The accompanying notes are an integral part
of these condensed consolidated financial statements.
The accompanying notes are an integral
part of these condensed consolidated financial statements.
The accompanying notes are an integral
part of these condensed consolidated financial statements.
The accompanying notes are
an integral part of these condensed consolidated financial statements.
The accompanying notes are
an integral part of these condensed consolidated financial statements.
The accompanying notes are
an integral part of these condensed consolidated financial statements
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 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 its 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 and has agreed to sell its
Consumer product division (See Acquisitions and Dispositions – Pending Transaction below and Note 16 – Subsequent
Event).
As of September 30, 2016,
the Company had an accumulated deficit of $117,023 and shareholders deficit of $1,392. 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 September 30, 2016 were $1,636, including restricted cash of $342. 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 a 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., were
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, were insufficient to cover the weekly repayment amount due the lender.
Subject to the terms and
conditions of the Advance Agreement, the Lender was to make periodic advances to the Company (collectively with the January 2016
Advance and the April 2016 Advance described below, the “Advances”). The proceeds were used for general corporate purposes.
All outstanding Advances
were 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.
The above described
advances were paid in full on July 29, 2016 and the security interest in the defined collateral was released from lien.
The restricted cash
account includes $250 from the Neova Escrow Agreement (see Acquisitions and Dispositions below). Restricted cash also
includes $92 reflecting certain commitments connected to our leased office facilities in Israel. Additionally the Company
gained access to previously restricted cash amounts of $724 that were 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, the purchaser of that
business which amount was reflected within the loss from discontinued operations.
On August 30, 2016,
the Company entered into an Asset Purchase Agreement for the sale of its Neova product line. The sale was completed on September
15, 2016 resulting immediate proceeds to the company of $1.5 million and the Company recorded a loss of $1,731 from the transaction
during the three months ended September 30, 2016. (see Acquisitions and Dispositions below)
On October 4, 2016, the
Company entered into an Asset Purchase Agreement for the sale of its Consumer Division for $9.5 million, including $5 million in
cash plus a $4.5 million royalty agreement. (see Note 16 Subsequent Event and Acquisitions and Dispositions below).
On May 12, 2014, PhotoMedex
acquired 100% of the shares of LCA-Vision Inc. ("LCA-Vision" or "LCA"); the Company then 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 nine months periods ended September 30, 2015 as a discontinued operation.
On June 22, 2015, the Company,
sold the assets, and related liabilities, of the XTRAC and VTRAC business for $42.5 million in cash, including restricted cash
of $750 to be held in escrow for twelve months.
See Note 2, Discontinued
Operations, in the Company’s Form 10-K for the year ending December 31, 2015 for information regarding the LCA and XTRAC/VTRAC
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
represented 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 nine months ended September 30, 2016.
On August 30, 2016, PhotoMedex
and its subsidiary PhotoMedex Technology, Inc. (“PTECH”) entered into an Asset Purchase Agreement (the “Neova
Asset Purchase Agreement”) with Pharma Cosmetics Laboratories Ltd., an Israeli corporation, and its subsidiary Pharma Cosmetics
Inc., a Delaware corporation (together “PHARMA”) to acquire the Neova® skincare business (the “Transferred
Business”) from PTECH, for a total purchase price of $1.8 million (the “Neova Purchase Price”). This transaction
was completed on September 15, 2016, (the “Closing Date”). On that date, pursuant to the terms of the Neova Asset Purchase
Agreement, PHARMA acquired all of the assets related to and associated with the Transferred Business, including but not limited
to intellectual property, product inventory, accounts receivable and payable, and other tangible and intangible assets connected
with the conduct of that Transferred Business. In exchange for these assets, the Company received a net payment from PHARMA of
$1.5 million, subject to a post-closing working capital adjustment.
Also on that date, the
parties entered into a First Amendment (the “First Neova APA Amendment”) to the Neova Asset Purchase Agreement, which
provided that PHARMA would hold in trust the sum of $50 until such time as PhotoMedex and PTECH obtain a signed Worldwide Trademark
Co-existence Agreement and Consent to Assignment from Singer-Kosmetik GmbH, a German company formed under the laws of Germany,
(“Singer”) regarding the use by both Singer and the Transferred Business of their respective trademarks. That agreement
was obtained from the relevant parties, and the $50 held in trust by Pharma was released to PhotoMedex on October 28, 2016.
Management does not
believe that the sale of the Neova 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 $1,731 for the three and nine months period ended September 30, 2016.
The Neova Purchase Price
is subject to a post-closing working capital adjustment, pursuant to which the Neova Purchase Price paid to the Company at closing
will be adjusted up or down by an amount equal to the difference between the defined actual working capital and the target net
working capital of $200. Target working capital is defined as the net Accounts Receivable less trade Accounts Payable related to
the Transferred Business as of the closing date. The Neova Asset Purchase Agreement also contains customary representations, warranties
and covenants by each of the Company, PTECH and PHARMA, as well customary indemnification provisions among the parties.
The parties entered into
several ancillary agreements as part of this transaction, including a Neova Escrow Agreement and a Neova Transition Services Agreement.
Under the Neova Escrow Agreement, $250 of the Purchase Price (the "Escrow Amount") was placed into an escrow account
held by U.S. Bank National Association as Escrow Agent. The funds will remain in escrow for one year following the closing
of the transaction.
Under the Neova
Transition Services Agreement, PHMD will continue to provide certain accounting, benefit, payroll, regulatory, IT support and
other services to PHARMA for periods ranging from approximately three to up to nine months following the closing. During
those periods, PHARMA will arrange to transition the services it receives to its own personnel. PHARMA shall also have
the right to continue occupying certain portions of PHMD’s Willow Grove, Pennsylvania facility and the Orangeburg, New
York facility of PHMD’s Radiancy, Inc. subsidiary for a period of time. The amounts of compensation to be received by
the Company for these services will be reflected in the accompanying consolidated statements of comprehensive loss as a
reduction of the related expenses that the Company will incur to provide these services.
PENDING TRANSACTION (see also Note 16,
Subsequent Event)
On October 4, 2016,
PhotoMedex and its subsidiaries Radiancy, Inc., a Delaware corporation (“Radiancy US”), Photo Therapeutics Ltd., a
private limited company incorporated under the laws of England and Wales (“PHMD UK”), and Radiancy (Israel) Limited,
an Israel corporation (“Radiancy Israel” and, together with the Company, Radiancy, and PHMD UK, “PHMD”)
entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with ICTV Brands, Inc., a Nevada corporation
(“ICTV Parent”), and its subsidiary ICTV Holdings, Inc. a Nevada corporation (the “Purchaser” and together
with together with ICTV Parent, “ICTV”) pursuant to which ICTV will acquire PHMD’s consumer products division,
including its no!no!® hair and skin products and the Kyrobak back pain management products (all such consumer products, the
“Consumer Products”) and the shares of capital stock of Radiancy (HK) Limited, a private limited company incorporated
under the laws of Hong Kong (the “Hong Kong Foreign Subsidiary”), and LK Technology Importaçăo E Exportaçăo
LTDA, a private Sociedade limitada formed under the laws of Brazil (the “Brazilian Foreign Subsidiary” and together
with the Hong Kong Foreign Subsidiary, the “Foreign Subsidiaries”) (collectively, the “Transferred Business”)
from PHMD, for a total purchase price of $9.5 million (the “Purchase Price”) including $3 million in cash at closing,
$2 million of cash 90 days after closing collateralized by a letter of credit, and a $4.5 million royalty on future sales of the
product line. The closing (“Closing”) is anticipated to occur no later than 120 days from the date of the Agreement,
or by February 1, 2017 (the date of Closing, the “Closing Date”). Following the impairment of the consumer segment’s
goodwill and intangible asset during the three months period ended September 30,2016 , as discussed below, which, the company is
not expected to record significant gain or loss from the transaction contemplated under the Asset Purchase Agreement (see Note
16 Subsequent Event and Acquisitions and Dispositions).
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 was to 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 was to 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 were expected to qualify as tax-free transfers of property to DSKX for federal income tax purposes.
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 letter further stated,
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. 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 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.
Reverse Split and
Number of Shares Adjustment
On October 29, 2015 the
Company held its Annual Meeting of Stockholders in which, among other matters, Company stockholders authorized the board of directors
to amend the Company’s certificate of Incorporation with respect to a reverse split of the Company’s issued and outstanding
Common Stock in a ratio to be determined by the Company’s Board of Directors not to exceed a 1 for 5 ratio.
On September 7, 2016 the
Company’s Board of Directors approved a reverse split in a ratio of 1-for-five. The 2016 reverse split was implemented
on September 23, 2016 (the “2016 Reverse Split”). The amount of authorized Common Stock as well as the par value
for the Common Stock were not effected. Any fractional shares resulting from the 2016 Reverse Split were rounded up to the
nearest whole share.
All Common Stock, warrants,
options and per share amounts set forth herein are presented to give retroactive effect to the 2016 Reverse Split for all periods
presented.
On September 23, 2016,
the Company’s Common stock and warrants approved for listing on the NASDAQ Capital Market under the symbol PHMD. Shares
were previously listed on the NASDAQ Global Market under the same symbol.
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 nine
months ended September 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 a reporting company 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 the 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 business 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 the 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
).
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.
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.
|
•
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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
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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.
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 September 30, 2016,
the balance of such derivative instruments amounted to approximately $0 in liabilities and approximately $0 were recognized as
financing expense in the Statement of Comprehensive (Loss) Income during the nine months ended that date.
The nominal amounts of
foreign currency derivatives as of September 30, 2016 consist of forward transactions for the exchange of $0 into NIS as of September
30, 2016.
Accounting for the Impairment of Goodwill
and Other Intangibles
The Company evaluates the
carrying value of goodwill annually at the end of the calendar year and also between annual evaluations if events occur or circumstances
change that would more likely than not reduce the fair value of the reporting unit to which goodwill was allocated to below its
carrying amount. Such circumstances could include, but are not limited to: (1) a significant adverse change in legal factors or
in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. Goodwill impairment
evaluation is performed subsequent to Impairment evaluation of long-lived assets and intangibles (see Notes 6 and 7). Goodwill
impairment testing involves a two-step process. Step 1 compares the fair value of the Group’s reporting units to which goodwill
was allocated to their carrying values. If the fair value of the reporting unit exceeds its carrying value, no further analysis
is necessary. The reporting unit fair value is based upon consideration of various valuation methodologies, including guideline
transaction multiples, multiples of current earnings, and projected future cash flows discounted at rates commensurate with the
risk involved. If the carrying amount of the reporting unit exceeds its fair value, Step 2 must be completed to quantify the amount
of impairment. Step 2 calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible
assets, excluding goodwill, of the reporting unit, from the fair value of the reporting unit as determined in Step 1. The implied
fair value of goodwill determined in this step is compared to the carrying value of goodwill. If the implied fair value of goodwill
is less than the carrying value of goodwill, an impairment loss, equal to the difference, is recognized. . The fair value of Goodwill
associated with the operating and reporting units were estimated using a combination of Income and Market Approach methodologies
to valuation. The Income method of valuation explicitly recognizes the current value of future economic benefits developed by discounting
future net cash flows to their present value at a rate the reflects both the current return requirements of the market and the
risks inherent in the market. The Market approach measures the value of an asset through the analysis of recent sales or offerings
of comparable property. Our business is organized into three operating and reporting units which are defined as Consumer, Physician
Recurring, and Professional Equipment. The fair value of goodwill associated with the operating and reporting units took into consideration
the sale price of the consumer business in connection with the pending transaction with ICTV Brands, Inc. (see Note 1 The Company
and Note 16 Subsequent Event). Upon completion of our goodwill impairment analysis in connection with the pending transaction with
ICTV Brands, as of September 30, 2016 the Company recorded an impairment of Consumer segment goodwill in the amount of $2,257.
Also in connection with the
pending transaction with ICTV Brands, as of September 30, 2016, the Company recorded an impairment of the Consumer segment intangibles
for its Licensed Technology in the amount of $1,261.
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 nine months ended September 30, 2016 and 2015 (with respect to the continuing
operations) is summarized as follows:
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Accrual at beginning of period
|
|
$
|
331
|
|
|
$
|
529
|
|
Additions charged to warranty expense
|
|
|
78
|
|
|
|
202
|
|
Expiring warranties
|
|
|
(130
|
)
|
|
|
(14
|
)
|
Claims satisfied
|
|
|
(131
|
)
|
|
|
(345
|
)
|
Balance at end of period
|
|
$
|
148
|
|
|
$
|
372
|
|
For extended warranty on
the consumer products, see
Revenue Recognition
above.
Earnings Per Share
Basic and diluted earnings
per common share were calculated using the following weighted-average shares outstanding:
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Weighted-average number of common and common equivalent shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic number of common shares outstanding
|
|
|
4,157,917
|
|
|
|
4,297,766
|
|
|
|
4,173,146
|
|
|
|
3,991,725
|
|
Dilutive effect of stock options and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted number of common and common stock equivalent shares outstanding
|
|
|
4,157,917
|
|
|
|
4,297,766
|
|
|
|
4,173,146
|
|
|
|
3,991,725
|
|
Diluted earnings per share
for the three and nine months ended September 30, 2016, exclude the impact of common stock options and warrants, totaling 209,398
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.
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 permitted only as of annual reporting periods beginning after December 15, 2016, including
interim reporting periods within that reporting period. The Company is in the process of assessing the impact, if any, of ASU 2014-09
on its consolidated financial statements.
In August 2014, the FASB
issued Accounting Standards Update 2014-15,
Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going Concern
("ASU 2014-15"). ASU 2014-15 provide
guidance on management’s responsibility in evaluating whether there are conditions or events, considered in the aggregate,
that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that
the financial statements are issued (or within one year after the date that the financial statements are available to be issued
when applicable). ASU 2014-15 also provide guidance related to the required disclosures as a result of management evaluation.
The amendments in ASU 2014-15
are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early
application is permitted.
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 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.
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 nine months ended September 30, 2015 were $9,158. Loss from LCA,
reported as discontinued operations, for the nine months ended September 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 brought
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 XTRAC and VTRAC business met the criteria for presentation as a discontinued operation
during the nine months ended September 30, 2015. As a result, the accompanying condensed consolidated statement of comprehensive
loss for the nine months ended September 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 nine months ended September 30, 2015 were $14,699. Loss from the
sale of the XTRAC and VTRAC business, reported as discontinued operations, for the nine months ended September 30, 2015 was $5,042,
which includes stock compensation of $2,289 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.
Note 3
Acquisition:
See Pending Transactions in Note 1 for a discussion
of the terminated DSKX transaction and Note 1 and Note 16 (Subsequent Event) for the pending transaction with ICTV Brands, Inc.
Note 4
Inventories:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
(unaudited)
|
|
|
|
|
Raw materials and work in progress
|
|
$
|
1,874
|
|
|
$
|
4,236
|
|
Finished goods
|
|
|
6,330
|
|
|
|
7,499
|
|
Total inventories
|
|
$
|
8,204
|
|
|
$
|
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:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
(unaudited)
|
|
|
|
|
Equipment, computer hardware and software
|
|
$
|
4,992
|
|
|
$
|
5,147
|
|
Furniture and fixtures
|
|
|
433
|
|
|
|
424
|
|
Leasehold improvements
|
|
|
439
|
|
|
|
443
|
|
|
|
|
5,864
|
|
|
|
6,014
|
|
Accumulated depreciation and amortization
|
|
|
(4,813
|
)
|
|
|
(4,708
|
)
|
Property and equipment, net
|
|
$
|
1,051
|
|
|
$
|
1,306
|
|
Depreciation and related amortization expense
was $218 and $84 for the nine months ended September 30, 2016 and 2015, respectively.
Note 6
Patents and Licensed Technologies, net:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
(unaudited)
|
|
|
|
|
Gross amount beginning of period
|
|
$
|
3,376
|
|
|
$
|
7,027
|
|
Additions (disposals)
|
|
|
(177
|
)
|
|
|
(177
|
)
|
Translation differences
|
|
|
36
|
|
|
|
30
|
|
Gross amount end of period
|
|
|
3,235
|
|
|
|
6,880
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
(1,974
|
)
|
|
|
(3,843
|
)
|
Impairment (See Note 7 below)
|
|
|
(1,261
|
)
|
|
|
(1,424
|
)
|
|
|
|
|
|
|
|
|
|
Patents and licensed technologies, net
|
|
$
|
-
|
|
|
$
|
1,613
|
|
Related amortization expense was $230
and
$681 for the nine months ended September 30, 2016 and 2015, respectively.
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.
During the third quarter
of 2016, we recorded goodwill and other intangible asset impairment charges of $3,518, as we determined that a portion of the value
of our goodwill and other intangible assets was impaired in connection with the pending transaction with ICTV Brands, Inc. (see
Note 1, The Company and Note 16, Subsequent Event). The Company recorded an impairment of the Consumer segment goodwill in the
amount of $2,257 and recorded the impairment of the Consumer segment of the intangibles for its licensed technology in the amount
of $1,261. The Company recorded the reduction of goodwill in the Physician Recurring segment with the asset sale of the Neova product
line in the amount of $1,039.
Set forth below is a summary of activity
in Goodwill for the nine months ended September 30, 2016:
Balance at January 1, 2016
|
|
$
|
3,581
|
|
Disposal on sale of assets
|
|
|
(1,039
|
)
|
Impairment of goodwill
|
|
|
(2,257
|
)
|
Translation differences
|
|
|
(285
|
)
|
Balance at September 30, 2016
|
|
$
|
-
|
|
Set forth below is a summary of activity
in finite-lived intangible assets for the nine months ended September 30, 2016 along with the related accumulated amortization:
|
|
September 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
|
|
|
(221
|
)
|
|
|
-
|
|
|
|
(221
|
)
|
|
|
(531
|
)
|
|
|
(587
|
)
|
|
|
(1,118
|
)
|
Accumulated amortization
|
|
|
(184
|
)
|
|
|
-
|
|
|
|
(184
|
)
|
|
|
(1,358
|
)
|
|
|
(1,938
|
)
|
|
|
(3,296
|
)
|
Impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,763
|
)
|
|
|
(1,764
|
)
|
|
|
(3,527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Book Value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
241
|
|
|
$
|
-
|
|
|
$
|
241
|
|
Related amortization expense was $37
and
$647 for the nine months ended September 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”).
Note 8
Accrued Compensation and related expenses:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
(unaudited)
|
|
|
|
|
Accrued payroll and related taxes
|
|
$
|
360
|
|
|
$
|
403
|
|
Accrued vacation
|
|
|
97
|
|
|
|
94
|
|
Accrued commissions and bonuses
|
|
|
3,259
|
|
|
|
2,420
|
|
Total accrued compensation and related expense
|
|
$
|
3,716
|
|
|
$
|
2,917
|
|
Note 9
Other Accrued Liabilities:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
(unaudited)
|
|
|
|
|
Accrued warranty, current, see Note 1
|
|
$
|
148
|
|
|
$
|
330
|
|
Accrued taxes, net
|
|
|
2,067
|
|
|
|
1,135
|
|
Accrued sales returns (1)
|
|
|
1,688
|
|
|
|
4,179
|
|
Other accrued liabilities
|
|
|
4,492
|
|
|
|
2,921
|
|
Total other accrued liabilities
|
|
$
|
8,395
|
|
|
$
|
8,565
|
|
|
(1)
|
The activity in the accrued sales returns liability account was as follows:
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Balance at beginning of year
|
|
$
|
4,179
|
|
|
$
|
7,651
|
|
Additions that reduce net sales
|
|
|
7,124
|
|
|
|
16,090
|
|
Deductions from reserves
|
|
|
(9,615
|
)
|
|
|
(18,875
|
)
|
Balance at end of period
|
|
$
|
1,688
|
|
|
$
|
4,866
|
|
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., were
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, were insufficient to cover the weekly repayment amount due the lender. 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 was to 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
were required to 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 advances were paid
in full on July 29, 2016 and the security interest in the defined collateral was released from lien.
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 nine month period ended September 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 nine
months ended September 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.
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.
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.
During the year ended
December 31, 2013, Radiancy, Inc., a wholly-owned subsidiary of PhotoMedex, commenced legal action against Viatek Consumer Products
Group, Inc., over Viatek’s Pearl and Samba hair removal products which Radiancy believes infringe the intellectual property
covering its no!no! hair removal devices. The first suit, which was filed in the United States Federal Court, Southern District
of New York, includes claims against Viatek for patent infringement, trademark and trade dress infringement, and false and misleading
advertising. A second suit against Viatek was filed in Canada, where the Pearl is offered on that country’s The Shopping
Channel, alleging trademark and trade dress infringement, and false and misleading advertising. Viatek’s response contains
a variety of counterclaims and affirmative defenses against both Radiancy and its parent company PhotoMedex, including, among other
counts, claims regarding the invalidity of Radiancy’s patents and antitrust allegations regarding Radiancy’s conduct.
Radiancy, and PhotoMedex,
had moved to dismiss PhotoMedex from the case, and to dismiss the counterclaims and affirmative defenses asserted by Viatek. On
March 28, 2014, the Court granted the Company’s motion and dismissed PhotoMedex from the lawsuit. The Court also dismissed
certain counterclaims and affirmative defenses asserted by Viatek, including Viatek’s counterclaims against Radiancy for
antitrust, unfair competition, and tortuous interference with business relationships and Viatek’s affirmative defenses of
unclean hands and inequitable conduct before the U.S. Patent and Trademark Office in procuring its patent. Radiancy had also moved
for sanctions against Viatek for failure to provide meaningful and timely responses to Radiancy’s discovery requests; on
April 1, 2014, the Court granted that motion. Viatek appealed both the sanctions ruling and the dismissal of Viatek’s counterclaims
and defenses from the case, as well as PhotoMedex dismissal as a plaintiff; the Court has denied those appeals. The Court had appointed
a Special Master to oversee discovery. A Markman hearing on the patents at issue was held on March 2, 2015. Viatek had requested
an opportunity to supplement its patent invalidity contentions in the US case; Radiancy opposed that request. Radiancy had been
granted permission by the US Court to supplement its earlier sanctions motion to include the legal fees and costs associated with
preparing and prosecuting that motion; to date, Viatek has paid $83 in sanctions to Radiancy. Discovery and related court hearings
continued in both the US and the Canadian cases.
On October 4, 2016, PhotoMedex,
Inc., Radiancy, Inc. and Viatek Consumer Products, Inc. entered into General Releases under which the parties and the former and
present corporations in which they were or are shareholders; each and every one of their corporations; and such corporations’
predecessors, former and present subsidiaries, parent entities, affiliates, divisions, licensees, receivers, distributors, successors
and assigns, and the present, former and future officers, directors, employees and shareholders of the foregoing entities, and
their heirs, executors, administrators, attorneys, associates, agents, successors, assigns, and anyone affiliated with or acting
on behalf of any of them, from all actions, claims, liabilities, causes of action, suits, debts, dues, sums of money, accounts,
reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages,
judgments, extents, executions, claims, and demands whatsoever, in law, admiralty or equity, that a party or its affiliate ever
had, now has or hereafter can, shall or may have, from the beginning of the world to the day of the date of the General Release
including, but not limited to, the claims and counterclaims in the United States and Canadian litigation, as well as all claims
and rights of Viatek arising out of or related to the Letter of Intent, dated August 5, 2016, between Photomedex, Radiancy and
Viatek entitled Proposal to Acquire Certain Assets of Radiancy, Inc. As a result of these General Releases, both the United States
and the Canadian litigation were dismissed without costs effective October 11, 2016.
Note 13
Employee Stock Benefit Plans:
Post-Reverse Merger
The Company has a Non-Employee
Director Stock Option Plan. This plan has authorized 74,000 shares; of which 1,733 shares had been issued or were reserved for
issuance as awards of shares of common stock, and 1,999 shares were reserved for outstanding stock options. The number of shares
available for future issuance pursuant to this plan is 69,756 as of September 30, 2016.
In
addition, the Company has a 2005 Equity Compensation Plan (“2005 Equity Plan”). The 2005 Equity Plan has authorized
1,200,000 shares, of which 477,695 shares had been issued or were reserved for issuance as awards of shares of common stock, and
140,615 shares were reserved for outstanding options as of September 30, 2016. The number of shares available for future issuance
pursuant to this plan is 578,772 as of September 30, 2016.
Stock option activity under all of the Company’s
share-based compensation plans for the nine months ended September 30, 2016 was as follows:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding, January 1, 2016
|
|
|
150,117
|
|
|
$
|
3.40
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
(7,503
|
)
|
|
|
2.83
|
|
Outstanding, September 30, 2016
|
|
|
142,614
|
|
|
$
|
3.38
|
|
Options exercisable at September 30, 2016
|
|
|
111,404
|
|
|
$
|
3.37
|
|
At September 30, 2016,
there was $2,211 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 2.11 years. The intrinsic value of options outstanding and exercisable at September
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.
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 299,000 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 nine
months ended September 30, 2016, 22,000 and 37,250 shares had been cancelled due to forfeiture by employees.
On
October 29, 2015, the Company issued 1,000 shares of common stock to a non-employee director for an aggregate fair value of $3.
Total stock based compensation
expense was $1,478, and
$5,901, including $4,652 that is included in discontinued operations for
the nine months ended September 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 operating results of the Neova product line were included
thru September 15, 2016, the closing date of the asset sale of the Neova product line. See Note 1, Acquisitions and Dispositions,
above for more information. 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.
The following tables reflect results of operations
from our business segments for the periods indicated below:
Three Months Ended September 30, 2016 (unaudited)
|
|
CONSUMER
|
|
|
PHYSICIAN
RECURRING
|
|
|
PROFESSIONAL
|
|
|
TOTAL
|
|
Revenues
|
|
$
|
6,142
|
|
|
$
|
840
|
|
|
$
|
276
|
|
|
$
|
7,258
|
|
Costs of revenues
|
|
|
909
|
|
|
|
461
|
|
|
|
117
|
|
|
|
1,487
|
|
Gross profit
|
|
|
5,233
|
|
|
|
379
|
|
|
|
159
|
|
|
|
5,771
|
|
Gross profit %
|
|
|
85.2
|
%
|
|
|
45.1
|
%
|
|
|
57.6
|
%
|
|
|
79.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering and product development
|
|
|
243
|
|
|
|
83
|
|
|
|
-
|
|
|
|
326
|
|
Selling and marketing expenses
|
|
|
3,921
|
|
|
|
591
|
|
|
|
17
|
|
|
|
4,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
|
|
|
3,518
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,518
|
|
Loss on sale of assets
|
|
|
-
|
|
|
|
1,731
|
|
|
|
-
|
|
|
|
1,731
|
|
Unallocated operating expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,894
|
|
|
|
|
7,682
|
|
|
|
2,405
|
|
|
|
17
|
|
|
|
12,998
|
|
Income (loss) from continuing operations
|
|
|
(2,449
|
)
|
|
|
(2,026
|
)
|
|
|
142
|
|
|
|
(7,227
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other financing income, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
(2,449
|
)
|
|
$
|
(2,026
|
)
|
|
$
|
142
|
|
|
$
|
(7,139
|
)
|
Three Months Ended September 30, 2015 (unaudited)
|
|
CONSUMER
|
|
|
PHYSICIAN
RECURRING
|
|
|
PROFESSIONAL
|
|
|
TOTAL
|
|
Revenues
|
|
$
|
15,994
|
|
|
$
|
1,315
|
|
|
$
|
689
|
|
|
$
|
17,998
|
|
Costs of revenues
|
|
|
3,348
|
|
|
|
525
|
|
|
|
468
|
|
|
|
4,341
|
|
Gross profit
|
|
|
12,646
|
|
|
|
790
|
|
|
|
221
|
|
|
|
13,657
|
|
Gross profit %
|
|
|
79.1
|
%
|
|
|
60.1
|
%
|
|
|
32.1
|
%
|
|
|
75.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering and product development
|
|
|
245
|
|
|
|
19
|
|
|
|
(25
|
)
|
|
|
239
|
|
Selling and marketing expenses
|
|
|
13,198
|
|
|
|
1,009
|
|
|
|
70
|
|
|
|
14,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated operating expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,450
|
|
|
|
|
13,443
|
|
|
|
1,028
|
|
|
|
45
|
|
|
|
17,966
|
|
Income (loss) from continuing operations
|
|
|
(797
|
)
|
|
|
(238
|
)
|
|
|
176
|
|
|
|
(4,309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other financing expense, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(332
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
(797
|
)
|
|
$
|
(238
|
)
|
|
$
|
176
|
|
|
$
|
(4,641
|
)
|
Nine Months Ended September 30, 2016 (unaudited)
|
|
CONSUMER
|
|
|
PHYSICIAN
RECURRING
|
|
|
PROFESSIONAL
|
|
|
TOTAL
|
|
Revenues
|
|
$
|
25,724
|
|
|
$
|
3,302
|
|
|
$
|
708
|
|
|
$
|
29,734
|
|
Costs of revenues
|
|
|
5,412
|
|
|
|
1,853
|
|
|
|
330
|
|
|
|
7,595
|
|
Gross profit
|
|
|
20,312
|
|
|
|
1,449
|
|
|
|
378
|
|
|
|
22,139
|
|
Gross profit %
|
|
|
79.0
|
%
|
|
|
43.9
|
%
|
|
|
53.4
|
%
|
|
|
74.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering and product development
|
|
|
779
|
|
|
|
204
|
|
|
|
-
|
|
|
|
983
|
|
Selling and marketing expenses
|
|
|
16,677
|
|
|
|
2,045
|
|
|
|
35
|
|
|
|
18,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
|
|
|
3,518
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,518
|
|
Loss on sale of assets
|
|
|
-
|
|
|
|
1,731
|
|
|
|
843
|
|
|
|
2,574
|
|
Unallocated operating expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,791
|
|
|
|
|
20,974
|
|
|
|
3,980
|
|
|
|
878
|
|
|
|
35,623
|
|
Income (loss) from continuing operations
|
|
|
(662
|
)
|
|
|
(2,531
|
)
|
|
|
(500
|
)
|
|
|
(13,484
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other financing expense, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(537
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
(662
|
)
|
|
$
|
(2,531
|
)
|
|
$
|
(500
|
)
|
|
$
|
(14,021
|
)
|
Nine Months Ended September 30, 2015 (unaudited)
|
|
CONSUMER
|
|
|
PHYSICIAN
RECURRING
|
|
|
PROFESSIONAL
|
|
|
TOTAL
|
|
Revenues
|
|
$
|
51,659
|
|
|
$
|
4,742
|
|
|
$
|
2,194
|
|
|
$
|
58,595
|
|
Costs of revenues
|
|
|
10,922
|
|
|
|
1,807
|
|
|
|
1,185
|
|
|
|
13,914
|
|
Gross profit
|
|
|
40,737
|
|
|
|
2,935
|
|
|
|
1,009
|
|
|
|
44,681
|
|
Gross profit %
|
|
|
78.9
|
%
|
|
|
61.9
|
%
|
|
|
46.0
|
%
|
|
|
76.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering and product development
|
|
|
874
|
|
|
|
77
|
|
|
|
16
|
|
|
|
967
|
|
Selling and marketing expenses
|
|
|
43,023
|
|
|
|
3,099
|
|
|
|
249
|
|
|
|
46,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated operating expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,463
|
|
|
|
|
43,897
|
|
|
|
3,176
|
|
|
|
265
|
|
|
|
59,801
|
|
Income (loss) from continuing operations
|
|
|
(3,160
|
)
|
|
|
(241
|
)
|
|
|
744
|
|
|
|
(15,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other financing expense, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
(3,160
|
)
|
|
$
|
(241
|
)
|
|
$
|
744
|
|
|
$
|
(16,056
|
)
|
For the three and nine months ended September
30, 2016 and 2015 (unaudited), net revenues by geographic area were as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
North America
1
|
|
$
|
4,257
|
|
|
$
|
11,103
|
|
|
$
|
18,376
|
|
|
$
|
39,827
|
|
Asia Pacific
2
|
|
|
744
|
|
|
|
1,147
|
|
|
|
2,180
|
|
|
|
3,403
|
|
Europe (including Israel)
|
|
|
2,246
|
|
|
|
5,716
|
|
|
|
9,147
|
|
|
|
15,139
|
|
South America
|
|
|
11
|
|
|
|
32
|
|
|
|
31
|
|
|
|
226
|
|
|
|
$
|
7,258
|
|
|
$
|
17,998
|
|
|
$
|
29,734
|
|
|
$
|
58,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
United States
|
|
$
|
3,528
|
|
|
$
|
10,281
|
|
|
$
|
15,405
|
|
|
$
|
35,407
|
|
1
Canada
|
|
$
|
277
|
|
|
$
|
822
|
|
|
$
|
1,506
|
|
|
$
|
4,420
|
|
2
Japan
|
|
$
|
8
|
|
|
$
|
190
|
|
|
$
|
8
|
|
|
$
|
385
|
|
As of September 30, 2016 and December 31, 2015,
long-lived assets by geographic area were as follows:
|
|
September30, 2016
|
|
|
December 31, 2015
|
|
|
|
(unaudited)
|
|
|
|
|
North America
|
|
$
|
91
|
|
|
$
|
169
|
|
Asia Pacific
|
|
|
31
|
|
|
|
41
|
|
Europe (including Israel)
|
|
|
929
|
|
|
|
1,096
|
|
|
|
$
|
1,051
|
|
|
$
|
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:
Customer (A) representing
retail sales reflected in the Company’s Consumer Segment in the amount of $766 represented approximately 10.6% of consolidated
revenues for the three months ended September 30, 2016. Customer (A) representing retail sales reflected in the Company’s
Consumer Segment in the amount of $1,836 represented approximately 10.2% of consolidated revenues for the three months ended September
30, 2015. No single customer accounted for more than 10% of total company revenues for the nine months ended September 30, 2016
or for the nine months ended September 30, 2015.
Note 16
Subsequent Event:
On October 4, 2016, PhotoMedex
and its subsidiaries Radiancy, Inc., a Delaware corporation (“Radiancy US”), Photo Therapeutics Ltd., a private limited
company incorporated under the laws of England and Wales (“PHMD UK”), and Radiancy (Israel) Limited, an Israel corporation
(“Radiancy Israel” and, together with the Company, Radiancy, and PHMD UK, “PHMD”) entered into an Asset
Purchase Agreement (the “Asset Purchase Agreement”) with ICTV Brands, Inc., a Nevada corporation (“ICTV Parent”),
and its subsidiary ICTV Holdings, Inc. a Nevada corporation (the “Purchaser” and together with together with ICTV Parent,
“ICTV”) pursuant to which ICTV will acquire PHMD’s consumer products division, including its no!no!® hair
and skin products and the Kyrobak back pain management products (all such consumer products, the “Consumer Products”)
and the shares of capital stock of Radiancy (HK) Limited, a private limited company incorporated under the laws of Hong Kong (the
“Hong Kong Foreign Subsidiary”), and LK Technology Importaçăo E Exportaçăo LTDA, a private
Sociedade limitada formed under the laws of Brazil (the “Brazilian Foreign Subsidiary” and together with the Hong Kong
Foreign Subsidiary, the “Foreign Subsidiaries”) (collectively, the “Transferred Business”) from PHMD, for
a total purchase price of $9.5 million (the “Purchase Price”) including $3 million in cash at closing, $2 million of
cash 90 days after closing collateralized by a letter of credit, and a $4.5 million royalty on future sales of the product line..
The closing (“Closing”) is anticipated to occur no later than 120 days from the date of the Agreement, or by February
1, 2017 (the date of Closing, the “Closing Date”).
The Purchase Price will
be paid as follows:
ICTV placed Three Million Dollars ($3,000) in
immediately available funds in an escrow account in ICTV’s counsel’s IOLTA Trust Account to be held by ICTV’s
counsel as escrow agent under an escrow agreement among PHMD, ICTV and certain investors in ICTV Parent’s securities (the
“Escrow Agreement”). These funds will be paid to PHMD on the Closing Date of this transaction.
On or before the ninetieth (90th) day following
the Closing Date of this transaction, ICTV will pay PHMD Two Million Dollars ($2,000) in immediately available funds.
The remaining Four Million Five Hundred Thousand
Dollars ($4,500) will be paid by ICTV to PHMD under a continuing royalty on net cash (invoiced amount less sales refunds, returns,
rebates, allowances and similar items) actually received by ICTV or its Affiliates from sales of the Consumer Products commencing
with net cash actually received by the Purchaser or its Affiliates from and after the Closing Date of this transaction and continuing
until the total royalty paid to PHMD reaches that amount. Royalty payments will be made on a monthly basis in arrears within thirty
days of each month end. PHMD will receive thirty five percent (35%) of net cash actually received by ICTV through Consumer Products
sold through live television promotions less certain deductions and six percent (6%) of all other sales of Consumer Products.
The sale of the Transferred
Business will result in the disposition of substantially all of PHMD’s assets, requiring shareholder approval of the transaction.
To obtain shareholder approval, the Company is obligated under the Asset Purchase Agreement to file the appropriate preliminary
proxy documents by October 19, 2016. The Company complied with this requirement.
The Asset Purchase Agreement
provides that ICTV will make offers of employment to certain employees of the Transferred Business and that PHMD will not solicit
such employees (or any other employees of ICTV) for employment or other services for a period of five years and that PHMD will
not compete with ICTV with respect to the Transferred Business for a period of five years. It also contains customary representations,
warranties and covenants by the Company, each of its subsidiaries and ICTV, as well customary indemnification provisions among
the parties.
The Closing is subject
to customary closing conditions, including, without limitation, the accuracy of all representations and warranties of PHMD and
ICTV, the performance of all covenants of PHMD and ICTV, the receipt of all authorizations, consents and approvals of all governmental
authorities or agencies or any required consents of third parties, delivery of all documents required for the transfer of the acquired
assets, including all intellectual property assignments and lease assignments and the requisite approvals of the shareholders of
the Company and ICTV Parent.
The Asset Purchase Agreement
may be terminated by mutual written consent of the parties, by PHMD or ICTV if there has been a material misrepresentation or a
breach of any covenant or agreement contained in the Asset Purchase Agreement by the other party if such material misrepresentation
or breach has not been promptly cured after at least fourteen (14) day’s written notice by the non-offending party, or by
PHMD or ICTV if the other party has not met the conditions to closing contained in the Asset Purchase Agreement by February 1,
2017.