State for the State of Nevada. (23)
3.2 Bylaws of PhotoMedex, Inc. (a Nevada corporation), adopted December 28, 2010 (18)
10.74 Agreement of Sale of Assets dated March 31, 2016, among PhotoMedex, Inc., PhotoMedex Technology, Inc., and The Lotus Global Group, Inc.  (46)
31.1 Rule 13a-14(a) Certificate of Chief Executive Officer
31.2 Rule 13a-14(a) Certificate of Chief Financial Officer
32.1 Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Schema
101.CAL XBRL Taxonomy Calculation Linkbase
101.DEF XBRL Taxonomy Definition Linkbase
101.LAB XBRL Taxonomy Label Linkbase
101.PRE XBRL Taxonomy Presentation Linkbase

 

(18)   Filed as part of our Annual Report on Form 10-K for the year ended December 31, 2010.

 

(23)   Filed as part of our Current Report on Form 8-K on December 16, 2011.

 

(34)   Filed as part of LCA Vision, Inc.’s Current Report on Form 8-K on February 13, 2014.

 

(41)  

Filed as part of this Form 10-K.

   
(46)

Filed as part of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2016.

   
* The certifications attached as Exhibit 32.1 accompany this Annual Report on Form 10-K pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

    

  44  

 

SIGNATURES

 

Pursuant to the requirements 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   August 12, 2016 By: /s/ Dolev Rafaeli  
    Name  Dolev Rafaeli  
    Title    Chief Executive Officer  

 

Date   August 12, 2016 By: /s/ Dennis M. McGrath  
    Name  Dennis M. McGrath  
    Title    President & Chief Financial Officer  

      

  45  

 

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