NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
Note
1
The
Company:
Background
PhotoMedex,
Inc. (and its subsidiaries) (the “Company”), re-incorporated in Nevada on December 30, 2010, originally formed in
Delaware in 1980, is in the process of transitioning from a skin health company providing medical and cosmetic solutions for dermatological
conditions to a real estate investment company holding investments in a variety of current and future projects, including residential
developments, commercial properties such as gas station sites, and hotels and resort communities, as described further in this
report.
The
Company was originally, until the recent sale of the Company’s last significant business unit (its consumer products division
which was sold to ICTV Brands, Inc. on January 23, 2017), as described below and in other sections of this report, a Global Skin
Health company providing integrated disease management and aesthetic solutions to dermatologists, professional aestheticians and
consumers. The Company provided proprietary products and services that address skin diseases and conditions including psoriasis,
acne, actinic keratosis (a precursor to certain types of skin cancer), photo damage and unwanted hair. 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 then commercial bank loan covenants. As part of such redirected
efforts, management maintained comprehensive efforts to minimize the Company’s operational costs and capital expenditures.
During this time the Company also sold off certain business units and product lines to support this restructuring and on January
31, 2017, sold the last remaining major product line, its consumer products division. The Company did not present the consumer
products segment as a discontinued operation, since the consumer products represented the entire remaining major operations of
the Company.
On
March 31, 2017, the Company and its newly-formed subsidiary FC Global Realty Operating Partnership, LLC, a Delaware limited liability
company (“Acquiror”) entered into an Interest Contribution Agreement (the “Agreement”) with First Capital
Real Estate Operating Partnership, L.P., a Delaware limited partnership (“Contributor”), and First Capital Real Estate
Trust Incorporated, a Maryland corporation, (the “Contributor Parent” and, together with Contributor, the “Contributor
Parties”), under which the Contributor will contribute mostly certain real estate assets (the “Contributed Properties”)
to the Company’s subsidiary in a series of three installments which will conclude no later than December 31, 2017. In exchange,
the Contributor will receive shares of the Company’s Common Stock and newly designated Series A Convertible Preferred Stock
as described below.
As a result of this transaction, the Company
has primarily become a real estate investment company for the purpose of investing in a diversified portfolio of quality commercial
and residential real estate properties and other real estate investments located both throughout the United States and in various
international locales. The first installment of contributed assets (the “First Contribution”) closed on May 17, 2017
(the “Initial Closing”). The main provisions of the Agreement are summarized below.
First
Contribution
In the Initial Closing, the Contributor
transferred certain assets comprising the Contributed Properties to the Company. On the Initial Closing date, the Contributor
transferred to the Acquiror four vacant land sites set for development into gas stations, which are located in Atwater and Merced,
northern California, and which have an agreed upon value of approximately $2.6 million. The Contributor then completed the
transfer to the Acquiror of its 17.9% passive interest in a limited liability company that is constructing a single family residential
development located in Los Lunas, New Mexico (the “Avalon Property”) on June 26, 2017. This residential development
in New Mexico consists of 251, non-contiguous, single family residential lots and a 10,000 square foot club house. 37 of the lots
have been finished, and the remaining 214 are platted and engineered lots. The agreed upon value of its share of this property
is approximately $7.4 million.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
In return for the Contributed Properties,
the Company issued to the Contributor 879,234 duly authorized, fully paid and non-assessable shares of the Company’s common
stock, par value $0.01 per share (the “Common Stock”), which represented approximately 19.9% of the Company’s
issued and outstanding Common Stock immediately prior to the Initial Closing, at an agreed upon Per Share Value (defined below)
of $2.5183, or $2,214,175 in the aggregate. These shares of Common Stock are restricted and unregistered. The Company issued the
remaining $7,785,825 of the approximately $10 million agreed upon consideration to the Contributor in the form of 123,668 shares
of the Company’s newly designated non-voting Series A Convertible Preferred Stock, par value $0.01 per share (the “Series
A Stock”). Each share of the Series A Stock is convertible into 25 shares of the Company’s Common Stock, subject to
the satisfaction of certain conditions, including stockholder approval in accordance with the rules of The Nasdaq Stock Market
(“
Nasdaq
”). The shares of Series A Stock are restricted and unregistered. The number of shares of Common Stock
issued to the Contributor and to be issued upon conversion of the Series A Stock was determined by dividing the $10 million agreed
upon value of the Contributed Assets by $2.5183, a specified price per share value which represents a 7.5% premium above the volume-weighted
average price (“
VWAP
”) of all on-exchange transactions in the Company’s Common Stock executed on Nasdaq
during the forty-three (43) trading days prior to the trading day immediately prior to the public announcement of the transaction
by the Company and the Contributor Parent, as reported by Bloomberg L.P. (the “
Per Share Value
”). The shares
of Common Stock both issued to the Contributor and issuable upon the conversion of the Series A Stock carry registration rights
as specified in a Registration Rights Agreement dated May 17, 2017.
The
Series A Convertible Preferred Stock does not have voting rights; however, the Company may not (a) alter or change adversely the
powers, preferences or rights of that stock, (b) amend or change its certificate of incorporation in a manner that adversely affects
that stock, (c) increase the number of shares of preferred stock, or (d) otherwise enter into an agreement that accomplishes any
of the foregoing, without the affirmative vote of a majority of the holders of the outstanding Series A Convertible Preferred
Stock prior to any such change.
At the Initial Closing, the Company assumed
the liabilities associated with the Contributed Properties, except that it did not assume any liabilities with respect to the
Avalon Property until that property’s contribution was completed on June 26, 2017. The obligations that the Acquiror assumed
at the Initial Closing include the following: Obligations of the Contributor and its affiliates under certain agreements covering
the contributed properties, including an Operating Agreement of Central Valley Gas Station Development, LLC, a Delaware limited
liability company, dated January 28, 2013, and all amendments thereto; and a Construction Contract dated November 19, 2014 between
Central Valley Gas Stations Development, LLC, as owner and First Capital Builders, LLC, as Contractor, with respect to the project
known commonly as Green Sands and Buhach Rd., Atwater, CA. Once the full interest in the Avalon Property was contributed
to the Company, the Company also assumed the Operating Agreement of Avalon Jubilee, LLC, a New Mexico limited liability company
dated as of May 16, 2012, and all amendments thereto; and a Development Services Agreement dated September 15, 2015 by and between
UR-FC Contributed Assets, LLC, a Delaware limited liability company, as Owner, and Land Strategies, LLC, a Nevada limited liability
company, as Developer, with respect to real property owned by Avalon Jubilee, LLC. As of the Initial Closing, the Company
also assumed an installment note dated April 7, 2015 made by First Capital Real Estate Investments, LLC (“FCREI”)
in favor of George Zambelli (“Zambelli”) in the original principal amount of $470 (the “Note”) and a Long
Form Deed of Trust and Assignment of Rents dated April 7, 2015 between FCREI, as Trustor, Fidelity National Title Company, as
Trustee (“Trustee”), and Zambelli, as Beneficiary (the “Deed of Trust”), which secures the Note.
The Company is expected to enter into
amended agreements with respect to some or all of these agreements.
Finally,
the Company will assume all ancillary agreements, commitments and obligations with respect to these properties.
The Company elected to early adopt ASU
2017-01 B
usiness Combinations (Topic 805) Clarifying the Definition of a Business.
Accordingly, the determination whether
the asset contribution represent a business combination was evaluated by applying ASU 2017-01 guidance. The Company has determined
that the group of assets assumed in the First Contribution do not include (and also, none of them on a stand-alone basis) include,
an input and a substantive process that together significantly contribute to the ability to create output and thus it was determined
that the First Contribution represent an acquisition of asset rather than a business combination. Accordingly, the total sum of
the fair value of consideration given (i.e. the fair value of the equity interests issued) together with the transaction costs
and the fair value of financial assets and financial liabilities resulting from the Second Contribution (i.e. the fair value of
the equity interests issued) and the Optional Contribution (i.e. the fair value of the equity interests issued),, was allocated
to the individual assets acquired and liabilities assumed in the first contribution based on their relative fair values at the
date of acquisition. Such allocation did not give rise to goodwill. See Note 2
Acquisition of Real Estate Assets.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
Second
Contribution
Contributor Parent is also required to
contribute two additional property interests valued at the agreed upon value amount of $20 million if certain conditions as set
forth in the Agreement are satisfied by December 31, 2017. This second installment is mandatory.
Contributor
Parent must contribute to the Acquirer its 100% ownership interest in a private hotel that is currently undergoing renovations
to convert to a Wyndham Garden Hotel. This 265 room full service hotel is located in Amarillo, Texas and has an agreed upon value
of approximately $16 million and outstanding loans of approximately $10.11 million. Before contributing the property to the Acquiror,
Contributor Parent must resolve a lawsuit concerning ownership of the property. Only when Contributor Parent has confirmed that
it is the full and undisputed owner of the property may it contribute that interest to the Acquiror.
On July 3, 2017, the Company and the Acquiror
entered into an Agreement to Waive Second Closing Deliverables (the “Second Waiver”) with the Contributor Parties,
amending the Agreement. The Contributor Parties have received an offer to purchase the Amarillo Hotel from a non-related third
party. Under the Second Waiver, the Company and the Acquiror agreed to waive the requirement for the Contributor Parties to contribute
to the Acquiror their 100% ownership interest in the Amarillo Hotel, and to accept in its place a contribution in cash of not less
than $5.89 million from the Contributor Parties from the sale proceeds of the Amarillo Hotel, after the satisfaction of the outstanding
loan, provided that the sale is completed and closed upon not later than August 31, 2017. In exchange the Contributor Parties shall
receive shares of stock in the Company, such amount to be calculated as set forth in the Second Waiver and Agreement. If the sale
of the Amarillo Hotel is not completed and closed by August 31, 2017, the waiver of the requirement for the contribution of the
interest in the Amarillo Hotel will lapse. As of the filing of this report, August 21, 2017 the sale of the Amarillo Hotel has
not been completed.
In
addition, Contributor Parent must contribute to the Acquiror its interest in Dutchman’s Bay and Serenity Bay (referred to
as the “Antigua Resort Developments”), two planned full service resort hotel developments located in Antigua and Barbuda
in which Contributor Parent owns a 75% interest in coordination with the Antigua government. Serenity Bay is a planned five star
resort comprised of five contiguous parcels (28.33 acres) zoned for hotel and residential use that are planned for 246 units and
80 one, two and three bedroom condo units. Dutchman’s Bay, is a planned four star condo hotel with 180 guestrooms, 102 two
bedroom condos, and 14 three bedroom villas. For the property in Antigua, Contributor Parent must obtain an amendment to its agreement
with the government to extend the time for development of these properties and confirm that all development conditions in the
original agreement with the government have been either satisfied or waived.
In exchange for each of these properties, the Company will issue to Contributor a number of duly authorized,
fully paid and non-assessable shares of the Company’s Common Stock or Series A Convertible Preferred Stock, determined by
dividing the $20 million agreed upon value of that contribution by the Per Share Value. The shares shall be comprised entirely
of shares of Common Stock if the issuance has been approved by the Company’s stockholders prior to the issuance thereof and
shall be comprised entirely of shares of Series A Convertible Preferred Stock if such approval has not yet been obtained.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
The Company has determined in accordance
with the updated guidance of ASU 2017-01 B
usiness Combinations (Topic 805) Clarifying the Definition of a Business
that
the Amarillo property (an operating hotel) represents a business as it is include an organized workforce with the necessary skills,
knowledge and experience to perform the acquired process and an input that the workforce could develop or convert into output.
However, it was determined that the Antigua property does not represent a business. Based on the above conclusion it was determined
that the Amarillo property component is not required to be analyzed under the provisions of ASC 815-10 -
Derivatives and
Hedging
since such contract between an acquirer and a seller to enter into a business combination are scoped out from its provisions.
As for the Antigua property it was determined that such future transaction does not constitute a derivative instrument in accordance
with ASC 815-10 -
Derivatives and Hedging
as the net settlement criteria is not met. Further, the Company considered the
provisions of Subtopic ASC 815-40
Contracts in the Entity’s Own Equity
and determined that such contractual obligations
cannot be considered as indexed to an entity’s own stock, as its settlement provisions do not based on a fixed monetary amount
or a fixed amount of a debt instrument issued by the entity but rather on the fair value of the Antigua property which represent
a real estate asset. Based on the terms of this component, (i.e. the fair value of the Antigua property and the fair value of the
shares that the Company is obligated to issue for this asset), it was determined that such freestanding financial instrument represent a financial asset required to be measured upon initial recognition at fair value. Subsequent
to initial recognition the financial instrument (which might be a financial asset or a financial liability depending on the fair
value of its settlement terms) is required to be measured at fair value, with changes in fair value reported in earnings (within
the line item “Revaluation of financial instrument related to asset contribution”). See Note 2
Acquisition of Real
Estate Assets
.
Optional
Contribution
Contributor Parent has the option to contribute
either or both of two additional property interests valued at the agreed upon value of $66.5 million if certain conditions as set
forth in the Agreement are satisfied by December 31, 2017. This third installment is optional in Contributor Parent’s sole
discretion.
The
Contributor Parent may contribute to the Acquiror its interest in a resort development project on an island just south of Hilton
Head, South Carolina (“Melrose”). Contributor Parent currently has the property under a Letter of Intent and expects
to close on the property by December 31, 2017. Melrose is valued by Contributor Parent at $22.5 million, based upon a senior lending
position that Contributor Parent holds under the Letter of Intent on this property.
Contributor
Parent also may contribute to the Acquiror a golf and surf club development project on the Baja Peninsula in Mexico (“Punta
Brava”). Contributor Parent also has this property under a Letter of Intent and expects to close by December 31, 2017. Punta
Brava is valued at the agreed upon value by Contributor Parent at $44 million based on Contributor Parent’s commitment of
$5 million upon closing on this property, plus a commitment for an additional $5 million and a second commitment of $34 million
for construction of the project.
In exchange for each of these properties,
the Company will issue to Contributor a number of duly authorized, fully paid and non-assessable shares of the Company’s
Common Stock or Series A Convertible Preferred Stock, determined by dividing an agreed upon value of $86,450 (130% of the value
of the agreed upon value of $66,500) that contribution) by the Per Share Value. The shares shall be comprised entirely of shares
of Common Stock if the issuance has been approved by the Company’s stockholders prior to the issuance thereof and shall be
comprised entirely of shares of Series A Convertible Preferred Stock if such approval has not yet been obtained. In addition, the
Company will issued to Contributor a five (5) year warrant (the “Warrant”) to purchase up to 25,000,000 shares of the
Company’s Common Stock at an exercise price of $3.00 per share that shall vest with respect to the number of underlying shares
upon the achievement of the milestone specified in the Agreement. The number of warrant shares and the exercise price will be equitably
adjusted in the event of a stock split, stock combination, recapitalization or similar transaction. These optional contributions
represent a potential liability to the company as the number of shares to be issued is fixed but the market value of the shares
fluctuates. It is possible that the share price could rise to a level that upon contribution of the properties causes the Company
to give consideration that exceeds the fair value of the assets acquired. This would represent a potential liability to the Company
and to quantify the liability the Company has used the Black Scholes formula. The warrants also represent a potential liability
in that the Company may be required to issues shares at $3 when the shares price is significantly higher.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
To estimate the fair value of the liability
associated with optionality granted to the Contributor as well as the warrant liability Management has used the Black Scholes option
pricing formula. The key input in the calculation is the assumption of how volatile the Company stock will be over the life of
the option. The more volatile the Company is expected to be, the greater its potential liability. Future volatility is unknown,
as such Management has used a volatility proxy of 39.45% which equals the average volatility of stocks in the Company’s forward
looking peer group of Real Estate Development. After the calculation is performed, additional factors must be considered.
It is possible that despite being economically rational to contribute the properties based on the Company stock price relative
to the value of the optional properties the Contributor may not have the ability to contribute. Therefore a 50% discount is applied
to the option value produced by the Black Scholes formula to arrive at final liability value for the optionality component. The
warrants receive a further 50% discount as they contain a vesting schedule with milestones that must be achieved by the Contributor
once the property is contributed. As of June 30, 2017 the fair value of such liability is estimated to be $1,222 and
is represented on the Balance sheet.
The Company has determined that the company’s
contractual obligations under the optional contributions does not constitute a derivative instrument in accordance with ASC 815-10
-
Derivatives and Hedging
as the net settlement criteria is not met. Further, the company considered the provisions of Subtopic
ASC 815-40
Contracts in the Entity’s Own Equity
and determined that such contractual obligations cannot be considered
as indexed to an entity’s own stock, as its settlement provisions do not based on a fixed monetary amount or a fixed amount
of a debt instrument issued by the entity but rather on the fair value of certain real estate assets. Thus, such freestanding financial
instrument were classified as financial liabilities and were measured upon initial recognition
at fair value. Subsequent to initial recognition the financial liabilities are measured at fair value, with changes in fair value
reported in earnings (within the line item “Revaluation of assets contribution related financial instruments related the
asset contribution”).
The
above optional contributions were determined to represent a financial liabilities related to future contingent assets contributions.
See Note 2 Acquisitions and Dispositions
.
Resignation
and Appointment of Officers and Directors
Pursuant to the Agreement, there were changes
to the Company’s named executive officers and its board of directors that were made on May 17, 2017.
Named
Executive Officers
Dr. Dolev Rafaeli and Dennis McGrath resigned
from their positions as officers of the Company and its subsidiaries, and Dr. Yoav Ben-Dror resigned from his position as director
of the Company and its subsidiaries. Dr. Rafaeli resigned as Chief Executive Officer, and Mr. McGrath resigned as President
and Chief Operating Officer, of the Company; following such resignation both employees assumed other positions within the company
and their employment terms were remained unchanged.
Suneet Singal was appointed as Chief Executive
Officer of the Company, and Stephen Johnson as the Company’s Chief Financial Officer. Mr. Singal had signed an employment
agreement with the Company on the date of the First Closing; Mr. Johnson signed an employment agreement with the Company on July
28, 2017. See also Note 14.
Dr.
Ben-Dror resigned as a director of the Company’s foreign subsidiaries, including Radiancy (Israel) Ltd. and Photo Therapeutics
Limited in the United Kingdom. He will not continue his affiliation with those companies.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
Board
of Directors
At
the closing for the First Contribution, certain members of the Company’s board of directors resigned, and the board was
expanded, so that the board consists of seven (7) persons, of whom (i) three (3) were designated by the Company’s departing
board, (ii) three (3) were designated by Contributor Parent; and (iii) one (1) (the “Nonaffiliated Director”) was
selected by the other six (6) directors
At
the Closing, Lewis C. Pell, Dr. Yoav Ben-Dror and Stephen P. Connelly each resigned from the Board.
Dr. Rafaeli and Mr. McGrath remained on
the Board as the Company’s designees, and Michael R. Stewart was appointed as the Company’s Independent Director Designee.
Suneet
Singal, Richard J. Leider and Dr. Bob Froehlich were appointed as the Contributor Parent’s designees (with Richard J. Leider
and Dr. Bob Froehlich serving as Independent Directors).
Together,
the six board members selected Darrel Menthe as the Nonaffiliated Director. Mr. Menthe also serves as an Independent Director.
The Agreement provided that the compensation committee, nominations and corporate governance committee and audit committee of
the Company shall each consist of the Company’s designee who is an Independent Director, one of Contributor Parent’s
designees who is an Independent Director and the Nonaffiliated Director.
General
Conditions
In
each case, the Company’s board of directors will determine whether or not the pre-contribution conditions have been satisfied
before accepting the property interests and issuing shares of the Company’s stock to Contributor Parent.
The
Agreement is subject to the usual pre- and post-closing representations, warranties and covenants, and restricts the Company’s
conduct to the conduct to that in the ordinary course of business between the signing and December 31, 2017.
Under the Agreement, amounts due to Dr.
Dolev Rafaeli and Dennis McGrath under their employment agreements, as well as amounts due to Dr. Yoav Ben-Dror for his services
as a board member of the Company’s foreign subsidiaries (see Note 6), will be converted to convertible secured notes (the
“Payout Notes”) after approval from the Company’s stockholders. The Payout Notes will be due one year after the
stockholder approval and carry a ten percent (10%) interest rate. The principal will convert to shares of the Company’s Common
Stock at the lower of (i) the Per Share Value or (ii) the VWAP with respect to on-exchange transactions in the Company’s
Common Stock executed on the NASDAQ during the thirty (30) trading days prior to the maturity date as reported by Bloomberg L.P.;
provided, however, that the value of the Company’s Common Stock shall in no event be less than $1.75 per share. The Payout
Notes will be secured by a security interest in all assets of the Company; provided, however, that such security interest will
be subordinated to any (i) claims or liens to the holders of any debt (including mortgage debt) being assumed by the Company as
a result of the transaction contemplated by the Agreement, and (ii) all post-closing indebtedness incurred by the Company or its
subsidiaries. The holders of the Payout Notes will have demand registration rights which will require the filing of a resale registration
statement on appropriate form that registers for re-sale the shares of Common Stock underlying the Payout Notes within thirty (30)
days of issuance with best efforts to cause the same to become effective within one-hundred twenty (120) days of issuance.
Special
Meeting of Stockholders
As promptly as possible following the Initial
Closing, the Company is required file a proxy statement and hold a special meeting of its stockholders to authorize and approve
the following matters:
● an increase in the number of authorized
shares of common stock, $.01 par value per share, of the Company from fifty million (50,000,000) shares to five hundred million
(500,000,000) shares and increase the number of authorized shares of preferred stock, $.01 par value per share, of the Company
from five million (5,000,000) shares to fifty million (50,000,000) shares;
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
•
the issuance to the Contributor or its designee or designees of the Company’s common and/or preferred shares in exchange
for the contributed assets, and the issuance of the Warrant and, upon exercise of the Warrant, the underlying shares of the Company’s
Common Stock in exchange for the contribution of the optional property interests, if any are made;
•
the amendment and restatement of the Articles of Incorporation of the Company;
•
the approval of the issuance of the Payout Notes and the issuance of the Company’s Common Stock upon conversion thereof;
and
•
the election of a new Board of Directors as set forth above in Resignation and Appointment of Officers and Directors in this report.
Board
members, officers and certain insiders of the Company are subject to a voting agreement under which they are obligated to vote
in favor of the proposals at the above mentioned stockholder meeting.
Registration
Rights
Promptly
following the execution of the Agreement, the Company is required prepare and file with the Securities and Exchange Commission
two registration statements on Form S-3 (or such other form available for this purpose) (the “Registration Statements”)
to register (a) the primary offering by the Company (i) to the holders of the Payout Notes the Common Stock underlying the Payout
Notes, and (ii) to the unaffiliated shareholders of Contributor Parent the Common Stock distributed to such unaffiliated shareholders
as a dividend by Contributor Parent and (b) the secondary offering (i) by the Contributor Parties of all the shares of the Company’s
Common Stock (including, without limitation, the shares of Common Stock underlying the Warrant) retained by the Contributor Parties,
(ii) by Maxim Group LLC of the shares received by it as compensation for services rendered to Contributor Parent, and (ii) by
certain affiliates of the Contributor Parent who receive shares from Contributor Parent.
Termination
Fee
Finally,
the transaction is subject to a termination provision under which, in the event of a material breach of the terms of the transaction,
the breaching company must pay all out-of-pocket expenses of the non-breaching company incurred up to the date of termination
of the transaction.
The
Company will conduct most of its building, construction financing and site management activities through various subsidiaries
affiliated with the Contributor Parties. The Company will maintain only a small staff of employees to handle its accounting, legal
and compliance activities, including a new Chief Executive Officer and a new Chief Financial Officer, who assumed their duties
following the close of the First Contribution.
Notification
of Delisting of Shares
The
Company received a written notification (the “Original Notice”) on November 18, 2016 from The NASDAQ Stock Market
LLC (“NASDAQ”) that the Company’s stockholder equity reported on its Form 10-Q for the period ended September
30, 2016 had fallen below the minimum requirement of $2.5 million, and that the Company was therefore not in compliance with the
requirements for continued listing on the NASDAQ Capital Market under NASDAQ Marketplace Rule 5550(b)(1). The Original Notice
provided the Company with a period of 45 calendar days, or until January 2, 2017, to submit a plan to regain compliance with the
listing rules; that plan was filed with NASDAQ on January 10, 2017 under a one-week extension due to the holiday period.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
NASDAQ
granted the Company a combined extension of time to comply with the Rule until March 10, 2017.
On
March 15, 2017, in a letter from Nasdaq to the Company (the “Nasdaq March 15th Letter”), Nasdaq granted the Company
a further extension until May 17, 2017, to comply with the Continued Listing Rule, subject to (i) the Company having signed a
definitive agreement with the Contributor Parent on or before March 31, 2017, which it did (i.e. the Contribution Agreement),
and (ii) the Company having closed the transaction contemplated by such definitive agreement on or before May 17, 2017. As a result
of the Company’s acquisition of the Contributed Assets in the Initial Closing on May 17, 2017, the Company, as of May 17,
2017, has complied with the requirements of the Nasdaq March 15th Letter and, as of that date, is in compliance with the Continued
Listing Rule, including the requirement to maintain shareholder equity of at least $2.5 million.
However,
on May 22, 2017, the Company received an additional letter from Nasdaq, notifying the Company that, while it was now in compliance
with the Continued Listing Rule, it was not in compliance with Listing Rule 5110(a) because it failed to submit an initial listing
application to receive approval to list the post-transaction entities, prior to the Initial Closing. Because of this failure,
Nasdaq had determined to delist the Company’s securities from listing and registration on The Nasdaq Stock Market.
Under
Nasdaq rules, the Company had the right to appeal Nasdaq’s delisting determination and request a hearing, which it did.
At the hearing on June 26, 2917, the Company presented to Nasdaq its request that the delisting determination be set aside and
its plan to satisfy all necessary criteria for listing on NASDAQ and to comply with the requirements of an initial listing application.
Nevertheless, on July 5, 2017, the Company received another notice (the “July 5th Notice”) from NASDAQ indicating
that, based upon the Company’s non-compliance with NASDAQ Listing Rule 5110a, which requires an issuer to file an initial
listing application and satisfy the initial listing criteria upon completion of a change of control transaction, the NASDAQ Hearings
Panel had determined to delist the Company’s common stock from NASDAQ and that trading of the Company’s common stock
would be suspended on NASDAQ effective with the open of business on July 7, 2017.
The Company has appealed the Panel’s
determination; however, the appeal does not stay the suspension of trading of the Company’s securities on NASDAQ. The Company
has already filed an initial listing application with NASDAQ, and is working to evidence full compliance with the applicable NASDAQ
Listing Rules as soon as possible. The Company cannot determine at this time whether NASDAQ will accepts its initial listing application.
Upon
the suspension of trading on NASDAQ, the Company’s common stock moved to trade over-the-counter via the OTC Markets’
“Pink” tier. On July 24, 2017, the Company received written notice that its common stock had been up-listed and approved
for trading on OTCQB, the higher tier of the OTC Markets, under its existing symbol “PHMD.” The Securities and Exchange
Commission (the “SEC”) considers the OTCQB marketplace to be an “established public market” for the purpose
of determining the public market price of a company’s stock when registering securities for resale with the SEC, and the
majority of broker-dealers trade stocks on the OTCQB marketplace. Listing on the OTCQB generally provides that a company maintain
higher reporting standards and requirements and imposes management certification and compliance requirements. The Company believes
that trading its stock on the OTCQB will likely enhance liquidity and shareholder value while its NASDAQ appeal is pending.
Liquidity
and Going Concern
As of June 30, 2017, the Company had an
accumulated deficit of $116,345. To date, and subsequent to the recent sale of the Company’s last significant business unit,
the Company has dedicated most of its financial resources to general and administrative expenses. At present, the Company is not
generating any revenues from operating activities.
Cash and cash equivalents as of June 30,
2017 were $2,329, including restricted cash of $250. 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 sales
of certain assets and business units. The Company will be required to obtain additional liquidity resources in order to support
its operations. On January 23, 2017, the Company sold its consumer products division to ICTV Brands, Inc., for a total selling
price of $9.5 million. The Company has collected $5 million of that purchase price; the remaining amount of up to $4.5 million
was payable through a contingent royalty on the sale of consumer products by ICTV Brands.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
On
July 12, 2017 the Company, along with its subsidiaries Radiancy, Inc. (“Radiancy”); PhotoTherapeutics Ltd. (“PHMD
UK”); and Radiancy (Israel) Limited (“Radiancy Israel” and together with the Company, Radiancy and PHMD UK the
“Sellers” and each individually a “Seller”) entered into a Termination and Release Agreement (the “Release”)
between the Sellers and ICTV Brands Inc. (“ICTV”) and its subsidiary ICTV Holdings, Inc. (“ICTV Holdings”).
The Sellers, ICTV and ICTV Holdings are referred to herein individually as a “Party” and collectively as the “Parties.”
Under
the terms of the Release, the Asset Purchase Agreement among the Parties, dated October 4, 2016, as amended by the First Amendment
to the Asset Purchase Agreement, dated January 23, 2017 (as so amended, the “Purchase Agreement”), is terminated and
of no further force and effect, except for certain surviving rights, obligations and covenants described in the Release. Pursuant
to the Release, each of the Sellers, on one hand, and ICTV and ICTV Holdings, on the other hand, fully release, forever discharge
and covenant not to sue any other Party, from and with respect to any and all past and present claims arising out of, based upon
or relating to the Purchase Agreement (other than the surviving covenants described in the Purchase Agreement) or the transactions
contemplated thereby.
Pursuant to the terms of the Release, ICTV
paid to the Company, within 3 business days of the date of the Release, $2,000 in cash and in immediately available funds (the
“Payment”). Subject to this Payment, neither ICTV nor ICTV Holdings shall have any further royalty or other payment
obligations under the Purchase Agreement. The Company received $2,000 on July 13, 2017.
As partial consideration for the releases
provided by ICTV Holdings to the Sellers pursuant to the Release and in accordance with the terms therein, on July 12, 2017, the
Sellers and ICTV Holdings entered into a Bill of Sale and Assignment (“Bill of Sale”), which provides that each Seller
sell, assign, transfer, convey and deliver to ICTV Holdings, and ICTV Holdings purchase and accept from each Seller, all of the
right, title and interest, legal or equitable, of each such Seller in and to a deposit in the amount of $210 held by a consumer
division vendor, Sigmatron International, Inc. (“Sigmatron”), pursuant to an arrangement between one or more of the
Sellers and Sigmatron.
On March 31, 2017, the Company entered
into an Interest Contribution Agreement with First Capital Real Estate Operating Partnership, L.P., and its parent, First Capital
Real Estate Trust Incorporated, under which certain real estate investment properties will be contributed to the Company in exchange
for the issuance of Company stock. The closing on the First Contribution under this pending transaction occurred on May 17, 2017.
However, there is no guarantee that additional contributions under the pending transaction with First Capital will close, or will
close on time; that we will be able to obtain an adequate level of financial resources required for the short and long-term support
of its operations or that we will be able to obtain additional financing as needed, or meet the conditions of such financing, or
that the costs of such financing may not be prohibitive. As described above the First Contribution was closed at May 2017. However,
the assets assumed in such contribution do not represent a business and are not producing cash flows and/or revenues. Also, the
Second Contribution and the Optional Contribution are not assured and might not be completed.
In light of the Company’s recent
operating losses and negative cash flows and the uncertainties related to the completion of such pending transactions, 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 condensed
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.
Acquisitions
and Dispositions
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 in immediate cash proceeds to the Company of $1.5 million and the Company recorded a loss of $1,731
from the transaction during the year ended December 31, 2016. 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 until September 15, 2017, one year following the closing of the transaction.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
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 (which was terminated – see below). On January 23, 2017, the Company entered into a First
Amendment (the “First APA Amendment”) to the Asset Purchase Agreement which revised the definition of Business
Assets and Assumed Liabilities, provided for the establishment of employee benefit plans by the Purchaser and substituted a new
Disclosure Letter for the one delivered concurrently with the signing of the original Asset Purchase Agreement. The amendment
also extended the term of the Letter of Credit issued in connection with the Asset Purchase Agreement to 100 days after the Closing
Date. The Company also entered into a First Amendment (the “First TSA Amendment”) to the Transition Services
Agreement between the Company and its subsidiaries and the Purchaser of the Consumer Products division, pursuant to which the Company
and its subsidiaries will provide the Purchaser with certain accounting, benefit, payroll, regulatory, IT support and other services
for periods ranging from approximately three months to up to one year following the Closing Date, during which time the Purchaser
will arrange to transition the services it receives to its own personnel. The First TSA Amendment revised references in the
Transition Services Agreement from “Effective Date” to “Closing Date”, and clarified specifications regarding
the lease for certain premises in Israel by and between Radiancy Israel and the landlord for those premises. This transaction
was completed on January 23, 2017. See background paragraph above.
On July 12, 2017 the Company entered into
a Termination and Release Agreement (the “Release”) under which the Asset Purchase Agreement described above was terminated
and is of no further force and effect, except for certain surviving rights, obligations and covenants described in the Release.
Pursuant to the Release, the purchaser of the Consumer Division paid to the Company $2,000 in cash and in immediately available
funds; the purchaser will have no further royalty or other payment obligations under the Purchase Agreement. The Company derecognized
the $4,500 Royalty Receivable at June 30, 2017 and recorded the $2,000 as a current asset, Receivable from Acquiror, on the balance
sheet at June 30, 2017. The Company recognized a total loss of $ 2 million in the three-month period ended June 30, 2017.
The
Company had classified the assets of the Consumer Division as assets held for sale as of December 31, 2016.
As
part of the sale of the consumer product line which transaction was determined to represent a complete liquidation of a foreign
subsidiary the cumulative translation adjustment related to that foreign entity was reclassified from accumulated other comprehensive
income (loss) and reported as part of gain or loss from the sale.
On March 31, 2017, the Company entered
into an Interest Contribution Agreement (the “Agreement”) with First Capital Real Estate Operating Partnership, L.P.,
a Delaware limited partnership (“Contributor”), and First Capital Real Estate Trust Incorporated, a Maryland corporation,
the “Contributor Parent” and, together with Contributor, the “Contributor Parties”), under which the Contributor
will contribute certain real estate assets to the Company’s subsidiary in a series of three installments which will conclude
no later than December 31, 2017. In exchange, the Contributor will receive shares of the Company’s Common Stock and newly
designated Series A Convertible Preferred Stock. Further details on this transaction and the Company’s transition to a real
estate investment company are contained in these notes and in the Current Reports on Form 8-K filed on April 3, 2017; May 19, 2017;
May 28, 2017; July 10, 2017; July 31, 2017; and August 3, 2017.
TERMINATION
OF PROPOSED TRANSACTION
On
February 19, 2016, PhotoMedex, Inc., Radiancy, Inc., a wholly-owned subsidiary of the Company (“Radiancy”), DS Healthcare
Group, Inc. (“DSKX”) and PHMD Consumer Acquisition Corp., a wholly-owned subsidiary of DSKX (“Merger Sub A”),
entered into an Agreement and Plan of Merger and Reorganization (the “Radiancy Merger Agreement”) pursuant to which
Radiancy will merge with Merger Sub A, with Radiancy as the surviving corporation in such merger (the “Radiancy Merger”).
Concurrently, PHMD, PTECH, DSKX, and PHMD Professional Acquisition Corp., a wholly-owned subsidiary of DSKX (“Merger Sub
B”), entered into an Agreement and Plan of Merger and Reorganization (the “P-Tech Merger Agreement” and together
with the Radiancy Merger Agreement, the “Merger Agreements”) pursuant to which PTECH will merge with Merger Sub B,
with PTECH as the surviving corporation in such merger (the “P-Tech Merger” and together with the Radiancy Merger,
the “Mergers”). As a result of the Mergers, DSKX would become the holding company for Radiancy and PTECH. The Mergers
are expected to qualify as tax-free transfers of property to DSKX for federal income tax purposes.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
On
March 23, 2016, DSKX filed a Current Report on Form 8-K (the “DSKX March 23 Form 8-K”) with the SEC reporting its
audit committee, after discussion with its independent registered public accounting firm, concluded that the unaudited condensed
consolidated financial statements of DSKX for the two fiscal quarters ended June 30, 2015 and September 30, 2015 should no longer
be relied upon because of certain errors in such financial statements. To the knowledge of DSKX’s audit committee, the facts
underlying its conclusion include that revenues recognized related to certain customers of DSKX did not meet revenue recognition
criteria in the two fiscal quarters ended June 30, 2015 and September 30, 2015. Additionally, certain equity transactions in the
two fiscal quarters ended June 30, 2015 and September 30, 2015 were not properly recorded in accordance with United States Generally
Accepted Accounting Principles and also were not properly disclosed.
DSKX
reported in the DSKX March 23 Form 8-K that, on March 17, 2016, all members of DSKX’s board of directors other than Mr.
Khesin, terminated the employment of Mr. Khesin, as its president and as an employee of DSKX, and also terminated Mr. Khesin’s
employment agreement, dated December 16, 2013. DSKX reported in the DSKX March 23 Form 8-K that all members of DSKX’s board
of directors other than Mr. Khesin terminated both Mr. Khesin’s employment and employment agreement for cause. In addition,
DSKX reported in the DSKX March 23 Form 8-K that all members of DSKX’s board of directors other than Mr. Khesin unanimously
removed Mr. Khesin as Chairman and a member of DSKX’s board of directors, also for cause. DSKX reported in the DSKX March
23 Form 8-K that DSKX’s board terminated Mr. Khesin for cause from both his employment and board positions because DSKX’s
board believes, based on the results of the investigation as of the date of the DSKX March 23 Form 8-K, that there is sufficient
evidence to conclude that Mr. Khesin violated his fiduciary duty to DSKX and its subsidiaries.
The
Company was not advised of this investigation during its negotiations with DSKX or after signing the Merger Agreements until the
evening of March 21, 2016. On April 12, 2016, the Company sent a Reservation of Rights letter to DSKX. The Notice states that,
based upon the disclosures set forth in DSKX’s Current Report on Form 8-K filed on March 23, 2016 and subsequent press releases
and filings by DSKX with the United States Securities and Exchange Commission (collectively, the “DSKX Public Disclosure”),
DSKX is in material breach of various representations, warranties, covenants and agreements set forth in the Agreements; had failed
to provide to the Company the information contained in the DSKX Public Disclosures during the discussions relating to the negotiation
and execution of the Agreements; and continues to be in material breach under the Agreements. As a result, the conditions precedent
to the closing of these transactions as set forth in the Agreements may not be able to occur.
On
May 27, 2016, PHMD, Radiancy, and P-Tech, terminated both Agreements and Plans of Merger and Reorganization among PhotoMedex and
its affiliates and DS Healthcare Group. 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.
On
June 23, 2017, the Company and its subsidiaries Radiancy and P-Tech entered into a Confidential Settlement and Mutual Release
Agreement (the “Settlement Agreement”) with DSKX and its subsidiaries.
The terms of the Settlement Agreement are
confidential; the parties dismissed the suit between them with prejudice on June 23, 2017.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
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 were 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 (see also above).
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, 2016
(“fiscal 2016”). 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 three and six months ended June 30, 2017 are not necessarily indicative of the results to be expected for the
year ending December 31, 2017 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.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
Commencing
January 1, 2015 (the effective date of the ASU 2014-08), only disposal of a component of an entity or a group of components of
an entity that represents a strategic shift that has or will have a major effect on an entity’s operations and financial
results shall be reported as discontinued operations. The revised guidance did not change the criteria required to qualify for
held for sale presentation. The revised guidance includes several new disclosures and among others, required to reclassify the
assets and liabilities of discontinued operations to separate line items in the balance sheets for all periods presented (including
comparatives).
In
connection with the sale of the Consumer Division to ICTV Brands, Inc., announced on October 4, 2016 and subsequently completed
on January 23, 2017, the assets related to this transaction were classified as of December 31, 2016 as Assets Held for Sale, as
follows:
Inventory
|
|
$
|
7,336
|
|
Property and equipment
|
|
|
911
|
|
Other assets
|
|
|
115
|
|
Assets held for sale as of December 31, 2016
|
|
$
|
8,362
|
|
Revenue
Recognition
The
following is a description of the revenue recognition policy related to the previous skin care business: 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 shipped 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 was 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 provided 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 8
). Due to the sale
of the remainder of the consumer products division in January 2017, there is no remaining allowance for product returns as of
June 30, 2017.
Deferred
revenue included 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 were 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.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
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
.
Upon
sale of a foreign subsidiary or upon sale of group of asset within a consolidated foreign subsidiary, in a transaction that was
determined to represent a complete liquidation of that foreign subsidiary, the cumulative translation adjustment related to that
foreign entity is reclassified from accumulated other comprehensive income (loss) and reported as part of gain or loss from the
sale.
Fair
Value Measurements
The
Company measures and discloses fair value in accordance with Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification 820,
Fair Value Measurements and Disclosures
(“ASC Topic 820”). ASC Topic 820 defines
fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures
about fair value measurements. Fair value is an exit price, representing the amount that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value
is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an
asset or liability. As a basis for considering such assumptions there exists a three-tier fair-value hierarchy, which prioritizes
the inputs used in measuring fair value as follows:
|
●
|
Level
1 – unadjusted quoted prices are available in active markets for identical assets or liabilities that the Company has
the ability to access as of the measurement date.
|
|
●
|
Level
2 – pricing inputs are other than quoted prices in active markets that are directly observable for the asset or liability
or indirectly observable through corroboration with observable market data.
|
|
●
|
Level
3 – pricing inputs are unobservable for the non-financial asset or liability and only used when there is little, if
any, market activity for the non-financial asset or liability at the measurement date. The inputs into the determination of
fair value require significant management judgment or estimation. Fair value is determined using comparable market transactions
and other valuation methodologies, adjusted as appropriate for liquidity, credit, market and/or other risk factors
|
This
hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when
determining fair value.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
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.
Financial liabilities and financial assets
related to the mandatory Second Contribution and the Optional Contribution described in Note 2 Acquisition of Real Estate Assets
above were accounted for at fair value on a recurring basis. The estimated fair value was based on appraised value, such measurement
resides within level 3 of the fair value hierarchy.
In
addition to items that are measured at fair value on a recurring basis, there are also assets and liabilities that are measured
at fair value on a nonrecurring basis. Assets and liabilities that are measured at fair value on a nonrecurring basis include
certain long-lived assets, including goodwill. As such, we have determined that each of these fair value measurements reside within
Level 3 of the fair value hierarchy.
Derivatives
The
Company applies the provisions of Accounting Standards Codification (“ASC”) Topic 815,
Derivatives and Hedging
.
In accordance with ASC Topic 815, all the derivative financial instruments are recognized as either financial assets or financial
liabilities on the balance sheet at fair value. The accounting for changes in the fair value of a derivative financial instrument
depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging
relationship. For derivative financial instruments that are designated and qualify as hedging instruments, a company must designate
the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge or a hedge of a net investment
in a foreign operation.
From
time to time the Company carries out transactions involving foreign exchange derivative financial instruments (mainly forward
exchange contracts) which are expected to be paid with respect to forecasted expenses of the Israeli subsidiary (Radiancy) denominated
in Israeli local currency (NIS) which is different than its functional currency.
Such
derivatives were not designated as hedging instruments, and accordingly they were recognized in the balance sheet at their fair
value, with changes in the fair value carried to the Statement of Comprehensive Income (Loss) and included in interest and other
financing expenses, net.
At
June 30, 2017, the balance of such derivative instruments amounted to approximately $0 in assets and approximately $0 were recognized
as financing income in the Statement of Comprehensive (Loss) Income during the three and six month periods ended that date.
There
are no foreign currency derivatives as of June 30, 2017.
Accrued
Warranty Costs
The
Company offered a standard warranty on product sales generally for a one to two-year period. The Company provides for the estimated
cost of the future warranty claims on the date the product is sold. Total accrued warranty is included in
Other Accrued
Liabilities
on the balance sheet. The activity in the warranty accrual during the six months ended June 30, 2017 and 2016
is summarized as follows:
|
|
June
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Accrual at beginning
of year
|
|
$
|
241
|
|
|
$
|
330
|
|
Additions charged to warranty expense
|
|
|
—
|
|
|
|
61
|
|
Expiring warranties
|
|
|
—
|
|
|
|
(135
|
)
|
Claims satisfied
|
|
|
—
|
|
|
|
(93
|
)
|
Sale of consumer
segment
|
|
|
(241
|
)
|
|
|
—
|
|
Total
|
|
$
|
—
|
|
|
$
|
163
|
|
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
For
extended warranty on the consumer products, see
Revenue Recognition
above.
Net
Loss Per Share
The loss and the weighted average number
of shares used in computing basic and diluted loss per share for the three and six months ended June 30, 2017 and 2016, are as
follows:
|
|
For the three months
ended June 30,
|
|
|
For the six months
ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) for the year
|
|
|
1,139
|
|
|
|
(2,238
|
)
|
|
|
(710
|
)
|
|
|
(7,110
|
)
|
Adjustment related to revaluation of asset contribution related financial instruments, net securities
|
|
|
(2,622
|
)
|
|
|
—
|
|
|
|
(2,622
|
)
|
|
|
—
|
|
Income (loss) for the period attributable to common stockholders
|
|
|
(1,483
|
)
|
|
|
(2,238
|
)
|
|
|
(3,332
|
)
|
|
|
(7,110
|
)
|
|
|
For
the Three Months Ended June 30,
|
|
|
For
the Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Weighted-average number of common
and common equivalent shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
number of common shares outstanding
|
|
|
6,157,529
|
|
|
|
4,153,714
|
|
|
|
5,278,543
|
|
|
|
4,167,600
|
|
Incremental shares related to assumed exercise of asset contribution financial instruments
|
|
|
31,399,337
|
|
|
|
—
|
|
|
|
15,786,407
|
|
|
|
—
|
|
Diluted
number of common and common stock equivalent shares outstanding
|
|
|
37,556,866
|
|
|
|
4,153,714
|
|
|
|
21,064,950
|
|
|
|
4,167,600
|
|
The
Company computes earnings (net loss) per share in accordance with ASC Topic. 260, Earnings per share. Basic earnings (loss)
per share are computed by dividing net income or loss by the weighted-average number of common shares outstanding during the
period, net of the weighted average number of treasury shares (if any). Securities that may participate in dividends with the
ordinary shares (such as the convertible preferred shares) are considered in the computation of basic loss per share under the two
class method. The participating securities are considered also in periods of net loss, since such preferred shares have a
contractual obligation to share in the losses of the Company, in accordance with the guidance of ASC Topic 260-10.
Diluted loss per common share are computed
similar to basic earnings per share, except that the denominator is increased to include the number of additional potential common
shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were
dilutive. Also, when applicable, the nominator is adjusted to reflect the effect of financial instruments that might be settled
for shares. Potential common shares are excluded from the computation if their effect is anti-dilutive. The Company’s potential
common shares consist of preferred shares, financial instruments related to future contribution of assets for issuance of shares,
and of stock options, warrants and restricted stock awards issued under the Company’s stock incentive plans.
Diluted
loss per share for the three and six months ended June 30, 2017, exclude the impact of common stock options and warrants, totaling
156,565 shares, as the effect of their inclusion would be anti-dilutive, due to the loss from continuing operations for the periods.
Diluted earnings per share for the three and six months ended June 30, 2016, excluded the impact of common stock options and warrants,
totaling 190,598 shares, as the effect of their inclusion would be anti-dilutive, due to the loss from continuing operations for
the periods.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
Recently
Issued Accounting Standards
ASU
2014-09
“Revenue from Contracts with Customers (Topic 606)” and Related Updates
In
May of 2014, the FASB issued ASC Update 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASC Update 2014-09
provides guidance for the recognition, measurement and disclosure of revenue related to the transfer of promised goods or services
to customers. This update was effective for fiscal years beginning after December 15, 2016, for which early adoption was prohibited.
However,
in August of 2015, the FASB issued ASC Update 2014-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the
Effective Date,” deferring the effective date of ASC Update 2014-09 to fiscal years beginning after December 15, 2017 (the
first quarter of fiscal year 2018 for the Company), and permitting early adoption of this update, but only for annual reporting
periods beginning after December 15, 2016, and interim reporting periods within that reporting period.
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.
The
Company intends to adopt ASU 2014-09 as of January 1, 2018. The Company is in the process of evaluating the impact of ASU 2014-09
on its potential revenue streams, if any, and on its financial reporting and disclosures. Management is expecting to complete
the evaluation of the impact of the accounting and disclosure changes on the business processes, controls and systems throughout
2017. Since the company currently does not have any revenue streams, Management believes that the adoption of ASU 2014-09 will
not have significant impact on its financial statements.
ASU
2016 - 02 “
Leases (Topic 842): Section A – Leases: Amendments to the FASB Accounting Standards Codification; Section
B – Conforming Amendments Related to Leases: Amendments to the FASB Accounting Standards Codification; Section C –
Background Information and Basis for Conclusions
”
In
February of 2016, the FASB issued ASC Update 2016 - 02, “Leases (Topic 842): Section A – Leases: Amendments to the
FASB Accounting Standards Codification; Section B – Conforming Amendments Related to Leases: Amendments to the FASB Accounting
Standards Codification; Section C – Background Information and Basis for Conclusions.” ASC Update 2016-02 amends guidance
related to the recognition, measurement, presentation and disclosure of leases for lessors and lessees. This update is effective
for fiscal years beginning after December 15, 2018, including the interim periods within those years, with early adoption permitted.
The Company is in the process of evaluating the effect that ASU 2016-02 will have on the results of operations and financial statements.
ASU
2016-13
“Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”
In
June 2016, the FASB issued ASC Update 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments.” ASC Update 2016-13 revised the criteria for the measurement, recognition, and reporting
of credit losses on financial instruments to be recognized when expected. This update is effective for fiscal years beginning
after December 15, 2019, including the interim periods within those years, with early adoption permitted for fiscal years beginning
after December 15, 2018, including interim periods within those years. The Company is in the process of evaluating the effect
that ASU 2016-13 will have on the results of operations and financial statements.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
ASU
2016-09 “
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
”
In
March 2016, the FASB has issued ASC 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).
The
Company is in the process of assessing the impact, if any, of ASU 09-2016 on its financial statements.
ASU
2017-01
“Business Combinations (Topic 805): Clarifying the Definition of a Business, clarifying the definition of a business”
In
January 2017, the FASB has issued ASC Update (ASU) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of
a Business, clarifying the definition of a business. The amendments affect all companies and other reporting organizations that
must determine whether they have acquired or sold a business.
The
amendments in ASU 2017-01 are intended to help companies and other organizations evaluate whether transactions should be accounted
for as acquisitions (or disposals) of assets or businesses. The amendments provide a more robust framework to use in determining
when a set of assets and activities is a business. They also provide more consistency in applying the guidance, reduce the costs
of application, and make the definition of a business more operable.
The
amendments in ASU 2017-01 provide a screen to determine when a set is not a business. The screen requires that when substantially
all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group
of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further
evaluated.
If
the screen is not met, the amendments in this Update (1) require that to be considered a business, a set must include, at a minimum,
an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation
of whether a market participant could replace missing elements. The amendments provide a framework to assist entities in evaluating
whether both an input and a substantive process are present. The framework includes two sets of criteria to consider that depend
on whether a set has outputs. Although outputs are not required for a set to be a business, outputs generally are a key element
of a business; therefore, the Board has developed more stringent criteria for sets without outputs. Also, ASU 2017- 01 narrows
the definition of the term output so that the term is consistent with how outputs are described in Topic 606
For
public companies, the amendments are effective for annual periods beginning after December 15, 2017, including interim periods
within those periods. Early application of the amendments in this Update is allowed for transactions for which the acquisition
date occurs before the issuance date or effective date of the amendments, only when the transaction has not been reported in financial
statements that have been issued or made available for issuance.
The
amendments of ASU 2017-01should be applied prospectively on or after the effective date. No disclosures are required at transition.
The
company decided to early apply ASU 2017-01, and thus the assets contributed to the company in connection with the asset contribution
described in Note (which its first installment was closed on May 17, 2017) were evaluated in accordance with ASU 2017-01 updated
guidance.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
Note
2
Acquisition
of Real Estate Assets:
The
Company elected to early adopt ASU 2017-01 Business Combinations (Topic 805)
Clarifying the Definition of a Business.
Accordingly,
the determination whether the asset contribution represent a business combination was evaluated by applying ASU 2017-01 guidance.
The company has determined that the group of assets assumed in the First Contribution (and also, none of them on a stand-alone
basis) include, an input and a substantive process that together significantly contribute to the ability to create output and
thus it was determined that the First Contribution represent an acquisition of asset rather than a business combination. Accordingly,
the total sum of the fair value of consideration given (i.e. the fair value of the equity interests issued) together with the
transaction costs and the fair value of financial assets and financial liabilities resulting from the Second Contribution and
the Optional Contribution, was allocated to the individual assets acquired and liabilities assumed in the first contribution based
on their relative fair values at the date of acquisition. Such allocation did not give rise to goodwill.
The consideration of the asset acquisition consists of:
Fair value of PHMD common stock
|
|
$
|
1,275
|
|
Fair value of PHMD series A preferred stock
|
|
|
4,483
|
|
Fair value of financial liability related to Optional contribution (A)
|
|
|
857
|
|
Fair value of Warrant (A)
|
|
|
1,925
|
|
Fair value of asset related to future mandatory asset contribution (B)
|
|
|
(4,175
|
)
|
Fair value of note payable on acquired asset
|
|
|
470
|
|
Transaction costs
|
|
|
283
|
|
Total consideration
|
|
$
|
5,118
|
|
A.
|
See
Note 1 “Second Contribution”
|
B.
|
See
Note 1 “Optional Contribution”
|
Investment property equivalents
|
|
|
2,450
|
|
Investment in other company
|
|
|
2,668
|
|
Total assets acquired at fair value
|
|
$
|
5,118
|
|
The
fair value of the assets acquired and liabilities assumed were based on management estimates and values derived from an outside
independent appraisal. The following table summarizes the allocation of the consideration to the assets acquired in the transaction.
The fair value of options
granted was estimated at the dates of grant using the Black-Scholes option pricing model. The following are the data and assumptions
used:
Options Value:
|
|
May 17, 2017
|
|
|
June 30, 2017
|
|
Dividend yield (%)
|
|
|
0
|
|
|
|
0
|
|
Expected volatility (%)
|
|
|
39.45
|
|
|
|
39.45
|
|
Risk free interest rate (%)
|
|
|
1.25
|
|
|
|
1.25
|
|
Strike price (US dollars)
|
|
|
1.93
|
|
|
|
1.93
|
|
Stock price (US dollars)
|
|
|
1.45
|
|
|
|
1.18
|
|
Probability (%)
|
|
|
50
|
|
|
|
50
|
|
Expected term of options (years)
|
|
|
0.62
|
|
|
|
0.5
|
|
Warrants
Value:
|
|
May 17, 2017
|
|
|
June 30, 2017
|
|
Dividend yield (%)
|
|
|
0
|
|
|
|
0
|
|
Expected volatility (%)
|
|
|
39.45
|
|
|
|
39.45
|
|
Risk free interest rate (%)
|
|
|
1.25
|
|
|
|
1.25
|
|
Strike price (US dollars)
|
|
|
3
|
|
|
|
3
|
|
Stock price (US dollars)
|
|
|
1.45
|
|
|
|
1.18
|
|
Probability (%)
|
|
|
50
|
|
|
|
50
|
|
Expected
term of options (years)
|
|
|
5
|
|
|
|
4.88
|
|
Asset
related to future mandatory asset contribution:
|
|
May 17, 2017
|
|
|
June 30, 2017
|
|
Dividend yield (%)
|
|
|
0
|
|
|
|
0
|
|
Stock price (US dollars)
|
|
|
1.45
|
|
|
|
1.18
|
|
Probability (%)
|
|
|
70
|
|
|
|
70
|
|
During the period from the closing of the first contribution on June 30, 2017 the company recognized $ 2.6 million as revaluation
of the fair value of the financial asset and liabilities described above.
Note
3
Inventories:
|
|
June
30,
2017
|
|
|
December
31,
2016
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Raw materials and work
in progress
|
|
$
|
—
|
|
|
$
|
1,968
|
|
Finished goods
|
|
|
—
|
|
|
|
5,368
|
|
Total Inventories
|
|
|
—
|
|
|
$
|
7,336
|
|
Less assets
held for sale
|
|
|
—
|
|
|
|
(7,336
|
)
|
Total inventories
|
|
$
|
—
|
|
|
$
|
—
|
|
Work-in-process
was immaterial, given the Company’s typically short manufacturing cycle, and therefore was disclosed in conjunction with raw
materials. See Acquisitions and Dispositions regarding inventory balance classified as part of the assets held for sale as of
December 31, 2016. During January 2017, all consumer inventory was sold to ICTV. See Acquisitions and Dispositions in Note 1.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
Note
4
Property
and Equipment, net:
|
|
June
30,
2017
|
|
|
December
31,
2016
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Equipment, computer hardware
and software
|
|
$
|
314
|
|
|
|
5,005
|
|
Furniture and fixtures
|
|
|
350
|
|
|
|
433
|
|
Leasehold improvements
|
|
|
112
|
|
|
|
438
|
|
|
|
|
776
|
|
|
|
5,876
|
|
Accumulated depreciation
and amortization
|
|
|
(776
|
)
|
|
|
(4,888
|
)
|
Total property and equipment
|
|
|
—
|
|
|
$
|
988
|
|
Less assets held
for sale
|
|
|
—
|
|
|
|
(911
|
)
|
Property and equipment,
net
|
|
$
|
—
|
|
|
$
|
77
|
|
Depreciation
and related amortization expense was $177 and $149 for the six months ended June 30, 2017 and 2016, respectively.
Note
5
Patents
and Licensed Technologies, net:
|
|
June
30,
2017
|
|
|
December
31,
2016
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Gross amount beginning of
period
|
|
$
|
—
|
|
|
$
|
3,376
|
|
Additions
|
|
|
—
|
|
|
|
(177
|
)
|
Translation
differences
|
|
|
—
|
|
|
|
36
|
|
Gross amount end of period
|
|
|
—
|
|
|
|
3,235
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
—
|
|
|
|
(1,974
|
)
|
Impairment
|
|
|
—
|
|
|
|
(1,261
|
)
|
|
|
|
|
|
|
|
|
|
Patents and licensed
technologies, net
|
|
$
|
—
|
|
|
$
|
—
|
|
Related
amortization expense was $0 and $116 for the six months ended June 30, 2017 and 2016, respectively.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
Note
6
Goodwill
and Other Intangible Assets:
As
part of the purchase price allocation for the 2011 reverse acquisition, the Company recorded goodwill in the amount of $24,005
and definite-lived intangibles in the amount of $12,000. Goodwill reflected the value or premium of the acquisition price in excess
of the fair values assigned to specific tangible and intangible assets. Goodwill had an indefinite useful life and therefore was
not amortized as an expense, but was reviewed annually for impairment of its fair value to the Company. Activity in goodwill during
the year ended December 31, 2016 follows:
Balance at January 1,
2016
|
|
$
|
3,581
|
|
Disposal on sale of assets
|
|
|
(1,039
|
)
|
Impairment of goodwill
|
|
|
(2,257
|
)
|
Translation
differences
|
|
|
(285
|
)
|
Balance at December
31, 2016
|
|
$
|
0
|
|
See
Note 1 Accounting for the Impairment of Goodwill, in the Company’s Form 10-K for the year ending December 31, 2016, for
more information.
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 then pending transaction
with ICTV Brands, Inc. See Note 18, Subsequent Event in the Company’s Form 10-K for the year ended December 31, 2016, for
more information. The Company recorded an impairment of the entire remaining balance of 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 derecognized an amount of $1,039 of goodwill related to the Physician Recurring segment in connection with
the asset sale of the Neova product line.
Also
in connection with the then pending transaction with ICTV Brands, as of December 31, 2016, and based on the expected price of
such transaction which management believed represents market approach fair value estimate, the Company recorded an impairment
of the Consumer segment intangibles for its Licensed Technology in the amount of $1,261.
Note
7
Accrued
Compensation and related expenses:
|
|
June
30,
2017
|
|
|
December
31,
2016
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Accrued payroll and related
taxes
|
|
$
|
49
|
|
|
$
|
262
|
|
Accrued vacation
|
|
|
49
|
|
|
|
66
|
|
Accrued commissions
and bonuses
|
|
|
2,515
|
|
|
|
3,701
|
|
Total accrued
compensation and related expense
|
|
$
|
2,613
|
|
|
$
|
4,029
|
|
Note
8
Other
Accrued Liabilities:
|
|
June
30,
2017
|
|
|
December
31,
2016
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Accrued warranty, current,
see Note 1
|
|
$
|
—
|
|
|
$
|
93
|
|
Accrued taxes, net
|
|
|
1,671
|
|
|
|
1,606
|
|
Accrued sales returns (1)
|
|
|
—
|
|
|
|
1,975
|
|
Other accrued
liabilities
|
|
|
2,007
|
|
|
|
4,417
|
|
Total other
accrued liabilities
|
|
$
|
3,678
|
|
|
$
|
8,091
|
|
|
(1)
|
The
activity in the accrued sales returns liability account was as follows:
|
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
|
|
Six
Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Balance
at beginning of year
|
|
$
|
1,975
|
|
|
$
|
4,179
|
|
Additions
that reduce net sales
|
|
|
—
|
|
|
|
4,976
|
|
Deductions
from reserves
|
|
|
(1,975
|
)
|
|
|
(7,182
|
)
|
Balance
at end of period
|
|
$
|
—
|
|
|
$
|
1,973
|
|
Note
9
Income
Taxes:
In
connection with the former skincare activities, the Company’s tax expense included 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 six month period ended June 30, 2017 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 six months ended June 30, 2017, 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 2016 and is also generally subject to
various State income tax examinations for calendar years 2012 through 2016. 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
2016.
As
a result of its anticipated transition into a real estate investment company, such transition to commence after the filing of
this report with the closing of the Second Contribution scheduled for September 30, 2017 and with the closing of the First Contribution
May 17, 2017, the Company will re-examine its tax status and to re-evaluate the quantity and type of its tax reporting.
Note
10
Commitments
and contingencies:
On
June 22, 2017, the United States District Court for the Middle District of Florida, Orlando Division, dismissed the Company and
Dr. Dolev Rafaeli, its former Chief Executive Officer, from the case of Linda Andrew v. Radiancy, Inc.; Photomedex, Inc.; and
Dolev Rafaeli. Ms. Andrew had filed a product liability suit alleging damages from her use of a no!no! hair device. The claims
against the Company and Dr. Rafaeli were dismissed without prejudice. The Company’s subsidiary, Radiancy, Inc., remains
a defendant in the suit.
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
As
previously reported on Form 10-Q, Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for
the period ending March 31, 2017, and on the Forms 10-K, Current Report, filed on April 14, 2016 and May 31, 2016, the Company
and its subsidiaries had entered into Agreements and Plans of Merger and Reorganization with DSKX and its subsidiaries, under
which DSKX’s subsidiaries would merge with the Company’s subsidiaries, in exchange for which DSKX would issue stock
in its company to PhotoMedex. On May 27, 2016, the Company and its subsidiaries terminated the Agreements and Plans of Merger
and Reorganization with DSKX and filed suit against DSKX in the United States District Court for the Southern District of New
York alleging that DSKX breached certain obligations under those Merger Agreements and asserted claims for declaratory judgment,
breach of contract, 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
June 23, 2017, the Company and its subsidiaries, Radiancy, Inc. (“Radiancy”) and PhotoMedex Technology, Inc. (“P-Tech”),
entered into a Confidential Settlement and Mutual Release Agreement (the “Settlement Agreement”) with DS Healthcare
Group, Inc. (“DSKX”) and its subsidiaries, PHMD Consumer Acquisition Corp. and PHMD Professional Acquisition Corp.
The terms of the Settlement Agreement
are confidential; the parties dismissed the suit between them with prejudice on June 23, 2017.
See
Note 11, Commitments and Contingencies, in the Company’s Form 10-K for the year ended December 31, 2016 for further information
on pending legal actions involving the Company and its subsidiaries. There have been no significant changes to the status of the
items reported in the above Form 10-K.
Note
11
Employee
Stock Benefit Plans:
The
Company has a Non-Employee Director Stock Option Plan. This plan has authorized 74,000 shares; of which 2,135 shares had been
issued or were reserved for issuance as awards of shares of common stock, and 12,079 shares were reserved for outstanding stock
options. The number of shares available for future issuance pursuant to this plan is 71,374 as of June 30, 2017.
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 467,328 shares had been issued or were reserved for issuance as awards of shares of common stock, and
143,815 shares were reserved for outstanding options as of June 30, 2017. The number of shares available for future issuance pursuant
to this plan is 588,857 as of June 30, 2017.
Stock
option activity under all of the Company’s share-based compensation plans for the six months ended June 30, 2017 was as
follows:
|
|
|
Number
of Options
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding,
January 1, 2017
|
|
|
|
134,150
|
|
|
$
|
85.22
|
|
Granted
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
Cancelled
|
|
|
|
(42,085
|
)
|
|
|
71.50
|
|
Outstanding, June 30,
2017
|
|
|
|
92,065
|
|
|
$
|
91.43
|
|
Options exercisable
at June 30, 2017
|
|
|
|
88,185
|
|
|
$
|
91.22
|
|
PHOTOMEDEX,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share amounts)
At
June 30, 2017, there was $111 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 0.65 years. Following the completion of the transaction described
in Note 1, such compensation will be accelerated.
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 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. As of June 30, 2017,
251,250 shares had been cancelled due to forfeiture by employees.
Total
stock based compensation expense was $935, and $860, for the six months ended June 30, 2017 and 2016 respectively including amounts
relating to consultants.
Note
12
Business
Segments and Geographic Data:
The
Company is in the process of transitioning from a skin health company providing medical and cosmetic solutions for dermatological
conditions, to a real estate investment company holding investments in a variety of current and future projects, including residential
developments, commercial properties such as gas station sites, and hotels and resort communities, as described further in this
report.
Under
the skin care health operations the Company was organized its original 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 derived its revenues from the design, development, manufacturing and selling of long-term hair reduction
and acne consumer products; that segment was sold on January 23, 2017. The Physician Recurring segment derived its revenues mainly
from the sales of skincare products; that segment was sold on September 15, 2016. The Professional segment generates revenues
from the sale of equipment, such as medical and esthetic light and heat based products; that segment remains with the Company
as of the current date.
The
anticipated real estate investment properties to be transferred to the Company will be classified into one or more additional
business segments.
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.
PHOTOMEDEX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share
and per share amounts)
The
following tables reflect results of operations from our business segments for the periods indicated below. The consumer segment
reflects operation from January 1, 2017 through January 23, 2017 the date of the sale of the consumer division to ICTV. See Note
1 Acquisitions and Dispositions for more information.
|
|
Three
Months Ended June 30, 2017 (unaudited)
|
|
|
|
|
|
|
CONSUMER
|
|
|
PHYSICIAN
RECURRING
|
|
|
PROFESSIONAL
|
|
|
TOTAL
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Costs
of revenues
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Gross
profit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Gross
profit %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated
operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering
and product development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Selling
and marketing expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loss
on disposal of assets
|
|
|
2,166
|
|
|
|
|
|
|
|
|
|
|
|
2,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated
operating expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(802
|
)
|
|
|
|
2,166
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,364
|
|
Loss
from continuing operations
|
|
|
(2,166
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,622
|
|
Interest
and other financing expense, net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations before income taxes
|
|
($
|
2,166
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,212
|
|
PHOTOMEDEX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except share
and per share amounts)
|
|
Three
Months Ended June 30, 2016 (unaudited)
|
|
|
|
|
|
|
CONSUMER
|
|
|
PHYSICIAN RECURRING
|
|
|
PROFESSIONAL
|
|
|
TOTAL
|
|
Revenues
|
|
$
|
9,660
|
|
|
$
|
1,254
|
|
|
$
|
329
|
|
|
$
|
11,243
|
|
Costs of revenues
|
|
|
2,284
|
|
|
|
926
|
|
|
|
144
|
|
|
|
3,354
|
|
Gross profit
|
|
|
7,376
|
|
|
|
328
|
|
|
|
185
|
|
|
|
7,889
|
|
Gross profit %
|
|
|
76.7
|
%
|
|
|
26.2
|
%
|
|
|
56.2
|
%
|
|
|
70.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering and product development
|
|
|
264
|
|
|
|
79
|
|
|
|
—
|
|
|
|
343
|
|
Selling and marketing expenses
|
|
|
5,795
|
|
|
|
625
|
|
|
|
5
|
|
|
|
6,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated operating expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,932
|
|
|
|
|
6,059
|
|
|
|
704
|
|
|
|
5
|
|
|
|
9,700
|
|
Income (loss) from continuing operations
|
|
|
1,317
|
|
|
|
(376
|
)
|
|
|
180
|
|
|
|
(1,811
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other financing expense, net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(292
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
1,317
|
|
|
($
|
376
|
)
|
|
$
|
180
|
|
|
($
|
2,103
|
)
|
|
|
Six
Months Ended June 30, 2017 (unaudited)
|
|
|
|
|
|
|
CONSUMER
|
|
|
PHYSICIAN RECURRING
|
|
|
PROFESSIONAL
|
|
|
TOTAL
|
|
Revenues
|
|
$
|
3,539
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,539
|
|
Costs of revenues
|
|
|
100
|
|
|
|
—
|
|
|
|
—
|
|
|
|
100
|
|
Gross profit
|
|
|
3,439
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,439
|
|
Gross profit %
|
|
|
97.1
|
%
|
|
|
|
|
|
|
|
|
|
|
97.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering and product development
|
|
|
143
|
|
|
|
—
|
|
|
|
—
|
|
|
|
143
|
|
Selling and marketing expenses
|
|
|
620
|
|
|
|
—
|
|
|
|
—
|
|
|
|
620
|
|
Loss on sale of assets
|
|
|
4,222
|
|
|
|
29
|
|
|
|
—
|
|
|
|
4,251
|
|
Unallocated operating expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,540
|
|
|
|
|
4,985
|
|
|
|
29
|
|
|
|
—
|
|
|
|
6,554
|
|
Loss from continuing operations
|
|
|
(1,546
|
)
|
|
|
(29
|
)
|
|
|
—
|
|
|
|
(3,115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,622
|
|
Interest and other financing expense, net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
($
|
1,546
|
)
|
|
($
|
29
|
)
|
|
|
$
|
|
|
($
|
616
|
)
|
PHOTOMEDEX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except share
and per share amounts)
|
|
Six
Months Ended June 30, 2016 (unaudited)
|
|
|
|
|
|
|
CONSUMER
|
|
|
PHYSICIAN RECURRING
|
|
|
PROFESSIONAL
|
|
|
TOTAL
|
|
Revenues
|
|
$
|
19,582
|
|
|
$
|
2,462
|
|
|
$
|
432
|
|
|
$
|
22,476
|
|
Costs of revenues
|
|
|
4,503
|
|
|
|
1,392
|
|
|
|
213
|
|
|
|
6,108
|
|
Gross profit
|
|
|
15,079
|
|
|
|
1,070
|
|
|
|
219
|
|
|
|
16,368
|
|
Gross profit %
|
|
|
77.0
|
%
|
|
|
43.5
|
%
|
|
|
50.7
|
%
|
|
|
72.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering and product development
|
|
|
536
|
|
|
|
121
|
|
|
|
—
|
|
|
|
657
|
|
Selling and marketing expenses
|
|
|
12,756
|
|
|
|
1,454
|
|
|
|
18
|
|
|
|
14,228
|
|
Loss on sale of assets
|
|
|
|
|
|
|
|
|
|
|
843
|
|
|
|
843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated operating expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,897
|
|
|
|
|
13,292
|
|
|
|
1,575
|
|
|
|
861
|
|
|
|
22,625
|
|
Income (loss) from continuing operations
|
|
|
1,787
|
|
|
|
(505
|
)
|
|
|
(642
|
)
|
|
|
(6,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other financing expense, net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
1,787
|
|
|
($
|
505
|
)
|
|
($
|
642
|
)
|
|
($
|
6,882
|
)
|
For
the three and six months ended June 30, 2017 and 2016 (unaudited), net revenues by geographic area were as follows:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
North America
1
|
|
$
|
—
|
|
|
$
|
6,806
|
|
|
$
|
2,475
|
|
|
$
|
14,119
|
|
Asia Pacific
2
|
|
|
—
|
|
|
|
922
|
|
|
|
—
|
|
|
|
1,436
|
|
Europe (including Israel)
|
|
|
—
|
|
|
|
3,510
|
|
|
|
1,064
|
|
|
|
6,901
|
|
South America
|
|
|
—
|
|
|
|
5
|
|
|
|
—
|
|
|
|
20
|
|
|
|
$
|
—
|
|
|
$
|
11,243
|
|
|
$
|
3,539
|
|
|
$
|
22,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
United States
|
|
|
|
|
|
$
|
5,783
|
|
|
$
|
2,475
|
|
|
$
|
11,877
|
|
1
Canada
|
|
|
|
|
|
$
|
534
|
|
|
$
|
—
|
|
|
$
|
1,229
|
|
As
of June 30, 2017 and December 31, 2016, long-lived assets by geographic area were as follows:
|
|
June 30, 2016
|
|
|
December 31, 2016
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
North America
|
|
$
|
—
|
|
|
$
|
71
|
|
Asia Pacific
|
|
|
—
|
|
|
|
17
|
|
Europe (including Israel)
|
|
|
—
|
|
|
|
900
|
|
|
|
$
|
—
|
|
|
$
|
988
|
|
The
Company discusses segmental details in its Management Discussion and Analysis found elsewhere in this Quarterly Report on Form
10-Q.
Note
13
Significant
Customer Concentration:
No
single customer accounted for more than 10% of total company revenues for either of the three or six months ended June 30, 2017
or 2016.
PHOTOMEDEX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except share
and per share amounts)
Note
14
Subsequent
Events:
Notice
of Delisting from NASDAQ
On
July 5, 2017, the Company received another notice (the
“
July 5th Notice
”
)
from NASDAQ indicating that, based upon the Company
’
s non-compliance with NASDAQ
Listing Rule 5110a, which requires an issuer to file an initial listing application and satisfy the initial listing criteria upon
completion of a change of control transaction, the NASDAQ Hearings Panel had determined to delist the Company
’
s
common stock from NASDAQ and that trading of the Company
’
s common stock would be
suspended on NASDAQ effective with the open of business on July 7, 2017.
The
Company has appealed the Panel
’
s determination; however, the appeal does not stay
the suspension of trading of the Company
’
s securities on NASDAQ. The Company has
already filed an initial listing application with NASDAQ, and is working to evidence full compliance with the applicable NASDAQ
Listing Rules as soon as possible.
Upon
the suspension of trading on NASDAQ, the Company
’
s common stock moved to trade
over-the-counter via the OTC Markets
’ “
Pink
”
tier. On July 24, 2017, the Company received written notice that its common stock had been up-listed and approved for trading
on OTCQB, the higher tier of the OTC Markets, under its existing symbol
“
PHMD.
”
The Securities and Exchange Commission (the
“
SEC
”
)
considers the OTCQB marketplace to be an
“
established public market
”
for the purpose of determining the public market price of a company
’
s stock
when registering securities for resale with the SEC, and the majority of broker-dealers trade stocks on the OTCQB marketplace.
Listing on the OTCQB generally provides that a company maintain higher reporting standards and requirements and imposes management
certification and compliance requirements. The Company believes that trading its stock on the OTCQB will likely enhance liquidity
and shareholder value while its NASDAQ appeal is pending.
Agreement
with ICTV Brands, Inc.
On
July 12, 2017 the Company, along with its subsidiaries Radiancy, Inc. (“Radiancy”); PhotoTherapeutics Ltd. (“PHMD
UK”); and Radiancy (Israel) Limited (“Radiancy Israel” and together with the Company, Radiancy and PHMD UK the
“Sellers” and each individually a “Seller”) entered into a Termination and Release Agreement (the “Release”)
between the Sellers and ICTV Brands Inc. (“ICTV”) and its subsidiary ICTV Holdings, Inc. (“ICTV Holdings”).
The Sellers, ICTV and ICTV Holdings are referred to herein individually as a “Party” and collectively as the “Parties.”
Under
the terms of the Release, the Asset Purchase Agreement among the Parties, dated October 4, 2016, as amended by the First Amendment
to the Asset Purchase Agreement, dated January 23, 2017 (as so amended, the “Purchase Agreement”), is terminated and
of no further force and effect, except for certain surviving rights, obligations and covenants described in the Release. Pursuant
to the Release, each of the Sellers, on one hand, and ICTV and ICTV Holdings, on the other hand, fully release, forever discharge
and covenant not to sue any other Party, from and with respect to any and all past and present claims arising out of, based upon
or relating to the Purchase Agreement (other than the surviving covenants described in the Purchase Agreement) or the transactions
contemplated thereby.
Pursuant
to the terms of the Release, ICTV paid to PHMD, within 3 business days of the date of the Release, $2,000 in cash and in immediately
available funds (the “Payment”). Subject to this Payment, neither ICTV nor ICTV Holdings shall have any further royalty
or other payment obligations under the Purchase Agreement. The Company received $2,000 on July 13, 2017.
PHOTOMEDEX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except share and
per share amounts)
As
partial consideration for the releases provided by ICTV Holdings to the Sellers pursuant to the Release and in accordance with
the terms therein, on July 12, 2017, the Sellers and ICTV Holdings entered into a Bill of Sale and Assignment (“Bill of
Sale”), which provides that each Seller sell, assign, transfer, convey and deliver to ICTV Holdings, and ICTV Holdings purchase
and accept from each Seller, all of the right, title and interest, legal or equitable, of each such Seller in and to a deposit
in the amount of $210 held by Sigmatron International, Inc. (“Sigmatron”), pursuant to an arrangement between one
or more of the Sellers and Sigmatron.
Johnson
Employment Agreement
On
July 28, 2017, PhotoMedex, Inc. (the “Company”) (OTCQB, Nasdaq and TASE: PHMD) entered into an Employment Agreement
(the “Johnson Agreement”) with Stephen Johnson, under which Mr. Johnson will serve as Chief Financial Officer of the
Company. The term of the Johnson Agreement is for a period commencing on May 17, 2017 (the “Effective Date”) and ending
on the second (2nd) anniversary of the Effective Date (the “Term”). The Term shall be renewed automatically for additional
one (1) year period(s) unless terminated by either the Company or Mr. Johnson in writing delivered no less than ninety (90) days
prior to the expiration of the then-applicable Term.
Mr.
Johnson shall be entitled to a base salary of $300 per annum (the “Base Salary”), payable in accordance with the Company’s
normal payroll practices. Increases in the Base Salary during the Term will be determined from time to time in the sole discretion
of the Board. Mr. Johnson will also be entitled to a bonus of not less than 35% of his Base Salary, subject to achieving certain
milestones to be set by the Company’s compensation committee within thirty (30) days after the committee receives a business
plan for the Company from Mr. Johnson and Suneet Singal, the Company’s Chief Executive Officer. In addition, Mr. Johnson
will be entitled to receive equity compensation in an amount and with a vesting schedule to be determined by the Company’s
compensation committee within thirty (30) days after receipt of the business plan.
Mr.
Johnson and his family will be eligible to participate in the Company’s healthcare, welfare benefit, life insurance, fringe
benefit and any qualified or non-qualified retirement plans in effect at the Company (collectively, the “Employee Benefits”)
on the same basis as those benefits are made available to the other senior executives of the Company. If the Company does provide
a health insurance plan for which Mr. Johnson is eligible, he will be reimbursed by the Company for the cost of the health insurance
paid by him for himself and his family. If the Company does not provide a health insurance plan for which he is eligible, Mr.
Johnson will be reimbursed by the Company for the cost of health insurance paid by him for himself and his family, grossed-up
to cover any taxes Mr. Johnson would be required to pay for that reimbursement. Additionally, Mr. Johnson will receive such perquisites
as are or have previously been made available to other senior executives of the Company, as well as four (4) weeks paid vacation
per year, and will be paid annually in cash for vacation days not taken by him so long as no more than four (4) weeks of vacation
are accrued each year for purposes of cash payments.
Mr.
Johnson’s employment may be terminated by the Company for Cause, as defined in the Agreement, upon delivery of a Notice
of Termination by the Company to him, except where he is entitled to a cure period, in which case the Date of Termination will
be upon the expiration of the cure period if the matter constituting Cause was not cured. His employment will terminate automatically
upon his resignation (other than for Good Reason or due to the Executive’s death or Disability).
If
Mr. Johnson’s employment is terminated by the Company for Cause, or if he resigns other than for Good Reason, he is entitled
to receive (a) any earned but unpaid Base Salary and/or accrued but unused vacation days, all vested equity, and any earned but
unpaid bonus awards through the Date of Termination, (b) reimbursement for any unreimbursed business expenses incurred by him
in accordance with the Company’s policy prior to the Date of Termination, and (c) such Employee Benefits, if any, to which
he may be entitled upon termination of employment under the terms of the plan documents and applicable law (including under the
applicable provisions of Consolidated Omnibus Budget Reconciliation Act of 1985, as amended).
PHOTOMEDEX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share
and per share amounts)
If
Mr. Johnson’s employment is terminated by the Company other than for Cause, immediately upon delivery of a Notice of Termination
by the Company to him, or if it terminates automatically and immediately upon his resignation for Good Reason at the end of any
applicable cure period (if the circumstances giving rise to Good Reason are not cured), then Mr. Johnson will receive (a) any
earned but unpaid Base Salary and/or accrued but unused vacation, all vested equity, and any earned but unpaid bonus awards through
the Date of Termination, plus an additional twelve (12) months of Annual Compensation, together in a lump sum payment; (b) acceleration
of any then-unvested stock options, restricted stock grants or other equity awards; (c) payment or reimbursement, as applicable,
of the full health insurance costs for Mr. Johnson and his family under a Company-provided group health plan or otherwise for
twenty-four (24) months, in compliance with the provisions regarding deferred compensation under Section 409A (“Section
409A”) of the Internal Revenue Code of 1986, as amended (the “Code”), if applicable; (d) if any bonus or other
form of additional compensation was paid to any other executive(s) of the Company for the fiscal year during which Mr. Johnson’s
employment ceased pursuant to this Section 5(c), a cash amount equal to the largest bonus or other form of additional compensation
payment made by the Company to any other executive of the Company during that fiscal year; (e) reimbursement for any accrued but
unused vacation days and/or unreimbursed business expenses incurred by Mr. Johnson in accordance with the Company’s policy
prior to the Date of Termination; and (f) other Employee Benefits, if any, as to which he may be entitled upon termination of
employment.
Moreover,
if Mr. Johnson resigns for Good Reason due to a Change of Control, as defined in the Johnson Agreement, then he will be entitled
to payment of an additional eighteen (18) months of Annual Compensation, not twelve (12) months as provided in the previous paragraph,
along with payment of the other amounts and benefits as provided in that paragraph.
Finally, Mr. Johnson’s employment terminates upon his death and may be terminated by the Company, within ten (10) days after
the delivery of a Notice of Termination by the Company to Mr. Johnson (or his legal representative) in the event of his disability.
In such instances, Mr. Johnson will receive the same payments and other items as he would be entitled to receive if his employment
was terminated for other than Cause, or if he resigned for Good Cause, except that he (in case of disability) or his estate (in
the event of death) will have the right to exercise any unexercised and vested options for a period of 90 days, and, in addition,
to receive payment for accrued but unpaid vacation time, if any.
The
Agreement is governed by the laws of the State of New York and contains customary general contract provisions.
Singal
Agreement
Additionally,
the Company has amended the Employment Agreement of Suneet Singal, entered into on May 17, 2017, to provide that Mr. Singal’s
annual compensation (his “Base Salary”) will be set initially at $250; that amount will be adjusted going forward
as Mr. Singal transitions to the provision of services to the Company on a full-time basis. Mr. Singal will also be entitled to
a bonus, amount to be determined and subject to achieving certain milestones, to be set by the Company’s compensation committee
within thirty (30) days after the committee receives a business plan for the Company from Mr. Johnson and Suneet Singal, the Company’s
Chief Executive Officer, and he will be entitled to receive equity compensation in an amount and with a vesting schedule to be
determined by the Company’s compensation committee within thirty (30) days after receipt of the business plan.
PHOTOMEDEX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share
and per share amounts)
First
Amendment to the Interest Contribution Agreement
On
August 3, 2017, the Company entered into a First Amendment (the “First Amendment”) to the Interest Contribution Agreement,
dated March 31, 2017, by and among First Capital Real Estate Operating Partnership, L.P., First Capital Real Estate Trust Incorporated
(together, the “Contributor Parties”), FC Global Realty Operating Partnership, LLC and PhotoMedex, Inc. (together,
the “Acquiror Parties”), as modified by the Agreement to Waive First Closing Deliverables, dated May 17, 2017, and
the Agreement to Waive Second Closing Deliverables, dated July 3, 2017 (collectively, the “Contribution Agreement”).
Under the First Amendment, the Contributor Parties irrevocably waived any conditions to the closings set under the Contribution
Agreement, including those conditions contained in Section 7 of the Contribution Agreement that require the Company to maintain
its listing and active trading of its securities on any of the NASDAQ markets. The Contributor Parties also reaffirmed their obligation
to use their best efforts to satisfy the Mandatory Contribution Conditions and contribute the Mandatory Entity Interests, both
as defined in the Contribution Agreement, on or before December 31, 2017. Additionally, the Acquiror Parties confirmed the Contributor
Parties’ understanding that the failure of the Contributor Parties to satisfy the Mandatory Contribution Conditions after
using commercially reasonable efforts to do so does not give rise to a unilateral right of the Acquiror Parties to terminate the
Contribution Agreement pursuant to Article 10 of the Contribution Agreement.
Finally,
the First Amendment clarified that references in the Contribution Agreement and its Exhibits to NASDAQ shall, to the extent necessary,
be deemed to be references to NASDAQ or such other trading market as the Company’s securities may be trading on, including,
without limitation, the OTCQB. For purposes of calculating the number of the Company’s shares into which the principal of
the Payout Notes under the Contribution Agreement will be converted, if the Company’s shares are not traded on NASDAQ on
the approval date of those Payout Notes, VWAP shall be calculated with respect to the transaction in the Company’s shares
executed on the OTCQB or such other market as the Company’s shares may then be traded on instead of NASDAQ.
The
First Amendment contains customary representations and warranties and general contract terms.