UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2013
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from ______________ to _____________
Commission file number: 0-11635
PHOTOMEDEX, INC.
(Exact name of registrant as specified in its charter)
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Nevada
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59-2058100
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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100 Lakeside Drive, Suite 100, Horsham, Pennsylvania 19044
(Address of principal executive offices, including zip code)
(215) 619-3600
(Issuer’s telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
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Name of each exchange
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Title of each class
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on which registered
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Common Stock
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Nasdaq Global Select Market, TASE
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Securities registered under Section 12(g) of the Exchange Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes o No x
Indicate by check mark whether the registrant: (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer x
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Non-accelerated filer o
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Smaller reporting company o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No x
The number of shares outstanding of our common stock as of June 28, 2013, was 20,722,939 shares. The aggregate market value of the common stock held by non-affiliates (11,846,911 shares), based on the closing market price ($15.94) of the common stock as of June 28, 2013, was $188,839,761.
As of March 14, 2014, the number of shares outstanding of our common stock was 18,903,245. The closing market price of our common stock as of March 14, 2014 was $16.39.
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Page
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Part I
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Item 1.
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1
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Item 1A.
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22
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Item 1B.
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58
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Item 2.
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58
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Item 3.
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58
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Item 4
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59
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Part II
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Item 5.
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60
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Item 6.
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63
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Item 7.
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64
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Item 7A.
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83
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Item 8.
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83
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Item 9.
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83
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Item 9A.
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83
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Item 9B.
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87
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Part III
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Item 10.
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87
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Item 11.
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93
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Item 12.
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102
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Item 13.
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104
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Item 14.
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104
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Item IV
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Item 15.
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105
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110
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K, or this Report, are "forward-looking statements." These forward-looking statements include, but are not limited to, statements about the plans, objectives, expectations and intentions of PhotoMedex, Inc., a Nevada corporation, (referred to in this Report as “we,” “us,” “our”, “registrant” or “the Company”) and other statements contained in this Report that are not historical facts. Forward-looking statements in this Report or hereafter included in other publicly available documents filed with the Securities and Exchange Commission, or the Commission, reports to our stockholders and other publicly available statements issued or released by us involve known and unknown risks, uncertainties and other factors which could cause our actual results, performance (financial or operating) or achievements to differ from the future results, performance (financial or operating) or achievements expressed or implied by such forward-looking statements. Such future results are based upon management's best estimates based upon current conditions and the most recent results of operations. When used in this Report, the words "will, " "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and similar expressions are generally intended to identify forward-looking statements, because these forward-looking statements involve risks and uncertainties. There are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements, including our plans, objectives, expectations and intentions and other factors discussed under "Risk Factors." We undertake no obligation to update such forward-looking statements. These forward-looking statements include, but are not limited to, statements about:
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forecasts of future business performance, consumer trends and macro-economic conditions;
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descriptions of market and/or competitive conditions;
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descriptions of plans or objectives of management for future operations, products or services;
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our estimates regarding the sufficiency of our cash resources, expenses, capital requirements and needs for additional financing and our ability to obtain additional financing
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our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;
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our ability to obtain and maintain regulatory approvals of our products;
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anticipated results of existing or future litigation; and
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descriptions or assumptions underlying or related to any of the above items.
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In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained in this Annual Report on Form 10-K might not occur. Investors are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent forward-looking statements attributable to us or to any person acting on its behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.
PART I
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Business
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Our Company
PhotoMedex, Inc., re-incorporated in Nevada December 30, 2010, originally formed in Delaware in 1980, is a global skin health company providing integrated disease management and aesthetic solutions to dermatologists, professional aestheticians and consumers. We provide proprietary products and services that address skin diseases and conditions including psoriasis, vitiligo, acne and photo damage. Our experience in the physician market provides the platform to expand our skin health solutions to spa markets, as well as traditional retail, online and infomercial outlets for home-use products. As a result of its December 2011 merger with Radiancy, Inc., PhotoMedex has added a range of home-use devices under the no!no!® brand, for various indications including hair removal, acne treatment, skin rejuvenation, and lower back pain. In addition, our professional product line increased its offerings for acne clearance, skin tightening, psoriasis care and hair removal sold to physician clinics and spas.
On December 13, 2011, or the Merger Date, we closed the merger with Radiancy, Inc, formerly private company. As of December 13, 2011, after giving effect to the reverse acquisition and the issuance of PhotoMedex, Inc. common stock to the shareholders of Radiancy, Inc., we had 18,820,852 shares of common stock issued and outstanding, with the Pre-merged PhotoMedex, Inc. shareholders collectively owning approximately 20% and the former Radiancy, Inc. stockholders owning approximately 80%, of the outstanding common stock of the Company. In connection with the merger, Radiancy, Inc became a majority-owned subsidiary of PhotoMedex. We refer to this transaction as the “reverse merger” in this Annual Report on Form 10-K. References to “Pre-merged PhotoMedex” and “Pre-merged Radiancy” mean PhotoMedex, Inc. and Radiancy, Inc., respectively, prior to the Merger Date.
On February 13, 2014, PhotoMedex, Inc., LCA-Vision Inc., a Delaware corporation (“LCA”), and Gatorade Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of PhotoMedex (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) under which PhotoMedex has agreed to acquire LCA. Pursuant to the Merger Agreement, and subject to the satisfaction or waiver of the conditions therein, Merger Sub will be merged with and into LCA (the “Merger”), with LCA surviving as a wholly-owned subsidiary of PhotoMedex. PhotoMedex will fund this transaction through a new $85 million committed senior secured credit facility including a $10 million revolving credit facility and a $75 million four-year term loan, as well as through existing cash balances. The Merger is not conditioned upon PhotoMedex receiving such financing. As of March 17, 2014, four individual lawsuits seeking to prevent this acquisition had been filed in state courts.
Our Key Strategies
Our technologies, products and research efforts are directed to addressing a worldwide aesthetic industry valued at $34 billion annually. We provide dermatologists, professional aestheticians, and consumers with the equipment and skin care products they need to treat psoriasis, vitiligo, acne, and UV damage, among other skin conditions. In December 2011, PhotoMedex merged with Radiancy Inc. which brought to PhotoMedex the no!no!® line of home-use consumer products for hair removal, acne treatment, skin rejuvenation and lower back pain. Radiancy also markets capital equipment to physicians, salons and med spas for hair removal, acne treatment, skin tightening and rejuvenation and psoriasis care. In addition to a synergistic product line, Radiancy possesses a proprietary consumer marketing engine built upon direct-to-consumer sales and creative marketing programs that drive brand awareness. During 2013, we began to benefit from the impact of these marketing methodologies and expertise on our XTRAC® Excimer Laser and NEOVA® topical skin care lines while continuing to realize organic and geographic growth of additional brands.
Skilled Direct Sales Force to Target Physician and Professional Segments
The merger has allowed us to blend our technologies and unique expertise in order to strengthen revenue lines, enable cross-selling and drive development opportunities for future growth. Pre-merged PhotoMedex has long been active in physician sales, having developed a portfolio of medical devices and topical formulations that are provided under various financial arrangements primarily to dermatologists and plastic surgeons as well as other aesthetic professionals at salons and med spas. These products comprise medical lasers for skin diseases such as psoriasis and vitiligo, phototherapies for acne and sun damage, therapeutic skin care and surgical laser systems, among other products. One of our competitive advantages is an experienced, 44-person, physician-targeted sales force that is currently selling into 3,000 U.S. locations. Since the December 2011 reverse merger, we are now capitalizing on this skilled sales force in order to drive greater adoption of our line of proprietary Light and Heat Energy (LHE®) products. These products, which provide skin rejuvenation, acne treatment, hair removal and other services for dermatologists and med spas, had been previously sold by a limited sales force comprising of a few individuals. We believe that the combination of this product line with Pre-merged PhotoMedex’s domestic U.S. sales infrastructure can expand the use of the LHE® products in multiple sales channels.
Expertise in Global Consumer Marketing
We have a highly advanced consumer sales engine accompanied by creative marketing programs, well-tested and successful direct-to-consumer marketing strategies and a global distributor and retail network. The no!no!® products are sold at roughly 5,000 retail outlets across 55 countries, through infomercials and print, radio other television advertising worldwide, online, on home shopping channels and at stores and kiosks.
We have begun to capitalize upon our consumer marketing expertise to further patient awareness of our XTRAC® Excimer Laser and NEOVA® topical skin care products, which have traditionally been marketed only to physicians and aesthetic professionals. By incorporating a direct-to-consumer/patient element, we aim to increase brand awareness and direct patients into physicians’ practices in search of these products. Our experience in effectively penetrating culturally distinct regions with targeted advertising is also anticipated to further benefit the expansion of our non-device technologies into global consumer channels.
Blending Corporate Cultures
Ultimately, due to the sales channel and product line synergies between the Radiancy and Pre-merged PhotoMedex businesses, we believe that the combination of these two businesses will enable a revenue and earnings growth potential that neither firm would have been able to achieve independently. Beyond these benefits, we have also developed complementary corporate cultures, with shared commitments to innovation, product quality and a high level of customer service to address the evolving needs of customers. We also emphasize the development of products and technologies that are backed by science and clinical support. We hold more than 90 clearances from the U.S. Food and Drug Administration (FDA) under Section 510(k) of the Food, Drug and Cosmetic Act, indicating that we have permission to commercialize such products in the U.S. based on having submitted safety and efficacy information to the FDA. See Government Regulations – Regulations Relating to Products and Manufacturing discussion below.
Full Product Life Cycle Model
Since 2004, we have introduced a portfolio of professional-grade consumer products for hair removal, acne treatment, skin rejuvenation, facial skin tightening and lower back pain. These products - marketed globally under the no!no!® and kyrobak® brands - are built upon the same technology platforms that are used in medical devices for physicians and aestheticians. We have been able to bring the clinical solutions used by physicians and med spas to the consumer home-use market by successfully miniaturizing equipment into handheld or lightweight convenient-to-carry products and engaging in a multi-faceted worldwide sales and marketing strategy. Under this type of “full product life cycle model,” the development of medical technology cleared through regulatory agencies, such as the FDA, and acceptance by physicians can ultimately lead to an effective new technology for consumer use.
Once a product idea is generated, it is refined and tested through the development stage, which includes leveraging the knowledge of our Scientific Advisory Board; our marketing organization then works to encourage physician adoption of the new process/product. While many companies may stop at this point, our full product life cycle encourages us to continue to innovate and broaden our market opportunity by further miniaturizing professional technologies for home-use. Optimizing technologies for consumer use involves many considerations, including understanding and matching consumer expectations and providing superior customer service, eliminating the need for consumers to calibrate or safety test devices in the way that professionals are required to do for in-office capital equipment, and setting price points that are favorable for us but affordable for consumers. These key elements were the basis for Radiancy’s no!no!® product line, which received the Consumer Survey of Product Innovation’s 2011 “Product of the Year” award in the At Home Beauty Treatment category and the HSN Most Innovative Product Award for 2012.
Our Global Growth Strategies
The global market for aesthetic devices and procedures continues to expand, driven by an individual desire to improve one’s appearance; a higher disposable income being spent on aesthetic treatments; an aging population in the industrialized world that desires a more youthful look; a younger generation seeking preventive solutions for the inevitable aging process; technological advances making products available to a consumer market that were previously only possible at the physician level; an increasing number of conditions, including acne and wrinkles, that can now be non-invasively treated; and a lower procedural cost, which has expanded the availability and affordability of many procedures to a greater number of individuals.
We are focused on addressing the above-mentioned trends by growing and expanding our three core business segments: consumer, physician recurring and professional. We possess a solid line of technology platforms that are currently driving, and are expected to continue to drive, new product introductions and consequently greater revenues. We are focused on growth both through geographic expansion and the pursuit of additional diversified marketing initiatives that are intended to increase market share and sustain the profitability that we have reported thus far.
Our three main sources of revenue generation form our three business segments: Consumer segment, Physician Recurring segment and Professional segment. Specific growth strategies as they relate to each of these core business channels are described below.
Consumer Segment
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Expand into additional geographic markets. We intend to continue implementing a global multichannel sales and marketing strategy. We have sold more than 5 million no!no!® units to consumers, the majority of these over the past four years. Growth has been largely driven by North America (with a population of 529 million) and Japan (with a population of 127 million), although our products are sold across 55 countries. Between these two populations, as well as other countries, we maintain that significant further market penetration is possible. In addition, during 2013 we launched our consumer marketing platform in Germany (population of approximately 83 million people) and more recently in Brazil (population of approximately 192 million people).
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Strengthen our retail distribution channel. We intend to continue the expansion and growth of our retail presence in the US and internationally. In the US in 2013 we expanded the in-store availability of our flagship product, no!no! Hair, which is now available for sale at approximately 950 Bed Bath & Beyondstores nationwide. This adds to the Company's rapidly growing global retail footprint including more than 7,500 retail outlets worldwide.
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Diversify media campaigns, extending beyond the historical overnight infomercial audience to also target short-form infomercials and daytime advertising. We will continue to diversify our media campaigns beyond the overnight infomercial audience (the 28-minute infomercial) by increasing our advertising expenditures for infomercials in short form (30 second, 1 minute, 2 minute and 5 minute) in daytime media buys. Furthermore, we continue to test and expand a variety of media messages in various formats (TV, radio, print) and in multiple languages.
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Capitalize on our consumer marketing expertise to bring NEOVA® and our other products into the consumer segment. We are positioned to introduce other technologies—either via product extension from the health and wellness area of the no!no!® and kyrobak® brands or from our NEOVA® and XTRAC® technologies—using the same marketing foundation.
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Build out brand extensions of the no!no!® line into additional health and wellness areas. There are several additional no!no!® brand extensions in the pipeline ready to be launched, which we believe we could do imminently should we experience any change in growth trajectory of our existing product offerings.
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Leverage technology development in the physician and professional segments to drive new products for the consumer channel. We believe that our consumer line can continue to increase market penetration. We have expertise in adapting products for consumer markets, as we have taken proprietary technologies focused toward physicians and med spas and adapted them to the home-use market. Employing this same expertise for our pre-merged PhotoMedex product line and technologies, we expect to grow sales and increase gross margins.
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Physician Recurring Segment
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Incorporate direct-to-consumer sales strategies to educate patients about the availability of treatments for psoriasis, vitiligo and other skin care concerns and, in turn, motivate patients to seek out XTRAC® and NEOVA® technologies sold by physicians, clinicians and other aesthetic professionals. Via the reverse merger, we now have greater options to offer our physician community. We currently sell into over 3,000 physician offices. With a direct-to-patient strategy creating awareness, we believe that we can drive these revenues significantly higher given the safety and effectiveness of our technology in treating psoriasis and vitiligo compared to alternatives on the market.
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In 2012 we launched a direct to patient and physician education campaign in the US for psoriasis and vitiligo patients. The Live Clear. Live Free. campaign is designed to accelerate awareness of the XTRAC® excimer laser treatment, improve patient care, expedite information sharing, and reduce healthcare costs for what many believe is one of the most challenging skin diseases. The national campaign includes TV, radio and direct mail marketing. Live Clear. Live Free. brings PhotoMedex's support of practices that administer XTRAC® excimer laser therapy to a new level. The campaign also drives awareness of the standard of care for psoriasis and vitiligo, attracting physicians outside of the dermatology discipline nationwide. As more physicians offer XTRAC®, PhotoMedex continues to close the gap between advancements and availability to improve patient care and lower healthcare costs.
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We conducted a market survey in early January 2011 of both physicians and patients of our XTRAC therapy. The results indicated that physicians were aware of the technology and felt positively about it. However, patients were largely unaware of the XTRAC treatment. When patients were made aware of the treatment, they asked where they could find it. Based on the results of the survey, we believe that we can dramatically change the dynamics of this component of our business by increasing consumer awareness.
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Seek to increase insurance reimbursement for vitiligo treatments using the XTRAC lasers. The XTRAC Excimer Laser is a procedure for psoriasis that is reimbursable by almost all major insurance companies, including Medicare. Although substantial improvement in the number of companies paying health insurance claims for vitiligo has recently occurred, it still lags behind psoriasis.
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Complete the clinical trial for the XTRAC device in combination with Galderma Laboratories, L.P.’s topical psoriasis medications Clobex® and Vectical®. Our XTRAC lasers are currently being studied in combination with Clobex and Vectical in a trial at the University of California, San Francisco. The trial aims to demonstrate that the combination therapy can achieve a 75% reduction or better in disease in 12 weeks and maintain that clearance for an extended period of time.
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Professional Segment
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Use pre-merged PhotoMedex’s 44-person U.S. direct sales force to increase sales of our professional products. Our current expertise in professional markets has opened channels for our LHE equipment. Historically, Pre-merged PhotoMedex marketed its products only to physicians, creating a skilled sales force with relationships in this arena.
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Our Products
We emphasize the development of physician-endorsed skin care products based on science. Once cleared for use by the required regulatory agencies, like the FDA, these products are commercialized through a systematic, proprietary marketing program that we view as integral to our business success. Some of our products, which are described in more detail below, are expected to be significant growth drivers for us. Our primary technology and product platforms are described below.
We evaluate four principal criteria in determining where to allocate product development resources:
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demonstrable clinical efficacy and safety;
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intellectual property protection;
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cost of goods; and
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market opportunity.
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Specifically, new projects must be able to work effectively, but also have a low enough cost of goods to achieve a favorable price point for consumers and a favorable margin for us to advertise our products effectively. As well, the market should be well defined and large enough to accommodate the new product with room for growth as we ramp up marketing efforts.
These platforms include the following:
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Our Thermicon® technology and no!no!® product line;
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Professional equipment built upon our Light and Heat Energy (LHE®) technology which is also incorporated into some of our consumer devices;
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Our XTRAC® technology to treat psoriasis and vitiligo;
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Our topical NEOVA® formulations to combat UV-induced damage causing premature skin aging;
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Light-emitting diode (LED) technology used in our Omnilux™ and Lumière™ Light Therapy systems as well as in some of our consumer devices; and
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Our Kyrobak® technology which incorporates Continuous Passive Motion (CPM) and Oscillation Therapy is for the relief of unspecified, lower back pain.
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Beyond these, we provide the Iamin® line of hair care products, which are formulated with a clinically tested Copper Peptide Micronutrient technology to manage the acute post-hair transplant period and improve outcomes. These products are targeted to the hair transplant and restoration market. We also operate a surgical business, which includes the LaserPro® Diode surgical laser system and UniMax® family of laser micromanipulators for the delivery of laser energy in microsurgical procedures.
THERMICON® HEAT TRANSFER TECHNOLOGY
Our no!no!® hair removal products are built upon our proprietary heat-based Thermicon® brand technology to address consumer concerns over perceived limitations of existing hair removal products, including safety and pain, and to overcome inherent limitations of light-based hair removal solutions. Unlike other products that use methods that are painful, have side effects, are limited in body areas that can be treated or that emanate from the principle of selective thermolysis, the Thermicon® brand devices are based on heat only and are therefore applicable for all hair colors and skin types, can be used on all body areas, and if used per instructions – do not have adverse events, and are virtually painless. Thermicon® brand devices utilize a high-temperature thermodynamic wire filament that is activated when the devices are moved in contact with and across the treatment area. We believe that the no!no!® brand hair removal products have several advantages over existing products for both the consumer and professional hair removal market, including:
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Broad Applicability. Where other hair removal products such as shavers, waxing, threading and laser-based and intense pulsed light-based products are either limited by body area treated, are only effective at treating certain hair colors and skin types or are limited by the age of the consumer, products employing the Thermicon® brand devices technology, which do not rely upon light, are virtually painless and without side-effects and are equally effective across all hair colors and all skin types. Therefore, we believe that unlike other hair removal methods (such as shaving, threading and waxing), including light based devices, Thermicon® brand devices effectively remove hair on people with light hair or dark skin.
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Compact Size. Since the Thermicon® brand devices do not require large energy sources or cooling systems, we are able to produce compact, hand-held, portable, reachable wireless products uniquely suitable for the consumer market, without sacrificing safety or efficacy.
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Pain-Free. Many traditional hair-removal procedures, such as waxing or shaving, can cause nicks, cuts and significant pain. We believe that users of products employing the Thermicon® Brand devices experience only a mild tingling sensation.
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Low Cost of Goods to MSRP ratio. Thermicon® brand technology has an average retail price of around $270 in the US and between $300-400 in other markets. In contrast, other hair removal methods, require consumers to undergo expensive in-office (or in-spa) visits for treatments that can cost several thousands of dollars. The Thermicon® brand platform enables a low cost of goods, and therefore a beneficial relationship cost of goods to MSRP.
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no!no!® Product Line: “Professional Technology Made for Consumers”
We have realized favorable market adoption of Thermicon® brand technology, which not only overcomes the challenges of other hair removal methods but also puts control of the hair removal process in consumers’ hands.
We market a full line of consumer products based on the patented Thermicon® brand technology. These products are sold globally through infomercials and television shopping channels, retail stores, online shopping websites and worldwide strategic distribution agreements.
Since 2007, we have introduced a series of no!no! devices. Every product evolution—from the no!no! Classic™, the no!no! Hair™, the no!no! Hair for Men™, the no!no! Plus™ to the no!no! PRO 3™ and the no!no! PRO 5™—represents continued innovation and product line extension. Notably, each of the prior brands is still marketed even as we continue to introduce new product extensions. Going forward, we believe that the no!no! pipeline is considerable, with multiple new products and devices being developed with some that already have launched overseas. We are committed to effectively managing our product life cycle, seeking to ensure that, if there is a change in growth trajectory, we will likely possess new, enhanced technologies that are synergistic with our platform.
The no!no!® line of products also includes a consumables-based revenue model, which helps provide us with a growing, high-margin recurring revenue stream as consumers make repeat purchases of refill Thermicon tips, buffers and topical products.
LIGHT AND HEAT ENERGY (LHE®)
Our proprietary LHE® brand technology combines the benefits of direct heat and a full-spectrum light source. This technology is used primarily in our professional products, which entail capital equipment sold to physicians and skin care specialists worldwide. This technology has also been adapted to our hand-held consumer line of products like no!no! Skin, a medical device for acne.
LHE capitalizes upon the principles of selective photothermolysis, which is a type of photo (or light-based) therapy in which heat is generated using selective absorption of light within the targeted tissue. Selective photothermolysis entails precisely targeting a pigmented tissue or structure with a specific wavelength of light that is absorbed into and limited to the target area but does not penetrate into the surrounding area. Heat is also produced and directed to the target with minimal effect on surrounding skin.
While there are many phototherapy options available for patients today, including laser and intense pulse light (IPL), we believe that we have optimized the light/heat relationship. Both Laser and IPL treatments filter out the heat given off by their flashes or pulses of light, primarily relying on the light energy to cause a clinical change. We believe that by not using the heat energy as well, laser and IPL technologies must be administered at high densities, which may require skin cooling techniques to protect patients from burns.
In contrast, LHE technology was developed with the objective of efficiently using both light and heat energy to provide a greater treatment advantage. In doing so, LHE® brand products can deliver less energy density (known as “low fluences”) to the target skin area, which is believed to create a safer, more efficient product. We believe that lowering the fluence of our LHE® brand products reduces the need for skin cooling techniques, simplifies the treatment process and decreases the risk of harmful side effects. In addition, balancing light and heat enables phototherapy treatments for more sensitive skin types as well as a broader spectrum of hair colors.
We have incorporated patented internal filters that protect the skin during treatment with LHE technology. We also offer a specialized light unit assembly for use on sensitive skin to further enhance our products’ safety and comfort without compromising results.
As a result of our LHE technology, we have created an LHE® brand professional product line designed for clinical efficacy in a variety of applications, including psoriasis care, acne treatment, skin tightening, skin rejuvenation, wrinkle reduction, collagen renewal, vascular and pigmented lesion treatments and hair removal. (Note that not all applications are cleared in the U.S.)
We believe that LHE can be more attractive than both laser and IPL technologies due to our cost structure, efficacy and ease of application. Medical devices that use LHE can treat a larger spot size than a laser-based system, with less discomfort and without requiring post-treatment skin cooling. As well, our research finds that our LHE approach offers meaningful results for thin and/or light hair. The technology also enables the development of smaller equipment, which is more affordable than bulky laser systems for many clinicians.
Benefits of the LHE approach are summarized below.
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Non-invasive, non-abrasive treatments;
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No down time;
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Clinically proven results;
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Safety and efficacy for all skin types;
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Especially suited for Skin Types V-VI; and
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Easy to use
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The no!no! Skin™
LHE® brand technology is also used in the no!no! Skin, a handheld consumer product sold worldwide under our no!no!® brand. The no!no! Skin is a 510(k)-cleared product that has been clinically demonstrated to resolve or improve acne lesions by 81% within 24 hours. It uses the same LHE® brand technology from our physician LHE® brand products but is optimized for home use.
The no!no! Skin puts out wide spectrum light (from 400 to 2,000 nm) and gentle pulses of heat to penetrate blocked pores and stop acne at its source. The device seeks to pinpoint Propionibacterium acnes (P. acnes), or acne-causing bacteria, in the pore. The green light serves to stimulate the release of oxygen radicals, which attack the P. acnes. Simultaneously, the red light produces an anti-inflammatory reaction that reduces pimples’ visible swelling. The addition of heat intensifies the process and gently opens the pores to release the clog and further soothe the inflammation.
The no!no! GLOW applies the same LHE® brand technology from our physician LHE® devices but is optimally miniaturized for home use.
KYROBAK
Kyrobak uses clinically proven, proprietary technology to treat unspecified, lower back pain. The unique combination of Continuous Passive Motion (CPM) and Oscillation therapy is a non-invasive, relaxing method for long lasting relief of back pain. Used for better than 3 decades in professional rehabilitation and chiropractic settings, CPM has been proven to increase mobility of the joints, draw more oxygen and blood flow to the area, allowing the muscles to relax and release pressure between the vertebrae allowing the spine to open up and decompress.
Given that back pain is the leading cause of disability in Americans under the age of 45 and that it affects 25 Million Americans, from 25- 64, annually, we believe the market need is unfilled and the population underserved. Through our direct-to-consumer initiatives, we will be targeting the estimated 80% of Americans who have suffered lower back pain at least once in their lives with the Kyrobak brand device and a series of accessories poised to grow the brand further.
XTRAC® EXCIMER LASERS
XTRAC is a legacy, ultraviolet (UV) light, excimer laser technology from Pre-merged PhotoMedex. It received an FDA clearance in 2000 and has since become a widely recognized treatment among dermatologists for psoriasis and other skin diseases for which there are no cures. Excimer lasers emit very concentrated UV light and are used in ophthalmology and dermatology practices. Our XTRAC brand lasers deliver ulta narrow-band ultraviolet B (UVB) light to affected areas of the skin in order to treat an array of skin conditions, including psoriasis and vitiligo, which combined affect up to 10.5 million people in the U.S. and 190 million people worldwide.
Present in natural sunlight, UVB is an accepted psoriasis treatment that penetrates the skin to slow the growth of damaged skin cells. UVB therapy occurs as patients expose their affected skin to a UVB light source for a set length of time on a regular schedule. In our XTRAC system, we have refined the delivery of optimum amounts of UVB directly to skin lesions. The XTRAC lasers emit a high-intensity beam of ultra narrow-band UVB, which many studies prove can clear psoriasis faster and produce longer remissions than broad-band UVB. In comparison to broad-band UVB, narrow-band UVB also require fewer treatments to produce the desired effect.
We market two excimer laser brands: the XTRAC Ultra Plus and the XTRAC Velocity. The Velocity is a more advanced and faster machine, allowing clinicians to treat a greater surface area in a shorter period of time. It is designed to treat generalized psoriasis, but can be used for all disease levels (mild, moderate and severe).
The XTRAC products are sold to physicians primarily overseas, while in the US under a recurring revenue model, we generate incremental income on a per-use basis from these machines. We estimate that there are roughly 700 XTRAC lasers in use in the U.S., leaving considerable opportunity for growth, as the target U.S. audience for XTRAC lasers comprises approximately 3,500 dermatologists who perform disease management. This market excludes nearly 7,000 other U.S. dermatologists who are either in academia or not actively treating skin diseases.
To develop the XTRAC machines, our medical engineers and research team collaborated with Dr. Rox Anderson, director of the Wellman Center for Photomedicine at Massachusetts General Hospital, Harvard Medical School. The resulting device produced a monochromatic wavelength (308 nm) of UV light known to positively impact the psoriasis action spectrum.
We have found that XTRAC treatment leads to remission of patients’ psoriasis in an average of 8 to 12 treatments. Treatment protocols recommend that patients receive two treatments per week with a minimum of 48 hours between treatments. Our data shows that XTRAC has an 89% efficacy and produces only minimal side effects. In support of its clinical effect, the XTRAC Excimer Lasers have been cited in over 45 clinical studies and research programs, with findings published in peer-reviewed medical journals around the world. The products have also been endorsed by the National Psoriasis Foundation, and their use for psoriasis is covered by nearly all major insurance companies, including Medicare.
XTRAC is a reimbursable procedure for psoriasis under three Current Procedural Terminology (“CPT”) codes. It reimburses each treatment at approximately $175, with typical charges ranging from $150 to $250 depending on the amount of body surface being treated.
Psoriasis Treatment Options
There are essentially three main types of psoriasis treatments, as listed below.
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Topical therapies:
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These can include corticosteroids, vitamin D3 derivatives, coal tar, anthralin and retinoids, among others, that are sold as a cream, gel, liquid, spray, or ointment. The efficacy of topical agents varies from person to person, although these products are commonly associated with a loss of potency over time as people develop resistance.
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Phototherapy:
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This is the area in which we operate. Our XTRAC Excimer Lasers are FDA-cleared, fully reimbursable, National Psoriasis Foundation-endorsed phototherapy treatments for psoriasis. In addition to treatment with XTRAC machines at a clinician’s office, patients have the option of purchasing at-home UV light systems.
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Systemic medications:
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There are a number of prescription medications available for psoriasis, which are given either by mouth or as an injection. Generally, these drugs are administered only after both topical treatments and phototherapy have failed, or for people who have severe disease or active psoriatic arthritis.
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Ongoing Clinical Trial
The XTRAC® Excimer Lasers are particularly significant and beneficial for moderate and severe psoriasis patients who prefer a noninvasive treatment approach without the side effects of invasive, systemic agents, or to patients who have developed a resistance to topical agents. In many cases, UVB phototherapy can also be combined with topical or systemic medications in order to enhance efficacy. With this in mind, our XTRAC® lasers are currently being studied in a clinical trial in combination with Galderma Laboratories, L.P.’s topical psoriasis therapies Clobex and Vectical Ointment. Clobex is a topical corticosteroid cleared to treat moderate-to-severe plaque psoriasis. It is sold as a spray, shampoo, or lotion. Vectical Ointment is a topical treatment for mild-to-moderate plaque psoriasis. The trial is led by Dr. John Koo and Dr. Ethan Levin at the University of California, San Francisco.
The study’s primary endpoint is to achieve a Psoriasis Area and Severity Index (PASI) score of 75 or better in 12 weeks and subsequently maintain that clearance for an extended period of time. A PASI 75 score indicates a 75% reduction in disease, and is a benchmark endpoint for most clinical trials of psoriasis. Preliminary results for the first 21 patients that completed the new XTRAC treatment protocol were reported in the Journal of Dermatological Treatment in February 19, 2014. By week 12, 76% of the patients had a reduction in Psoriasis Area and Severity Index of at least 75% (PASI-75) and 52% had a Physicians Global Assessment of “clear” or “almost clear.” If this trend continues excimer laser therapy combined with an optimized topical agent may provide an extremely effective treatment of moderate and severe psoriasis that avoids the risk of serious side effects associated with many current systemic Biologic agents.
Using the XTRAC Excimer Lasers to Treat Vitiligo and Other Skin Diseases
UV light therapy is considered to be an effective and safe treatment for many skin disorders beyond psoriasis. To this effect, the XTRAC technology is FDA cleared for the treatment of not only psoriasis but also vitiligo (a skin pigment deficiency), atopic dermatitis (eczema) and leukoderma, which is a localized loss of skin pigmentation that occurs after an inflammatory skin condition, such as a burn, intralesional steroid injection, or post dermabrasion.
XTRAC technology works for vitiligo patients in much the same way as for psoriasis patients, although vitiligo treatment requires more therapy sessions. The XTRAC UVB light functions to reignite the skin’s melanocytes (the cells that produce melanin), which causes pigment to return. To date, there is not sufficient data to confirm how long patients can expect their vitiligo to be in remission after XTRAC therapy. Based on anecdotal reports, we believe that re-pigmentation may last for several years.
Traditionally, vitiligo treatments have been considered cosmetic procedures, and as such, were not reimbursed by insurance companies. However, over the past two years, there has been a significant increase in insurance coverage for these procedures, although it still lags behind the widespread reimbursement for psoriasis.
Due to a greater prevalence of vitiligo among people with darker skin types, regions such as the Middle East, where there is also a social stigma about the condition, are considerable markets for our XTRAC lasers.
Awareness of the positive effects of XTRAC treatments is the greatest limiting factor in making XTRAC treatments available to those who suffer from psoriasis and vitiligo. Therefore, we have initiated a direct to patient advertising campaign aimed at motivating psoriasis and vitiligo patients to seek out XTRAC treatments from our dermatologist customers. Specific advertisements encourage prospective patients to contact the Company’s patient advocacy center through telephone or web site whereby we provide information on the treatment, insurance coverage and ultimately schedule an appointment for the prospective patient with one of our dermatologist customers for an evaluation and treatment regimen.
NEOVA® PHYSICIAN-DISPENSED SKIN CARE
Our NEOVA skin care line is designed as a therapeutic intervention for preventing premature skin aging due to UV-induced DNA damage. The topical technology seeks to repair photo-damaged skin using a novel combination of two key ingredients: DNA repair enzymes and our Copper Peptide Complex®. Copper has been studied for more than 20 years for its wound healing applications. Research suggests that copper can be used to improve the elasticity of skin and is complementary to DNA repair enzymes, which repair damage caused by sunlight and other UV rays.
The DNA repair enzymes contained in the NEOVA formulation have several objectives:
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Continuously repair and enhance skin’s natural processes;
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Protect from UV immunosuppression;
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Restore barrier function;
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Promote collagen regeneration and skin elasticity; and
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Assist in correcting and improving cell metabolism.
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In concert with the repair enzymes, NEOVA’s Copper Peptide Complex serves to promote new blood vessel growth and enhance the expression of growth factors. It stimulates collagen and elastin formation, which accelerate the repair process. Additionally, the Copper Peptide Complex is designed to mitigate damage caused by free radicals by promoting an antioxidant defense. Free radicals are a type of highly reactive oxygen molecule known to cause oxidative stress, which triggers harmful inflammatory responses and cell death as the free radicals attack DNA, lipids, proteins and other cell components. They are also believed to accelerate the progression of cancer, cardiovascular disease and age-related diseases, including cataracts, arthritis, Alzheimer’s disease and diabetes. As typically occurs in normal, healthy cells, an antioxidant defense system comprising vitamins C and E and a variety of enzymes can minimize and repair free radical-induced damage.
Among other products, the NEOVA line includes DNA Damage Control SILC SHEER SPF 45, an award-winning tinted sunscreen that contains micronized titanium dioxide, organic blockers and DNA repair enzymes to reduce risks of skin cancer and premature aging—both of which are caused by photo damage from sun exposure. The DNA repair enzymes are clinically shown to reduce UV damage by 45% and increase UV protection by 300% in one hour.
NEOVA DNA Total Repair cream has been featured on The Doctors, a national daytime talk show that offers medical and health advice. The segment illustrated how the Total Repair product repairs damaged DNA in the cells of the skin in order to diminish age spots on someone who has used the cream consistently for two weeks. The guest testing the product reported that her hands had lightened considerably and some age spots had almost disappeared.
The NEOVA technology represents another opportunity to integrate our marketing platform with our direct sales force for plastic surgeons and dermatologists, which has traditionally been responsible for furthering market adoption of NEOVA products. Through a direct-to-consumer initiative, we seek to drive consumers to medical practices for NEOVA as well as to our website to buy direct.
We hold over 26 patents related to the NEOVA technology, as well as the ability to draw upon more than 150 peer-reviewed journal articles that provide scientific support for these ingredients.
Our direct-to-consumer efforts are designed to take full selling advantage of the 10,000 attentive customers a week inquiring after no!no! products. Introduced as upsells to this population, the tests have shown significant success with 26% of customers opting-in for a Neova continuity program.
LED TECHNOLOGY
Omnilux™
Omnilux Light Therapy uses light-emitting diode (LED) technology to treat skin conditions. Although commonly understood for their use in electronics, LEDs have gained notoriety for medical applications as well. The Omnilux LED system is FDA cleared to treat wrinkles, acne, minor muscle pain and pigmented lesions. For professional use, the Omnilux equipment entails a common base apparatus equipped with three interchangeable headlamps. Each of these lamps gives off a different wavelength of light, which allows physicians to treat more than one condition with the same piece of capital equipment. Omnilux technology is believed to be applicable to all skin types. Going forward, we believe the application of LED technology will likely continue to expand, particularly as more research is conducted on the possibilities of using LEDs to activate cancer drugs, among other medications.
Lumière
Lumière is a sister technology to Omnilux with the same patent protection. It is designed for use in non-medical applications, especially at salons and spas. Lumière combines LED technology with our DNA repair enzymes and Copper Peptide Complex, giving aesthetic professionals a complete non-invasive skin care solution. The Lumière™ light therapy equipment contains a self-service headlamp with two wavelengths built specially for salons and spas. Accompanying the LED treatment is a line of topical lotions to improve the appearance of fine lines, wrinkles, skin tone and blemishes.
SURGICAL PRODUCTS
We engage in the development, manufacture and sale of surgical products, including proprietary free-beam and Contact Laser™ Systems for surgery. We introduced Contact Laser surgery by combining proprietary Contact Laser Delivery Systems with an Nd:YAG laser unit to create a multi-specialty surgical instrument that can cut, coagulate or vaporize tissue. Our Contact Laser Delivery Systems can be used effectively with any wavelength of laser between 532nm and 1064nm, including the KTP laser (532nm), diode laser (various wavelengths) and Nd:YAG laser (1064nm). We are currently marketing such products under the trade name PhotoMedex Surgical Products.
Our proprietary Contact Laser probe and scalpel surface treatments provide the ability to alter selectively the temperature profile of tissue, replicating the clinical effect of many different types of lasers. Through our Contact Laser Delivery Systems, we are able to produce a wide range of temperature gradients, which address a broad range of surgical procedures within multiple specialties. Our multiple-specialty capability reduces a hospital’s need to purchase several lasers to meet its specialists’ varied requirements.
Our LaserPro® Diode laser system has replaced the Nd:YAG laser as the preferred host laser for our Contact Laser Delivery Systems. Our Contact Laser Delivery Systems consist of proprietary fiberoptic delivery systems which deliver the laser beam from our Diode (or Nd:YAG) laser unit via an optical fiber to the tissue, either directly or through a proprietary Laser Probe or Laser Scalpel. These delivery systems can also be used with the laser systems of certain other manufacturers.
Competition
The markets in which we participate are highly competitive. Certain of our competitors are larger than us and have substantially more resources. However, we believe that we are positioned to compete against a wide variety of peers, whether consumer-based companies of similar size or other companies competing in the aesthetics/physician channel. As it pertains to the aesthetic device market, this arena is complex and highly competitive—both for home use and treatment in a physician’s office. Over the past several decades, the aesthetics technology market has changed considerably due to technological innovation and discoveries. We are exposed to competition from small, closely held, specialized aesthetic device companies, such as Dezac Group, Home Skinovations Ltd., TRIA Beauty, Inc. and LumaTherm Inc. Several public companies, such as Syneron Medical Ltd. (ELOS-NASDAQ), Cynosure Inc. (CYNO-NASDAQ) and Valeant Pharmaceuticals, Inc. (VRX-NYSE), are either looking to market or are already marketing consumer aesthetics products.
Our no!no!® products are energy-based. As such, energy-based aesthetic products may face competition from non-energy-based medical products, such as shaving, tweezing, waxing and creams.
We believe that a significant barrier to entry into an applicable market is the cost basis of the product, since our products are based upon a proprietary technology that allows us to build products inexpensively. From a marketing standpoint, if competitors are developing a product that may compete with no!no!®, they then become tasked with the challenge of building the marketing for that product. We invested roughly $72 million in 2013 in marketing and advertising. Furthermore, our comprehensive intellectual property position may serve as a deterrent to companies.
We may also compete with pharmaceutical compounds and methodologies used to treat an array of skin conditions addressed by our professional products. Such alternative treatments may be in the form of topical products, systemic medications, and phototherapies from both large pharmaceutical and smaller laser companies. Currently, our XTRAC system is believed to be a competitive therapy to alternative treatments on the basis of its recognized clinical effect, cost-effectiveness and reimbursement. Potential competition for us in this category could come from Biogen Idec Inc. (BIIB-NASDAQ), Centocor, Inc. (a Johnson & Johnson company) and Abbott Laboratories (ABT-NYSE), which are engaged in R&D and commercialization of treatments in these areas. In some cases, these companies have already received FDA approval for products or commenced clinical trials for such treatments.
With regard to surgical lasers, we face substantial competition from other manufacturers of surgical laser systems, whose identity varies depending on the medical application for which the surgical system is being used and from traditional surgical methods. Other companies are developing competitive surgical systems and related technologies.
Manufacturing
We manufacture our excimer laser products and our excimer lamp product at our 11,300 sq. ft. facility in Carlsbad, California. We manufactured our surgical products at our 42,000 sq. ft. facility in Montgomeryville, Pennsylvania. Our California and Pennsylvania facilities are ISO 13485 certified. ISO 13485 is an International standardization written by the International Organization for Standardization, which publishes requirements for a comprehensive quality management system for the design and manufacture of medical devices. Certification to the standard is awarded by accredited third parties. We believe that our present manufacturing capacity at these facilities is sufficient to meet foreseeable demand for our products.
For our surgical products, we manufacture most of our own components and utilize certain suppliers for the manufacture of selected standard components and subassemblies, which are manufactured to our specifications. Most major components and raw materials, including optics and electro-optic devices, are available from a variety of sources. We conduct all final testing and inspection of our products. We have established a quality control program, including a set of standard manufacturing and documentation procedures intended to ensure that, where required, our products are manufactured in accordance with applicable FDA regulations and the comparable requirements of the European Community and other countries, including for example Japan and Canada.
Outsourcing and Fulfillment
We out-source the manufacturing of our Thermicon® and LHE® brand products while maintaining control over the production process. We believe that by outsourcing the manufacturing of each product, we can maintain low inventory levels and fixed unit costs, with minimal infrastructure, without incurring significant capital expenditures. We use third-party contract manufacturers and suppliers to obtain substantially all of the related product and packaging components and to manufacture these finished products. We believe that we have good relationships with our manufacturers and suppliers and that there are alternative sources in the event that one or more of these manufacturers or suppliers is not available or cease the conduct of its business. We continually review our manufacturing and supply needs against the capacity of our contract manufacturers and suppliers with the objective of ensuring that we are able to meet our production goals, reduce costs and operate more efficiently.
We contract with third-party fulfillment vendors to package and distribute our Thermicon®, LHE® and skincare products primarily from our fulfillment facilities in the United States, Canada and the United Kingdom.
We substantially outsource the manufacturing of our Skin Care products to OEM contract manufacturers. In addition, we currently out-source the manufacturing of our LED products. The LED product equipment is currently manufactured by an OEM manufacturer in the UK with tooling provided and owned by us. We believe that the manufacturing capacity of this supplier is sufficiently adequate for anticipated demand. Quality control is performed at the OEM manufacturer and at our facilities in the U.S. The hand-held devices and the consumable products are manufactured by an OEM manufacturer in Carlsbad, CA. We are currently reliant on a single supplier for LEDs. We have not had any difficulties in product supply of LEDs to date, but we are actively seeking an alternate supplier for the purpose of offsetting this single-supplier approach.
Research and Development
As of March 14, 2014, our research and development team, including engineers, consisted of 11 employees. We conduct research and development activities at three of our facilities located in Horsham, Pennsylvania, Carlsbad, California and Hod Hasharon, Israel. Our research and development expenditures were approximately $3.3 million in 2013, $2.9 million in 2012 and $1.1 million in 2011.
Our research and development activities are focused on:
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the utilization of existing technologies to develop additional consumer and professional applications and products;
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the application of our XTRAC system to the treatment of inflammatory skin disorders;
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the development of complementary devices to further improve the phototherapy treatments performed with our XTRAC and other light-based systems;
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the development of new skin health and hair care products; and
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the development of additional products and applications, whether in phototherapy or surgery, by working closely with our Scientific Advisory Board, medical centers, universities and other companies worldwide.
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Patents and Proprietary Technologies
We intend to protect our proprietary rights from unauthorized use by third parties to the extent that our proprietary rights are covered by valid and enforceable patents or are effectively maintained as trade secrets.
Our policy is to file patent applications and to protect certain technology, inventions and improvements that are commercially important to the development of our business. As patents expire and expose our inventions to public use, we seek to mitigate the impact of such expirations by seeking protection of improvements. The patents in our Skin Care product line relate to use of our copper and manganese peptide-based technology for a variety of healthcare applications and to the composition of certain biologically active, synthesized compounds. Our strategy has been to apply for and maintain patent protection for certain compounds and their discovered uses that are believed to have potential commercial value in countries that offer significant market potential. As of December 31, 2013, we had 144 issued patents and 44 patent applications. In the U.S. alone, our business is protected by 41 patents.
We have licensed certain of our proprietary technology to third parties. We seek licenses from third parties for technology that can broaden our product and service offerings. For example, we secured a license from the Mount Sinai School of Medicine, New York, New York, which granted us exclusive rights to a patent directed to the use of excimer lasers in the treatment of vitiligo.
We also rely on trade secrets, employee and third-party nondisclosure agreements and other protective measures to protect our intellectual property rights pertaining to our products and technology.
Many of our products and services are offered under trademarks and service marks, both registered and unregistered. We believe our trademarks encourage customer loyalty and aid in the differentiation of our products from competitors’ products, especially in our skincare products. Accordingly, we had 221 trademarks, either registered or being registered, in markets around the world that we intend to maintain in support of our products. These include 44 trademarks issued in the U.S. (including 32 for Pre-merged PhotoMedex) and 177 trademarks issued in the rest of the world (including 138 for Pre-merged PhotoMedex).
Government Regulation
Regulations Relating to Products and Manufacturing
Our products and research and development activities are regulated by numerous governmental authorities, principally the FDA and corresponding state and foreign regulatory agencies. Any medical device or cosmetic we manufacture and/or distribute will be subject to pervasive and continuing regulation by the FDA. The U.S. Food, Drug and Cosmetics Act, or FD&C Act, and other federal and state laws and regulations govern the pre-clinical and clinical testing, design, manufacture, use, labeling and promotion of medical devices, including our XTRAC system, LED devices, surgical lasers and other products currently under development by us and govern the manufacture and labeling of the cosmetic products. Product development and approval for medical devices within this regulatory framework takes a number of years and involves the expenditure of substantial resources.
In the U.S., medical devices are classified into three different classes, Class I, II and III, on the basis of controls deemed necessary to provide a reasonable assurance of the safety and effectiveness of the device. Class I devices are subject to general controls, such as facility registration, medical device listing, labeling requirements, premarket notification (unless the medical device has been specifically exempted from this requirement), adherence to the FDA’s Quality System Regulation, and requirements concerning the submission of device-related adverse event reports to the FDA. Class II devices are subject to general and special controls, such as performance standards, pre-market notification (510(k) clearance), post-market surveillance, and FDA Quality System Regulations. Generally, Class III devices are those that must receive premarket approval by the FDA to provide a reasonable assurance of their safety and effectiveness, such as life-sustaining, life-supporting and implantable devices, or new devices that have been found not to be substantially equivalent to existing legally marketed devices.
With limited exceptions, before a new medical device can be distributed in the U.S., marketing authorization typically must be obtained from the FDA through a premarket notification under Section 510(k) of the FDA Act, or through a premarket approval application under Section 515 of the FDA Act. The FDA will typically grant a 510(k) clearance if it can be established that the device is substantially equivalent to a predicate device that is a legally marketed Class I or II device (or to pre-amendments Class III devices for which the FDA has yet to call for premarket approvals). We have received FDA 510(k) clearance to market our XTRAC system for the treatment of psoriasis, vitiligo, atopic dermatitis and leukoderma and to market our LED products for a variety of indications for use. Additionally, the FDA has issued clearances to commercially market our Contact Laser System (which includes the system’s laser unit, laser probes, laser scalpels and fiberoptic delivery systems) in a variety of surgical specialties and procedures in gynecology, gastroenterology, urology, pulmonology, general and plastic surgery, cardiothoracic surgery, ENT surgery, ophthalmology, neurosurgery and head and neck surgery. The FDA granted these clearances under Section 510(k) on the basis of substantial equivalence to other laser or electrosurgical cutting devices that had received prior clearances.
For any devices that are cleared through the 510(k) process, modifications or enhancements that could significantly affect the safety or effectiveness of the device, or that constitute a major change in the intended use of the device, will require a new 510(k) submission. In August 2003, the FDA granted 510(k) clearance for a significantly modified version of our XTRAC laser, which we have marketed as the XTRAC XL Plus™ Excimer Laser System. In October 2004, the FDA granted clearance for the XTRAC Ultra™ (AL 8000) Excimer Laser System and, in March 2008, we received 510(k) clearance for the XTRAC Velocity™ (AL 10000) Excimer Laser System.
To date, we have not been required to secure premarket approval for our devices. A premarket approval application may be required for a Class II device if it is not substantially equivalent to an existing legally marketed Class I or II device (or a pre-amendments Class III device for which the FDA has yet to call for premarket approval) or if the device is a Class III premarket approval device by regulation. A premarket approval application must be supported by valid scientific evidence to demonstrate a reasonable assurance of safety and effectiveness of the device, typically including the results of clinical trials, bench tests and possibly animal studies. In addition, the submission must include, among other things, the proposed labeling. The premarket approval process can be expensive, uncertain and lengthy and a number of devices for which FDA approval has been sought by other companies have never been approved for marketing.
We are subject to routine inspection by the FDA and, as noted above, must comply with a number of regulatory requirements applicable to firms that manufacture medical devices and other FDA-regulated products for distribution within the U.S., including requirements related to device labeling (including prohibitions against promoting products for unapproved or off-label uses), facility registration, medical device listing, labeling requirements, adherence to the FDA’s Quality System Regulation, good manufacturing processes and requirements for the submission of reports regarding certain device-related adverse events to the FDA.
We are also subject to the radiological health provisions of the FDA Act and the general and laser-specific radiation safety regulations administered by the Center for Devices and Radiological Health, or CDRH, of the FDA. These regulations require laser manufacturers to file initial, new product, supplemental and annual reports, to maintain quality control, product testing and sales records, to incorporate certain design and operating features (depending on the class of product) in lasers sold to end users pursuant to a performance standard and to certify and appropriately label each laser sold as belonging to one of four classes, based on the level of radiation from the laser that is accessible to users. Moreover, we are obligated to repair, replace, or refund the cost of certain electronic products that are found to fail to comply with applicable federal standards or otherwise are found to be defective. The CDRH is empowered to seek fines and other remedies for violations of the regulatory requirements. To date, we have filed the documentation with the CDRH for our laser products requiring such filing and have not experienced any difficulties or incurred significant costs in complying with such regulations.
We have received approval from the European Union to affix the CE Mark to our XTRAC laser system, VTRAC™ lamp system, Omnilux LED system and our diode laser system. This certification is a mandatory conformity mark for products placed on the market in the European Economic Area, which is evidence that they meet all European Community, or EC, quality assurance standards and compliance with applicable European medical device directives for the production of medical devices. This will enable us to market our approved products in all of the member countries that accept the CE Mark. We also will be required to comply with additional individual national requirements that are in addition to those required by these nations. Our products have also met the requirements for marketing in various other countries.
Failure to comply with applicable regulatory requirements can result in fines, injunctions, civil penalties, recalls or seizures of products, total or partial suspensions of production, refusals by the U.S and foreign governments to permit product sales and criminal prosecution.
As to our cosmetic products, the FD&C Act and the regulations promulgated there and under other federal and state statutes govern the testing, manufacture, safety, labeling, storage, record-keeping, advertising and promotion of cosmetic products. Our cosmetic products and product candidates may be regulated by any of the various FDA Centers. Routinely, however, cosmetics are regulated by the FDA’s Center for Food Safety and Applied Nutrition. In other countries, cosmetic products may also be regulated by similar health and regulatory authorities. The skin care business also has two devices (e.g. wound care dressings) subject to 510(k) clearance, four products (e.g. sunscreen products) that contain drugs approved for use in over-the-counter products, and one prescription drug. Currently, the skincare products that are classified as drugs are not required to obtain pre-marketing regulatory approval. The process of obtaining and maintaining regulatory approvals in the U.S. and abroad for the manufacturing or marketing of our existing and potential skincare products is potentially costly and time-consuming and is subject to unanticipated delays. Regulatory requirements ultimately imposed could also adversely affect our ability to clinically test, manufacture or market products.
Failure to obtain regulatory approvals where appropriate for our cosmetic, device or drug product candidates or to attain or maintain compliance with quality system regulations or other manufacturing requirements, could have a material adverse effect on our business, financial condition and results of operations.
We are or may become subject to various other federal, state, local and foreign laws, regulations and policies relating to, among other things, safe working conditions, good laboratory practices and the use and disposal of hazardous or potentially hazardous substances used in connection with research and development.
Fraud and Abuse Laws
Because of the significant federal funding involved in Medicare and Medicaid, Congress and the states have enacted, and actively enforce, a number of laws whose purpose is to eliminate fraud and abuse in federal health care programs. Our business is subject to compliance with these laws.
Anti-Kickback Laws
In the U.S., there are federal and state anti-kickback laws that generally prohibit the payment or receipt of kickbacks, bribes or other remuneration in exchange for the referral of patients or other health-related business. The U.S. federal healthcare programs’ Anti-Kickback Statute makes it unlawful for individuals or entities knowingly and willfully to solicit, offer, receive or pay any kickback, bribe or other remuneration, directly or indirectly, in exchange for or to induce the purchase, lease or order, or arranging for or recommending purchasing, leasing, or ordering, any good, facility, service, or item for which payment may be made in whole or in part under a federal healthcare program such as Medicare or Medicaid. The Anti-Kickback Statute covers “any remuneration,” which has been broadly interpreted to include anything of value, including for example gifts, certain discounts, the furnishing of free supplies, equipment or services, credit arrangements, payments of cash and waivers of payments. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the arrangement can be found to violate the statute. Penalties for violations include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs. In addition, several courts have permitted kickback cases brought under the Federal False Claims Act to proceed, as discussed in more detail below.
Because the Anti-Kickback Statute is broadly written and encompasses many harmless or efficient arrangements, Congress authorized the Office of Inspector General of the U.S. Department of Health and Human Services, or OIG, to issue a series of regulations, known as “safe harbors.” For example, there are regulatory safe harbors for payments to bona fide employees, properly reported discounts and rebates, and for certain investment interests. Although an arrangement that fits into one or more of these exceptions or safe harbors is immune from prosecution, arrangements that do not fit squarely within an exception or safe harbor do not necessarily violate the statute. The failure of a transaction or arrangement to fit precisely within one or more of the exceptions or safe harbors does not necessarily mean that it is illegal or that prosecution will be pursued. However, conduct and business arrangements that arguably implicate the Anti-Kickback Statute but do not fully satisfy all the elements of an exception or safe harbor may be subject to increased scrutiny by government enforcement authorities such as the OIG.
Many states have laws that implicate anti-kickback restrictions similar to the Anti-Kickback Statute. Some of these state prohibitions apply, regardless of whether federal health care program business is involved, to arrangements such as for self-pay or private-pay patients.
Government officials have focused their enforcement efforts on marketing of healthcare services and products, among other activities, and recently have brought cases against companies, and certain sales, marketing and executive personnel, for allegedly offering unlawful inducements to potential or existing customers in an attempt to procure their business.
Federal Civil False Claims Act and State False Claims Laws
The federal civil False Claims Act imposes liability on any person or entity who, among other things, knowingly and willfully presents, or causes to be presented, a false or fraudulent claim for payment by a federal healthcare program, including Medicare and Medicaid. The “qui tam,” or “whistleblower” provisions of the False Claims Act allow a private individual to bring actions on behalf of the federal government alleging that the defendant has submitted a false claim to the federal government, and to share in any monetary recovery. In recent years, the number of suits brought against healthcare providers by private individuals has increased dramatically. Medical device companies, like us, can be held liable under false claims laws, even if they do not submit claims to the government, when they are deemed to have caused submission of false claims by, among other things, providing incorrect coding or billing advice about their products to customers that file claims, or by engaging in kickback arrangements with customers that file claims.
The False Claims Act also has been used to assert liability on the basis of misrepresentations with respect to the services rendered and in connection with alleged off-label promotion of products. Our future activities relating to the manner in which we sell our products and document our prices, such as the reporting of discount and rebate information and other information affecting federal, state and third-party reimbursement of our products, and the sale and marketing of our products, may be subject to scrutiny under these laws.
When an entity is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties of between $5,500 to $11,000 for each separate false claim. There are many potential bases for liability under the False Claims Act. A number of states have enacted false claim laws analogous to the federal civil False Claims Act and many of these state laws apply where a claim is submitted to any state or private third-party payor. In this environment, our engagement of physician consultants in product development and product training and education could subject us to similar scrutiny. We are unable to predict whether we would be subject to actions under the False Claims Act or a similar state law, or the impact of such actions. However, the costs of defending such claims, as well as any sanctions imposed, could significantly affect our financial performance.
HIPAA Fraud and Other Regulations
The Health Insurance Portability and Accountability Act of 1996, or HIPAA, created a class of federal crimes known as the “federal health care offenses,” including healthcare fraud and false statements relating to healthcare matters. The HIPAA health care fraud statute prohibits, among other things, knowingly and willfully executing, or attempting to execute, a scheme or artifice to defraud any healthcare benefit program, or to obtain by means of false of fraudulent pretenses, any money under the control of any health care benefit program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment and/or exclusion from government-sponsored programs. The HIPAA false statements statute prohibits, among other things, knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement or representation in connection with the delivery of or payment for healthcare benefits, items or services. A violation of this statute is a felony and may result in fines and/or imprisonment. Entities that are found to have aided or abetted in a violation of the HIPAA federal health care offenses are deemed by statute to have committed the offense and are punishable as a principal.
We are also subject to the U.S. Foreign Corrupt Practices Act and similar anti-bribery laws applicable in non-U.S. jurisdictions that generally prohibit companies and their intermediaries from making improper payments to non-U.S. government officials for the purpose of obtaining or retaining business. Because of the predominance of government-sponsored healthcare systems around the world, most of our customer relationships outside of the U.S. will be with governmental entities and therefore subject to such anti-bribery laws.
HIPAA and Other Privacy Regulations
The regulations that implement HIPAA also establish uniform standards governing the conduct of certain electronic healthcare transactions and protecting the security and privacy of individually identifiable health information maintained or transmitted by healthcare providers, health plans and healthcare clearinghouses, which are referred to as “covered entities.” Several regulations have been promulgated under HIPAA’s regulations including: the Standards for Privacy of Individually Identifiable Health Information, or the Privacy Rule, which restricts the use and disclosure of certain individually identifiable health information; the Standards for Electronic Transactions, or the Transactions Rule, which establishes standards for common healthcare transactions, such as claims information, plan eligibility, payment information and the use of electronic signatures; and the Security Standards for the Protection of Electronic Protected Health Information, or the Security Rule, which requires covered entities to implement and maintain certain security measures to safeguard certain electronic health information. Although we do not believe we are a covered entity and therefore are not currently directly subject to these standards, we expect that our customers generally will be covered entities and may ask us to contractually comply with certain aspects of these standards by entering into requisite business associate agreements. While the government intended this legislation to reduce administrative expenses and burdens for the healthcare industry, our compliance with certain provisions of these standards entails significant costs for us.
The Health Information Technology for Economic and Clinical Health Act, or the HITECH Act, which was enacted in February 2009, strengthens and expands the HIPAA Privacy and Security Rules and the restrictions on use and disclosure of patient identifiable health information. HITECH also fundamentally changed a business associate’s obligations by imposing a number of Privacy Rule requirements and a majority of Security Rule provisions directly on business associates that were previously only directly applicable to covered entities. HITECH includes, but is not limited to, prohibitions on exchanging patient identifiable health information for remuneration, restrictions on marketing to individuals, and obligations to agree to provide individuals an accounting of virtually all disclosures of their health information. Moreover, HITECH requires covered entities to report any unauthorized use or disclosure of patient identifiable health information, known as a breach, to the affected individuals, the United States Department of Health and Human Services, or HHS, and, depending on the size of any such breach, the media for the affected market. Business associates are similarly required to notify covered entities of a breach. Most of the HITECH provisions became effective in February 2010. HHS has already issued regulations governing breach notification which were effective in September 2009.
HITECH has increased civil penalty amounts for violations of HIPAA by either covered entities or business associates up to an annual maximum of $1.5 million for uncorrected violations based on willful neglect. Imposition of these penalties is more likely now because HITECH significantly strengthens enforcement. It requires HHS to conduct periodic audits to confirm compliance beginning in February 2010 and to investigate any violation that involves willful neglect which carries mandatory penalties beginning in February 2011. Additionally, state attorneys general are authorized to bring civil actions seeking either injunctions or damages in response to violations of HIPAA Privacy and Security Rules that threaten the privacy of state residents.
In addition to federal regulations issued under HIPAA, some states have enacted privacy and security statutes or regulations that, in some cases, are more stringent than those issued under HIPAA. In those cases, it may be necessary to modify our planned operations and procedures to comply with the more stringent state laws. If we fail to comply with applicable state laws and regulations, we could be subject to additional sanctions.
Federal and state consumer protection laws are being applied increasingly by the United States Federal Trade Commission, or FTC, and state attorneys general to regulate the collection, use, storage and disclosure of personal or patient information, through websites or otherwise, and to regulate the presentation of web site content. Courts may also adopt the standards for fair information practices promulgated by the FTC, which concern consumer notice, choice, security and access. Numerous other countries have or are developing laws governing the collection, use, disclosure and transmission of personal or patient information.
HIPAA as well as other federal and state laws apply to our receipt of patient identifiable health information in connection with research and clinical trials. We collaborate with other individuals and entities in conducting research and all involved parties must comply with applicable laws. Therefore, the compliance of the physicians, hospitals or other providers or entities with whom we collaborate also impacts our business.
Third-Party Reimbursement
Our ability to market our phototherapy products successfully depends in large part on the extent to which various third parties are willing to reimburse patients or providers for the cost of medical procedures utilizing our treatment products. These third parties include government authorities, private health insurers and other organizations, such as health maintenance organizations. Third-party payors are systematically challenging the prices charged for medical products and services. They may deny reimbursement if they determine that a prescribed device is not used in accordance with cost-effective treatment methods as determined by the payor, or is experimental, unnecessary or inappropriate. Accordingly, if less costly drugs or other treatments are available, third-party payors may not authorize, or may limit, reimbursement for the use of our products, even if our products are safer or more effective than the alternatives. Additionally, they may require changes to our pricing structure and revenue model before authorizing reimbursement.
Reimbursement systems in international markets vary significantly by country and by region within some countries, and reimbursement approvals must be obtained on a country-by-country basis. Many international markets have government-managed healthcare systems that control reimbursement for new devices and procedures. In most markets, there are private insurance systems, as well as government-managed systems. Our XTRAC products remain substantially without approval for reimbursement in many international markets under either government or private reimbursement systems. Since our skincare products are primarily for cosmetic applications, reimbursement is not a critical factor in growing revenues for this product segment.
Many private plans key their reimbursement rates to rates set by the Centers for Medicare and Medicaid Services under three distinct CPT codes based on the total skin surface area being treated.
As of December 31, 2013, the national rates were as follows:
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96920 – designated for: the total area less than 250 square centimeters. CMS assigned a 2014 national payment of approximately $153.32 per treatment;
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96921 – designated for: the total area 250 to 500 square centimeters. CMS assigned a 2014 national payment of approximately $169.08 per treatment; and
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96922 – designated for: the total area over 500 square centimeters. CMS assigned a 2014 national payment of approximately $234.64 per treatment.
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The national rates are adjusted by overhead factors applicable to each state.
Employees
As of March 14, 2014, we had 168 full-time employees, which consisted of two executive officers, 19 senior managers, 71 sales and marketing staff, 30 people engaged in operations, 11 customer-field service personnel, 11 engaged in research and development, including 6 engineers, and 24 finance and administration staff. We intend to hire additional sales personnel as the development of our business makes such action appropriate. The loss of the services of key employees could have a material adverse effect on our business. Since there is intense competition for qualified personnel knowledgeable in our industry, no assurances can be given that we will be successful in retaining and recruiting needed personnel.
Our employees are not represented by a labor union nor covered by a collective bargaining agreement. We believe that we have good relations with our employees.
Financial Information about Geographic Areas
See Note 14 to the consolidated financial statements.
Available Information
PhotoMedex’s website is www.photomedex.com. Our annual reports on Form 10-K, quarterly reports on 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available on our website at http://phx.corporate-ir.net/phoenix.zhtml?c=107542&p=irol-sec as soon as reasonably practicable after we electronically file such reports with, or furnish them to, the SEC.
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Risk Factors
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The following discussion of risk factors contains forward-looking statements as discussed on page 1. These risk factors may be important to understanding any statements in this Report or elsewhere. Our business routinely encounters and addresses risks, some of which may cause our future results to be different – sometimes materially different – than we presently anticipate.
Risk Factors Relating to the Company’s Business
Economic downturns and disruption in the financial markets could adversely affect the Company’s financial condition and results of operations.
Financial markets in the United States, Europe and Asia experienced significant disruption since 2008, including volatility in securities prices and diminished liquidity and credit availability. Furthermore, the economic slowdown during this period in the United States and other countries weakened consumer confidence and led to significant reductions in the amounts persons and businesses spent on consumer products and other expenditures. In part, as a result, certain of the Company’s operations and revenues declined.
If adverse general economic conditions continue, the Company’s future revenue, profitability and cash flow from operations could decrease and its liquidity and financial condition could be adversely impacted.
The Company is exposed to credit risk of some of its customers.
Most of the Company’s sales related to its no!no!® line of products are on an open credit basis. The Company monitors individual customer payment capability in granting such open credit arrangements, seeks to limit such open credit to amounts the Company believes the customers can pay, and maintains reserves it believes are adequate to cover exposure for doubtful accounts. Beyond its open credit arrangements, the Company has also experienced demands for customer financing and facilitation of leasing arrangements, which it typically refers to leasing companies unrelated to the Company.
The Company’s exposure to the credit risks may increase due to the current economic slowdown. Although the Company has programs in place that are designed to monitor and mitigate the associated risk, there can be no assurance that such programs will be effective in reducing its credit risks. Future credit losses, if incurred, could harm its business and have a material adverse effect on its operating results and financial condition. The Company maintains estimated accruals and allowances for its business terms. However, distributors tend to have more limited financial resources than other resellers and end-user customers and therefore represent potential sources of increased credit risk because they may be more likely to lack the reserve resources to meet payment obligations.
The Company may need to raise additional funds to pursue its growth strategy or continue its operations, and we may be unable to raise capital when needed.
From time to time, the Company may seek additional equity or debt financing to provide for the capital expenditures required to finance working capital requirements, continue its expansion, to increase liquidity, develop new products and services or make acquisitions or other investments. In addition, if its business plans change, general economic, financial or political conditions in its markets change, or other circumstances arise that have a material effect on its cash flow, the anticipated cash needs of its business as well as its conclusions as to the adequacy of its available sources of capital could change significantly.
Any of these events or circumstances could result in significant additional funding needs, requiring the Company to raise additional capital, and we cannot predict the timing or amount of any such capital requirements at this time. If financing is not available on satisfactory terms, or at all, the Company may be unable to expand its business or to develop new business at the rate desired and its results of operations may suffer.
If the Company does not continue to develop and commercialize new products and identify new markets for its products and technologies, the Company may not remain competitive, and its revenues and operating results could suffer.
The cosmetic industry is subject to continuous technological development and product innovation. If the Company does not continue to innovate in developing new cosmetic products and applications, its competitive position will likely deteriorate as other companies successfully design and commercialize new products and applications. Accordingly, its success depends in part on developing innovative applications of its technology and identifying new markets for, and applications of, existing products and technology. While the Company has reduced its cosmetic research and development expenditures in an effort to focus its resources on selling and marketing its existing no!no!® line of products, if the Company is unable to develop and commercialize new cosmetic products and identify new markets for such products and technology, its cosmetic products and technology could become obsolete and the Company’s revenues and operating results could be adversely affected.
The markets for the Company’s products are intensely competitive and we may not be able to compete effectively against the larger, more well-established companies that dominate this market or emerging, and small, innovative companies that may seek to obtain or increase their share of the market.
The markets for the Company’s products are intensely competitive and many of our competitors are much larger and have substantially more financial and human resources than we do. Many have long histories and strong reputations within the industry and a relatively small number of companies dominate these markets.
Our no!no!® hair removal products compete directly with branded, premium retail products such as Philips and Braun and other light based products of public companies such as Syneron, Valeant and Cynosure. In addition, due to regulatory restrictions concerning claims about the efficacy of personal care products, we may have difficulty differentiating our products from other competitive products, and competing products entering the personal care market could harm our revenue. Also, our no!no!® line of products are energy based. As such, energy-based aesthetic products may face competition from non-energy-based medical products, such as Botox, an injectable compound used to reduce wrinkles and collagen injections. Other alternatives to the use of our no!no!® line of products include electrolysis, a procedure involving the application of electric current to eliminate hair follicles and chemical peels. In addition, we may also face competition from manufacturers of other products that have not yet been developed.
We also face direct competition from large pharmaceutical companies, including, for example, Biogen, Inc., Centocor, Inc., and Abbott Laboratories, which are engaged in the research, development and commercialization of treatments for psoriasis, atopic dermatitis, vitiligo and leukoderma. In some cases, those companies have already received FDA approval or commenced clinical trials for such treatments. Many of these companies have significantly greater financial resources and expertise in research and development, manufacturing, conducting pre-clinical studies and clinical trials and marketing than we do.
Other competitors include well-established pharmaceutical, cosmetic and healthcare companies such as Allergan, Inc., Valeant Pharmaceuticals International, Inc and Estee Lauder Inc. These companies may enjoy significant competitive advantages over us, including:
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broad product offerings, which address the needs of physicians and hospitals in a wide range of procedures;
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greater experience in, and resources for, launching, marketing, distributing and selling products, including strong sales forces and established distribution networks;
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existing relationships with physicians and hospitals;
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more extensive intellectual property portfolios and resources for patent protection;
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greater financial and other resources for product research and development;
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greater experience in obtaining and maintaining FDA and other regulatory clearances or approvals for products and product enhancements;
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established manufacturing operations and contract manufacturing relationships;
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significantly greater name recognition and more recognizable trademarks; and
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established relationships with healthcare providers and payors.
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Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. Our commercial opportunity will be reduced or eliminated if we are unsuccessful in convincing physician and patient customers and consumers to use our products or if our competitors develop and commercialize products that are safer and more effective than any products that we may develop.
Because a substantial portion of the Company’s revenue is generated from its consumer business, if it fails to accurately forecast consumer demand and trends in consumer preferences, or if there is a decline in discretionary consumer spending, then the Company’s revenues and profitability could decline.
Consumers in the aesthetic and skincare products industry have tastes, preferences and loyalties that are subject to change. If we do not keep up with consumer preferences and trends, or if we do not accurately forecast such preferences and trends, sales revenues in the Company’s consumer business may decline or our reputation may suffer. The success of our consumer product business depends to a significant extent upon discretionary consumer spending, which is subject to a number of factors, including general economic conditions, consumer confidence, employment levels, business conditions, interest rates, availability of credit, inflation and taxation. Adverse trends in any of these economic indicators may cause consumer spending to decline further, which could hurt its sales and profitability.
The Company’s laser treatments of psoriasis, vitiligo, atopic dermatitis and leukoderma, the Company’s skincare products and its PTL (Photo Therapeutics Ltd.) products and any of the Company’s future products or services may fail to gain market acceptance, which could adversely affect the Company’s competitive position.
The Company has generated limited commercial distribution for its XTRAC system and certain of its other products. It is still not established that the PTL devices targeted for the consumer market will be widely accepted in that market. The Company may be unsuccessful in continuing its existing or developing new, strategic selling affiliates and alternate channels in order to maintain or expand the markets for the existing or future products of the skincare and PTL businesses.
Even if adequate financing is available and such products are ready for market, the Company cannot assure you that its products and services will find sufficient acceptance in the marketplace under its sales strategies.
The Company also faces a risk that other companies in the market for dermatological products and services may be able to provide dermatologists a higher overall yield on investment and therefore compromise the Company’s ability to increase its base of users and ensure they engage in optimal usage of its products. If, for example, such other companies have products (such as Botox or topical creams for disease management) that require less time commitment from the dermatologist and yield an attractive return on a dermatologist’s time and investment, we may find that our efforts to increase our base of users are hindered.
While the Company has engaged in clinical studies for its psoriasis treatment and, based on these studies, it has gained FDA clearance, appropriate Current Procedural Terminology, or CPT, reimbursement codes for treatment and suitable reimbursement rates for those codes, from the Centers for Medicare & Medicaid Services, or CMS, we may face other hurdles to market acceptance. For example, practitioners in significant numbers may wait to see longer-term studies; or it may become necessary to conduct studies corroborating the role of the XTRAC system as a first-line or second-line therapy for treating psoriasis; or patients simply may not elect to undergo psoriasis treatment using the XTRAC system.
Beginning in early 2010, Dr. John Y.M. Koo, the director of the Psoriasis Treatment Center at the University of California San Francisco Medical Center, initiated a clinical study to demonstrate the effectiveness of the XTRAC Velocity in combination with the drugs Clobex® and Vectical®, both from Galderma, for patients with severe psoriasis. This study may or may not result in demonstrating the effectiveness of those products in combination, or the treatment protocol and the treatment protocol may or may not gain FDA clearance. Even if the treatment protocol is successful and gains FDA clearance, limitation of supply of one or both drugs by Galderma, and lack of viable substitutes therefore, may adversely impact use of or compliance with the treatment protocol as a therapy for treatment of psoriasis. Further, the FDA limits claimed indications for use to those found in the “Instructions for Use Statement” in a device’s 510(k) clearance letter. The FDA may view certain of the Company’s claims of treatment as outside the scope of the device’s cleared indications for use.
If the FDA determines that the clinical studies were not conducted in accordance with applicable FDA requirements, the FDA could take regulatory and/or legal enforcement actions against the Company and/or its products and could attempt to withdraw premarket 510(k) clearance.
Whether a treatment may be delegated and, if so, to whom and to what extent, are matters that may vary state by state, as these matters are within the province of the state medical boards. In states that may be more restrictive in such delegation, a physician may decline to adopt the XTRAC system into his or her practice, deeming it to be fraught with too many constraints and finding other outlets for the physician’s time and staff time to be more remunerative. There can be no assurance that the Company will be successful in persuading such medical boards that a liberal standard for delegation is appropriate for the XTRAC system, based on its design for ease and safety of use. If the Company is not successful, it may find that even if a geographic region has wide insurance reimbursement, the region’s physicians may decline to adopt the XTRAC system into their practices.
The Company therefore cannot assure you that the marketplace will be receptive to its excimer laser technology or skincare products over competing products, services and therapies or that a cure will not be found for the underlying diseases the Company is focused on treating. Failure of the Company’s products to achieve market acceptance could have a material adverse effect on the Company’s business, financial condition and results of operations.
The success of the Company’s XTRAC system and other treatment products depends on third-party reimbursement of patients’ costs, which could result in potentially reduced prices or reduced demand and, in relevant part, adversely affect the Company’s revenues and business operations.
The Company’s ability to market the XTRAC system and other treatment products successfully will depend in large part on the extent to which various third parties are willing to reimburse patients or providers for the costs of medical procedures utilizing such products. These third parties include government authorities, private health insurers and other organizations, such as health maintenance organizations, whose patterns of reimbursement may change as a result of new standards for reimbursement determined by these third parties or because of the programs and policies enacted under the Patient Protection and Affordable Care Act of 2010.
Third-party payors are systematically challenging the prices charged for medical products and services. They may deny reimbursement if they determine that a prescribed device is not used in accordance with cost-effective treatment methods as determined by the payor, or is experimental, unnecessary or inappropriate. Further, although third parties may approve reimbursement, such approvals may be under terms and conditions that discourage use of the XTRAC system. Accordingly, if less costly drugs or other treatments are available, third-party payors may not authorize or may limit reimbursement for the use of the Company’s products, even if its products are safer or more effective than the alternatives.
In addition, medical insurance policies and treatment coverage may be affected by the parameters of the Patient Protection and Affordable Care Act of 2010. While the Act’s stated purpose is to expand access to coverage, it also mandates certain requirements regarding the types and limitations of insurance coverage. Some of these requirements have already been enacted, while others are scheduled to roll out over the next several years. There can be no guarantee that the changes in coverage under the Act will not have an effect on the type and level of reimbursement for our products.
Although the Company has received reimbursement approvals from an increasing number of private healthcare plans, we cannot give assurance that private plans will continue to adopt or maintain favorable reimbursement policies or to accept the XTRAC system in its clinical role as a second-line therapy in the treatment of psoriasis. Additionally, third-party payors may require further clinical studies or changes to the Company’s pricing structure and revenue model before authorizing reimbursement.
As of December 31, 2013, the Company estimates, based on published coverage policies and on payment practices of private and Medicare insurance plans, that more than 90% of the insured population in the U.S. is covered by insurance coverage or payment policies that reimburse physicians for using the XTRAC system for treatment of psoriasis. Based on these reports and estimates, the Company is continuing the implementation of a roll-out strategy under revised user models for the XTRAC system in the U.S. in selected areas of the country where reimbursement is widely available. The success of the roll-out depends on increasing physician and patient awareness and demand for the treatment. The Company can give no assurance that health insurers will not adversely modify their reimbursement policies for the use of the XTRAC system in the future.
The Company intends to seek coverage and reimbursement for the use of the XTRAC system to treat other inflammatory skin disorders after additional clinical studies are initiated. There can be no assurances that the Company will be in a position to continue to expand coverage for vitiligo or to seek reimbursement for the use of the XTRAC system to treat atopic dermatitis or leukoderma, or, if the Company does, that any health insurers will agree to any reimbursement policies.
Any failure in our customer education efforts could significantly reduce product marketing.
It is important to the success of our marketing efforts to educate physicians and technicians how to properly use the XTRAC system. We rely on physicians to spend their time and money to attend our pre-sale educational sessions. If physicians and technicians use the XTRAC system improperly, they may have unsatisfactory patient outcomes or cause patient injury, which may give rise to negative publicity or lawsuits against us, any of which could have a material adverse effect on our reputation, revenues and profitability.
Many of the Company’s expenses are fixed and many are based, in significant part, on its expectations of its future revenue and are incurred prior to the sale of its products and services. Therefore, any significant decline in revenue for any period could have an immediate negative impact on its margins, net income and financial results for the period.
The Company’s expense levels are based, in significant part, on its estimates of future revenue and many of these expenses are fixed in the short term. As a result, the Company may be unable to adjust its spending in a timely manner if its revenue falls short of its expectations. Accordingly, any significant shortfall of revenue in relation to its estimates could have an immediate negative effect on its profitability. In addition, as its business grows, the Company anticipates increasing its operating expenses to expand its product development, technical support, sales and marketing and administrative organizations. Any such expansion could cause material losses to the extent the Company does not generate additional revenue sufficient to cover the additional expenses.
If revenue from a significant customer declines, the Company may have difficulty replacing the lost revenue, which would negatively affect its results and operations.
Excluding niche marketing efforts, the Company’s skincare business targets its sales in the U.S. market to physicians, who then mark the products up for sale to their patients. No single physician practice in itself is generally responsible for a significant proportion of the Company’s sales. The Company finds as well that a few physicians re-sell our products not just to their own patients, but also at discounted prices on the internet. These practices undercut the sales of other physicians and violate the Company’s internet sales policy, but this policy can be difficult to enforce.
In its international businesses, the Company depends for a material portion of its sales in the international arena on several key sub-distributors, and especially on The Lotus Global Group, Inc., doing business as GlobalMed Technologies Co., or GlobalMed, which is the Company’s master distributor over most of the international arena for devices (excluding our no!no!® line of products). If the Company loses GlobalMed or one of these sub-distributors, the Company’s sales of phototherapy and surgical lasers are likely to suffer in the short term, which could have a negative effect on its revenues and profitability.
In addition to its sales through online and infomercial outlets, the Company’s no!no! brand products are also marketed through certain major retailers, including HSN, Nordstrom’s and Bed, Bath and Beyond. None of these retailers accounts for more than 10% of the sales of this product line in the United States. However, the loss of one or more of these retailers, without replacement by a comparable sales channel, could have a near-term impact on sales of the no!no! products and an effect on the Company’s revenues and profitability.
The Company’s failure to maintain its relationships with its key distributors (none of which have an ongoing obligation to sell our products) on acceptable terms would have a material adverse effect on its results of operations and financial condition, or if the Company fails to effectively manage or, retain its distribution network or its sales force, its business, prospects and brand may be materially and adversely affected.
Sales made through retailers and distributors constitute a significant part of the Company’s sales revenue. These retailers and distributors are not obligated to sell its products, and may choose to end their relationship with us. Even if we maintain a business relationship with such retailers and distributors, they may sell competing products or may not be able to sell our products. Maintaining business relationships with these retailers and distributors and their continued success is important to maintaining the Company’s revenues and profitability.
Furthermore, the Company has a limited ability to manage the activities of its independent third-party distributors. The Company’s distributors could take one or more of the following actions, any of which could have a material adverse effect on its business, prospects and brand:
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sell products that compete with its products in breach of their non-competition agreements with the Company;
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violate laws or regulations;
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fail to adequately promote its products; or
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fail to provide proper service to its retailers or end-users.
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Failure to adequately manage the Company’s distribution network, or the non-compliance of this network with its obligations under agreements with us, could harm the Company’s corporate image among end users of its products and disrupt its sales, or result in fines or other legal action against the Company.
Because the Company’s Japanese market for the no!no!® brand of products accounts for a significant part of its business, adverse conditions or risks relating to Japan may harm its business.
On November 21, 2013 the Company’s majority-owned subsidiary, Radiancy, Inc., terminated the exclusive distribution agreement between itself and Ya-Man Ltd., Radiancy’s independent distributor for the no!no!® brand products in the Japanese market. Sales in Japan represented approximately 5% of the revenues related to the sale of the no!no! products for the year ended December 31, 2013; those sales were largely generated in the first six months of the year. Ya-Man failed to meet its minimum purchasing commitments under the distribution agreement in the third and fourth quarters of the year, due to a restructuring of its methods of business operations. Radiancy and Ya-Man also disputed the responsibility for the payment of marketing expenses for that country of approximately $1 million.
The Company and Radiancy are now seeking a new distribution partner for the Japanese markets. Meanwhile, retail sales to consumers of the no!no! brand products remain strong, and Ya-Man has continued to market and sell its inventory of those products in Japan in accordance with the terms of its agreement with Radiancy. However, the Company has no assurance that a new distributor will continue to purchase these products at the same levels as Ya-Man, will purchase the Company’s new products, or that an agreement with a new distributor will be made on the same terms as the previous agreement with Ya-Man, or at all. The potential loss of this market may result in lower sales and profits. If the Company is unable to replace these sales, in Japan or through other markets, it may have an adverse material negative effect on its future operating results.
Other factors that could impact the Company’s results in the market include:
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increased regulatory constraints with respect to the claims the Company can make regarding the efficacy of products and tools, which could limit its ability to effectively market them;
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the Japanese economy may be adversely affected and consumer spending may be impaired as a result of the recent and potential future earthquakes, tsunami and other natural disasters in Japan;
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significant weakening of the Japanese yen;
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continued or increased levels of regulatory and media scrutiny and any regulatory actions taken by regulators, or any adoption of more restrictive regulations, in response to such scrutiny; and
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increased competitive pressures from other home use aesthetic device companies who actively seek to solicit its distributors to join their businesses.
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A number of the Company’s product sales depend on search engines and other online sources to attract visitors to its websites, and if the Company is unable to attract these visitors and convert them into customers in a cost-effective manner, its business and financial results may be harmed.
A major part of the Company’s direct response campaign for its no!no!® line of products’ success depends on its ability to attract online consumers to its websites and convert them into customers in a cost-effective manner, which depends, in part, on search engines and other online sources for its website traffic. Our subsidiary’s name, Radiancy, is included in search results as a result of both paid-search listings, where the Company purchases specific search terms that will result in the inclusion of its listing, and algorithmic searches that depend upon the searchable content on its sites. Search engines and other online sources revise their algorithms from time to time in an attempt to optimize their search results.
If one or more of the search engines or other online sources on which the Company relies for website traffic were to modify its general methodology for how it displays its websites, resulting in fewer consumers clicking through to its websites, the Company’s sales could suffer. If any free search engine on which the Company relies begins charging fees for listing or placement, or if one or more of the search engines or other online sources on which it relies for purchased listings, modifies or terminates its relationship with the Company, its expenses could rise, it could lose customers, and traffic to its websites could decrease.
The Company’s operating results could be negatively impacted by economic, political or other developments in foreign countries in which it or its subsidiaries do business.
The Company transports some of its goods across international borders, primarily those of the U.S., Canada, Europe, Japan and Israel. Since September 11, 2001, there has been more intense scrutiny of goods that are transported across international borders. As a result, some of our and our subsidiaries’ products may face delays, and increase in costs due to such delays in delivering goods to its customers. Any events that interfere with, or increase the costs of the transfer of goods across international borders, could have a material adverse effect on its business.
Further, global economic conditions continue to be challenging. Although the economy appears to be recovering in some countries, it is not possible for us to predict the extent and timing of any improvement in global economic conditions. Even with continued growth in many of our and our subsidiaries’ markets during this period, the economic downturn could adversely impact its business in the future by causing a decline in demand for our and our subsidiaries’ products, particularly if the economic conditions are prolonged or worsen.
The international nature of the Company’s business exposes us to certain business risks that could limit the effectiveness of the Company’s growth strategy and cause our results of operations to suffer.
Continued expansion into international markets is an element of the Company’s growth strategy. Introducing and marketing the Company’s services internationally, developing direct and indirect international sales and support channels and managing foreign personnel and operations will require significant management attention and financial resources. The Company faces a number of risks associated with expanding the Company’s business internationally that could negatively impact the Company’s results of operations, including:
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management, communication and integration problems resulting from cultural differences and geographic dispersion;
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compliance with foreign laws, including laws regarding importation and registration of products;
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compliance with foreign regulatory requirements and the ability of GlobalMed to establish additional regulatory clearances necessary to expand distribution of the Company’s products in countries outside of the United States;
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competition from companies with international operations, including large international competitors and entrenched local companies;
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difficulties in protecting intellectual property rights in international jurisdictions;
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political and economic instability in some international markets;
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sufficiency of qualified labor pools in various international markets;
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currency fluctuations and exchange rates; and
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potentially adverse tax consequences or an inability to realize tax benefits.
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The Company may not succeed in its efforts to expand its international presence as a result of the factors described above or other factors that may have an adverse impact on the Company’s overall financial condition and results of operations. In addition, the Company has a relationship with GlobalMed, whereby it provides the Company with certain non-U.S. regulatory support. To the extent that the Company discontinues its relationship with GlobalMed, or if GlobalMed is otherwise unable to provide the Company with the resources and assistance that the Company needs, the Company may have a difficult time expanding into international markets in an effective manner.
Conditions in Israel affect our operations related to our no!no!® line of products and may limit the Company’s ability to produce and sell its products.
Radiancy, Inc. is a majority owned subsidiary of the Company. All of Radiancy’s research and development activities, a portion of the manufacturing and other critical business operations are located in Israel, a country that has experienced terrorist attacks. Political, economic and military conditions in Israel could adversely affect its operations, including a disruption of such operations due to terrorist attacks or other hostilities. Although the current hostilities in Israel have had no immediate and direct impact on Radiancy, the interruption or curtailment of trade between Israel and its trading partners, or a significant downturn in the economic or financial condition of Israel, may adversely affect the flow of vital components from its Israeli subcontractors to us. We cannot assure you that ongoing hostilities related to Israel will not have a material adverse effect on its business or our share price.
The Company’s Israeli-based facilities or manufacturing subcontractors could also be subject to catastrophic loss such as fire, flood, or earthquake. Any such loss at any of its facilities could disrupt its operations, delay production, shipments and revenue and result in significant expense to repair and replace its facilities.
The operations of the Company’s subsidiary Radiancy (Israel) Ltd. may be disrupted by the obligation of its personnel to perform military service.
Many of the Company’s employees that are located in Israel are obligated to perform annual military reserve duty in the Israeli Defense Forces and may be called to active duty under emergency circumstances at any time. If a military conflict or war arises, these individuals could be required to serve in the military for extended periods of time. As a result, our Israeli-based operations could be disrupted by the absence for a significant period of one or more of its executive officers or a significant number of its other employees due to reserve duty.
If the Company fails to manage its sales and marketing force or to market and distribute its products effectively, the Company may experience diminished revenues and profits.
There are significant risks involved in integrating, building and managing the Company’s sales and marketing force and marketing its products, including the Company’s ability:
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to hire, as needed, a sufficient number of qualified sales and marketing personnel with the aptitude, skills and understanding to market its XTRAC system, its skincare products, its Omnilux products and its surgical products effectively;
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to adequately train its sales and marketing force in the use and benefits of all its products and services, thereby making them more effective promoters;
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to manage its sales and marketing force and its ancillary channels (e.g., telesales) such that variable and semi-fixed expenses grow at a lesser rate than its revenues;
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to set the prices and other terms and conditions for treatments using the XTRAC system in a complex legal environment so that they will be accepted as attractive skin health and appropriate alternatives to conventional modalities and treatments; and
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to cope with employee turnover among the sales force in the skin health business, in which there is substantial competition for talented sales representatives.
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To increase acceptance and utilization of its XTRAC system, the Company may have to expand its sales and marketing programs in the U.S. While the Company may be able to draw on currently available personnel within its organization to meet this need, the Company also expects that it will have to increase the number of representatives devoted to the sales and marketing programs and to broaden, through such representatives, the talents it has at its disposal. In some cases, the Company may look outside its organization for assistance in marketing its products.
In similar fashion, the Company cannot predict how successful it may be in marketing its skin health, hair care and wellness products in the U.S., nor can the Company predict the success of any new skin health and hair care products that it may introduce. Despite an increased focus on developing alternate channels for many of the Company’s skin health, hair care, and wellness products, the Company may find that channels that are attractive to the Company are unavailable because they already carry competitive products. No assurance can be given that the Company will be successful in marketing and selling its skin health, hair care, and wellness products.
The Company may be unsuccessful in accessing the home-use consumer market with its skin health, hair care, and wellness products. Distribution through the consumer market will be principally through mass-retail chains and e-commerce and electronic media. While the Company expects the volumes will be higher, the margins may be lower. It may also prove difficult to obtain long-term commitments from the retailers. If the Company is unable to secure distribution partners or obtain favorable pricing or long-term commitments, the Company’s efforts in the home-use consumer market may be unsuccessful.
The Company may encounter difficulties in quality testing and the manufacturing of its products in commercial quantities, which could adversely impact the rate at which the Company grows.
There can be no guarantee that the Company’s quality assurance testing programs will be adequate to detect all defects, either ones in individual products or ones that could affect numerous shipments, which might interfere with customer satisfaction, reduce sales opportunities, or affect gross margins. In the future, the Company may need to replace certain of its no!no!® product’s components and provide remediation in response to the discovery of defects or bugs in such products that it has shipped. There can be no assurance that such a remediation, depending on the product involved, would not have a material impact. An inability to cure a product defect could result in the failure of a product line, temporary or permanent withdrawal from a product or market, damage to its reputation, inventory costs or product reengineering expenses, any of which could have a material impact on the Company’s revenue, margins and net income.
Further, the Company may encounter difficulties manufacturing its line of products because it has limited experience manufacturing such products in significant commercial quantities. As a result, the Company will, in order to increase its manufacturing output significantly, have to attract and retain qualified employees for such assembly and testing operations.
Some of the components necessary for the assembly of the Company’s products are currently provided to the Company by third-party suppliers. While alternative suppliers exist and could be identified, the disruption or termination of the supply of components could cause a significant increase in the costs of these components, which could affect our operating results. The Company’s dependence on a limited number of third-party suppliers and the challenges the Company may face in obtaining adequate supplies involve several risks, including limited control over pricing, availability, quality and delivery schedules. A disruption or termination in the supply of components could also result in the Company’s inability to meet demand for its products, which could harm its ability to generate revenues, lead to customer dissatisfaction and damage its reputation. Furthermore, if the Company is required to change the manufacturer of a key component of its products, the Company may be required to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations and guidelines including Quality Systems Regulations, or QSR requirements and performance standards. Failure to do so could result in the FDA taking legal or regulatory enforcement action against the Company and/or its products (e.g. recalls, fines, penalties, injunctions, seizures, prosecution or other adverse actions). The delays associated with the verification of a new manufacturer could delay the Company’s ability to manufacture its products in a timely manner or within budget. The Company faces the risk that there will be supply chain problems if the volumes do not match to the margins, as certain of the Company’s consumer market products are intended to be high-volume, lower-margined products.
Although the Company believes that its current manufacturing facilities are adequate to support its commercial manufacturing activities for the foreseeable future, the Company may be required to expand or restructure its manufacturing facilities to increase capacity substantially. In addition, if the Company is unable to provide customers with high-quality products in a timely manner, the Company may not be able to achieve market acceptance for its XTRAC system or achieve market acceptance and growth for its skincare products. The Company’s inability to manufacture or commercialize its devices successfully could have a material adverse effect on its revenue.
If the Company fails to manage and protect its and its subsidiaries’ network security and underlying data effectively, its businesses could be disrupted which could harm its operating results.
The Company’s possession and use of personal information presents risks and expenses that could harm its business. Unauthorized disclosure or manipulation of such data, whether through breach of its network security or otherwise, could expose the Company to costly litigation, damage its reputation and possibly result in a lower revenue stream and the loss of some of its customers.
Maintaining the Company’s network security is of critical importance because the online e-commerce systems store proprietary and confidential customer data such as names, addresses, other personal information and credit card numbers. The Company uses commercially available encryption technology to transmit personal information when taking orders. However, third parties may be able to circumvent these security and business measures by developing and deploying viruses, worms and other malicious software programs that are designed to attack or attempt to infiltrate its systems and networks. In addition, employee error, malfeasance or other errors in the storage, use or transmission of personal information could result in a breach of customer or employee privacy. The Company employs contractors and temporary and part-time employees who may have access to the personal information of customers and employees. It is possible such individuals could circumvent its controls, which could result in a breach of customer privacy.
Possession and use of personal information in conducting its business subject the Company to legislative and regulatory burdens that could require notification of data breach, restrict its use of personal information and hinder its ability to acquire new customers or market to existing customers. The Company and its subsidiaries have incurred, and will continue to incur, expenses to comply with privacy and security standards and protocols imposed by law, regulation, industry standards or contractual obligations.
If third parties improperly obtain and use the personal information of the Company and its subsidiaries’ customers, we may be required to expend significant resources to resolve these problems. A major breach of its network security and systems could have serious negative consequences for its businesses, including possible fines, penalties and damages, reduced customer demand for its products and services, harm to its reputation and brand and loss of the Company or its subsidiary’s ability to accept and process customer credit card orders.
If the Company fails to manage its and its subsidiaries’ growth effectively, its businesses could be disrupted which could harm its operating results.
The Company has experienced, and may in the future experience, growth in its business, both organically and through the acquisition of businesses and products. The Company expects to make significant investments to enable its future growth through, among other things, new product innovation and clinical trials for new applications and products.
In addition, if private carriers continue to approve favorable reimbursement policies for psoriasis and the Company’s marketing programs are successful in increasing utilization of its XTRAC system, the Company expects to experience growth in the number of its employees and customers and the scope of its operations.
Such growth may place a strain on the Company’s management and operations. The Company’s ability to manage this growth will depend upon, among other factors, its ability to broaden its management team; its ability to attract, hire, train, motivate and retain skilled employees; and the ability of its officers and key employees to continue to implement and improve its operational, financial and other systems, to manage multiple, concurrent customer relationships and different products and to respond to increasing compliance requirements. The Company’s future success is heavily dependent upon achieving such growth and acceptance of its products. Any failure to effectively manage future growth could have a material adverse effect on the Company’s business, results of operations and financial condition.
The Company is exposed to risks associated with credit card and payment fraud and with credit card processing, which could cause the Company to lose revenue.
A significant part of its sales are processed by the Company through credit cards or automated payment systems to pay for its products and services. The Company has suffered losses, and may continue to suffer losses, as a result of orders placed with fraudulent credit cards or other fraudulent payment data. For example, under current credit card practices, the Company may be liable for fraudulent credit card transactions if it does not obtain a cardholder’s signature, a frequent practice in internet sales. The Company employs technology solutions to help it detect fraudulent transactions. However, the failure to detect or control payment fraud could cause the Company to lose sales and revenue.
Any significant interruptions in the operations of its third-party call centers could cause the Company to lose sales and disrupt its ability to process orders and deliver its solutions in a timely manner.
The Company relies on third-party call centers to sell its products, respond to customer service and technical support requests and process orders. Any significant interruption in the operation of these facilities, including an interruption caused by its failure to successfully expand or upgrade its systems or to manage these expansions or upgrades, could reduce its ability to receive and process orders and provide products and services, which could result in lost and cancelled sales and damage to the Company’s brand and reputation.
As the Company grows, it will need more capacity from those existing call centers, or the Company will need to identify and contract with new call centers. The Company may not be able to continue to locate and contract for call center capacity on favorable terms, or at all. Additionally, the rates those call centers charge the Company may increase, or those call centers may not continue to provide service at the current levels.
If the Company’s third-party call center operators do not convert inquiries into sales at expected rates, its ability to generate revenue could be impaired. Training and retaining qualified call center operators is challenging, and if the Company does not adequately train its third party call center operators, they will not convert inquiries into sales at an acceptable rate.
The Company is reliant on a limited number of suppliers for production of key products.
Production of the Company’s XTRAC system requires specific component parts obtained from the Company’s suppliers. Production of the Company’s surgical laser systems requires some component parts that may become harder to procure as the design of a system ages. Similarly, the Company’s skincare products may require compounds that can be efficiently produced only by a limited number of suppliers. The Company has one primary supplier of LEDs for its PTL business and relies on contract manufacturers. While the Company believes that it could find alternate suppliers, in the event that its suppliers fail to meet its needs, a change in suppliers or any significant delay in the Company’s ability to have access to such resources could have a material adverse effect on its delivery schedules, business, operating results and financial condition. Moreover, in the event the Company can no longer utilize this supplier or acquire this resource and must identify a new supplier or substitute a different resource, such change may trigger an obligation for the Company to comply with additional FDA regulatory requirements including, but not limited to, pre-marketing authorization and QSR requirements.
Finally, the Company’s no!no! brand products are sourced from one main supplier. The Company believes there are other, potential sources for the manufacture of these products. However, should our main supplier be unable to meet our production demands or cease doing business, we may encounter difficulty in transitioning our products to another manufacturer, and that other manufacturer or manufacturers may not be able to meet our production requirements. Any change in supplier or any significant delay in transition to a new supplier may have a material adverse effect on the delivery schedules for these products, our ability to meet customer demand, business, operating results and financial condition.
The Company’s failure to respond to rapid changes in technology and its applications in the medical devices industry or the development of a cure for skin conditions treated by its products could make its treatment system obsolete.
The medical device industry is subject to rapid and substantial technological development and product innovations. To be successful, the Company must respond to new developments in technology, new applications of existing technology and new treatment methods. The Company may also encounter greater pressure for innovation in order to satisfy a demand for novelty in the consumer market. The Company’s financial condition and operating results could be adversely affected if the Company fails to be responsive on a timely and effective basis to competitors’ new devices, applications, treatments or price strategies. For example, the development of a cure for psoriasis, vitiligo, atopic dermatitis or leukoderma would eliminate the need for the Company’s XTRAC system for these diseases and would require the Company to focus on other uses of its technology, which would have a material adverse effect on its business and prospects.
As the Company develops new products or improves its existing products, the Company may accelerate the economic obsolescence of the existing, unimproved products and their components. The obsolete products and related components may have little to no resale value, leading to an increase in the reserves the Company has against its inventory. Likewise, there is a risk that the new products or improved existing products may not achieve market acceptance and therefore may also lead to an increase in the reserves against the Company’s inventory.
The Company’s marketing campaigns and advertising may be attacked as false and misleading, and our media spending might not result in increased net sales or generate the levels of product and brand name awareness that the Company desires. The Company might not be able to increase its net sales at the same rate as it increases its advertising and marketing expenditures.
The Company’s future growth and profitability will depend in part on the effectiveness and efficiency of its marketing campaigns and media spending, including its ability to:
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create greater awareness of its products and brand name;
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determine the appropriate creative message and media mix for future expenditures; and
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effectively manage advertising costs, including creative and media costs, to maintain acceptable costs in relation to sales levels and operating margins.
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The Company’s no!no!® Hair and other consumer product’s portfolio of infomercials advertising, and other forms of media may not result in increased sales or generate desired levels of product and brand name awareness, and may be attacked as false and misleading. The Company may not be able to increase its net sales at the same rate as it increases its advertising expenditures or may be required to defend against inaccurate claims of false advertising. The Company is currently the subject of certain legal proceedings relating to its advertising claims in the U.S. The Company has voluntarily made changes to its advertising as part of its usual process for reviewing and updating its advertising through the various media and sales channels we rely upon, and which address certain of the claims made in these matters. These changes have not adversely affected the Company’s sales of the no!no!® Hair products in the U.S. to date; however the Company may be required to make other changes in the future in response to existing or potential legal proceedings that could materially and adversely affect such sales.
The Company periodically updates the content of its infomercials and revises its product offerings. If customers are not as receptive to new infomercial content or product offerings, the Company’s sales through its infomercial sales channel will decline. In addition, if there is a marked increase in the price that the Company pays for its media time, the cost-effectiveness of its infomercials will decrease. If the Company’s infomercials are broadcast during times when viewership is low, this could also result in a decrease of the cost-effectiveness of such broadcasts, which could cause its results of operations to suffer. Also, to the extent the Company has committed in advance for broadcast time for its infomercials, the Company would have fewer resources available for potentially more effective distribution channels.
A higher than anticipated level of product returns may adversely affect the Company’s business and its customers, or physicians and technicians, as the case may be, may misuse certain of its products, and product and other damages imposed on the Company may exceed its insurance coverage, or the Company may be subject to claims that are not covered by insurance.
The Company offers consumers who purchase its consumer products, including its no!no!® brands directly from the Company an unconditional full 60-days money-back guarantee. Retailers and home shopping channels are also permitted to return the consumer products, subject to certain limitations. The Company establishes revenue reserves for product returns based on historical experience, estimated channel inventory levels and other factors. If product returns exceed estimates, the excess would offset reported revenue, which could negatively affect the Company’s financial results. Product returns and the potential need to remedy defects or provide replacement products or parts for items shipped in volume could result in substantial costs, the requirement to conduct an FDA recall and/or submit an FDA-required report of a correction/removal and have a material adverse effect on the Company’s business and results of operations.
The Company may be subject to product liability claims from time to time. A number of the Company’s products are highly complex and some are used to treat delicate skin conditions on and near a patient’s face. In addition, the clinical testing, manufacturing, marketing and use of certain of the Company’s products and procedures may also expose the Company to product liability, FDA regulatory and/or legal actions, or other claims. Certain indications for use for the Company’s PTL light-based devices, though approved outside the U.S., are not approved in the U.S. If a physician elects to apply an off-label use and the use leads to injury, the Company may be involved in costly litigation. In addition, the fact that the Company trains technicians whom it does not supervise in the use of its XTRAC system during patient treatment may expose the Company to third-party claims if those doing the training are accused of providing inadequate training. The Company presently maintains liability insurance with coverage limits of at least $5,000,000 per occurrence, which the Company believes is an adequate level of product liability insurance, but product liability insurance is expensive and the Company might not be able to obtain product liability insurance in the future on acceptable terms or in sufficient amounts to protect the Company, if at all. A successful claim brought against the Company in excess of its insurance coverage could have a material adverse effect on its business, results of operations and financial condition. In addition, continuing insurance coverage may also not be available at an acceptable cost, if at all. Therefore, the Company may not be able to obtain insurance coverage that will be adequate to satisfy a liability that may arise. Regardless of merit or eventual outcome, product liability claims may result in decreased demand for a product, injury to its reputation, withdrawal of clinical trial volunteers and loss of revenues. As a result, regardless of whether the Company is insured, a product liability claim or product recall may result in losses that could result in the FDA taking legal or regulatory enforcement action against the Company and or its products including recall, and could have a material adverse effect upon the Company’s business, financial condition and results of operations.
The Company’s costs could substantially increase if it experiences a significant number of warranty claims.
The Company provides 12-month product warranties, and offers longer warranty available for purchase, against technical defects of its no!no!® line of hair removal products and other consumer products. Its product warranty requires the Company to repair defective parts of its products, and if necessary, replace defective components. Historically, the Company has received a limited number of warranty claims for these products. The costs associated with such warranty claims have historically been relatively low. Thus, the Company generally does not accrue a significant liability contingency for potential warranty claims.
If the Company experiences an increase in warranty claims, or if its repair and replacement costs associated with such warranty claims increase significantly, we will begin to incur liabilities for potential warranty claims after the sale of its products at levels that the Company has not previously incurred or anticipated. In addition, an increase in the frequency of our warranty claims or amount of warranty costs may harm our reputation and could have a material adverse effect on its financial condition and results of operations.
The Company may be subject to litigation that will be costly to defend or pursue and uncertain in its outcome.
The Company’s business may bring it into conflict with its licensees, licensors, or others with whom the Company have contractual or other business relationships, or with its competitors or others whose interests differ from it. If the Company is unable to resolve those conflicts on terms that are satisfactory to all parties, the Company may become involved in litigation brought by or against it. Such litigation is likely to be expensive and may require a significant amount of management’s time and attention, at the expense of other aspects of our business. The outcome of litigation is always uncertain, and in some cases could include judgments against the Company that require it to pay damages, enjoin it from certain activities, or otherwise affect its legal or contractual rights, which could have a significant adverse effect on its business. In addition, while the Company maintains insurance for certain risks, the amount of its insurance coverage may not be adequate to cover the total amount of all insured claims and liabilities. It also is not possible to obtain insurance against all potential risks and liabilities. The Company cannot predict what the outcome will be in any ongoing or threatened litigations, and any adverse results in any such litigations may also materially and negatively impact its business, the market price of its common stock, cash flow, prospects, revenues, profitability or capital expenditures, or have other material adverse effects on its business, reputation, results of operations, financial condition or liquidity.
From time to time, the Company may be threatened with material litigation.
From time to time, the Company is threatened with individual and class action litigations involving its business, products, advertisements, packaging, labeling, consumer claims, contracts, agreements, intellectual property, SEC or FDA matters, licenses and other areas involving it and its business. The outcome or effect on its business, the market price of the Company’s common stock, cash flows, prospects, revenues, profitability, capital expenditures, reputation, demand for its products, results of operations, financial condition or liquidity of any future litigation cannot be predicted by the Company.
Litigation is inherently unpredictable and may:
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result in rulings that are materially unfavorable to the Company, including claims for significant damages, fines or penalties, and administrative remedies, or other rulings that prevent it from operating its business in a certain manner;
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cause the Company to change its business operations to avoid perceived risks associated with such litigation; and
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require the expenditure of significant time and resources, which may divert the attention of management and interfere with the pursuit of the Company’s strategic objectives.
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While the Company maintains insurance for certain risks, the amount of its insurance coverage may not be adequate to cover the total amount of all insured claims and liabilities. It also is not possible to obtain insurance against all potential risks and liabilities. If any litigation were to have a material adverse result, there could be a material impact on the Company’s results of operations, cash flows or financial position.
The Company depends on its executive officers and key personnel to implement its business strategy and could be harmed by the loss of their services.
The Company believes that its growth and future success will depend in large part upon the skills of its key management, technical and scientific personnel. Certain of the Company’s management and other employees may voluntarily terminate their employment with the Company at any time. The loss of the services of these or other key personnel, or the inability to attract and retain additional qualified personnel, could result in delays to product development or approval, loss of sales and diversion of management resources. In particular, the Company’s success depends in part upon the continued service and performance of Dr. Dolev Rafaeli and Dennis M. McGrath. The Company has fixed-term employment agreements with Dr. Rafaeli and Mr. McGrath; however, there are no assurances that the services of these individuals will be available to the Company for any specified period of time. The loss of the services of one or both of these officers could adversely affect the Company’s ability to develop and introduce its new products.
In addition, the Company depends on its ability to attract and retain other highly skilled personnel, including research scientists. Competition for qualified personnel is intense, and the process of hiring and integrating such qualified personnel is often lengthy.
Additionally, the Company does not currently maintain “key person” life insurance on the lives of its executives or any of its employees. The Company’s lack of insurance means that it may not have adequate compensation for the loss of the services of its key employees.
It may be difficult for any of the Company’s stockholders to effect service of process against the Company or its officers and directors.
Certain of the Company’s operating subsidiaries’ assets are located outside the United States, including Israel, United Kingdom, Brazil and India. As a result, the Company’s stockholders may find it difficult to enforce their legal rights in the courts of these countries based on the civil liability provisions of the United States federal securities laws in the courts of the United States or these countries, even if civil judgments are obtained in courts of the United States. In addition, it is unclear if extradition treaties in effect between the United States and these countries would permit effective enforcement against the Company’s officers and directors that reside outside the United States of criminal penalties, under the United States federal securities laws or otherwise.
Currency exchange rate fluctuations could adversely affect the Company’s operating results.
Some of the Company’s operating expenses are denominated in New Israeli Shekel (“NIS”). Any significant fluctuation in value of the NIS may materially and adversely affect its cash flows, earnings and financial position. For example, an appreciation of NIS against the U.S. dollar would make any new NIS denominated investments or expenditures more costly to the Company, to the extent that it needs to convert U.S. dollars into NIS for such purposes. Furthermore, because certain parts of our business include international business transactions, costs and prices of its products or components in overseas countries, such transactions are affected by foreign exchange rate changes.
The majority of sales invoicing for the Company’s PTL business is done in Pounds Sterling, Euros or U.S. dollars, while product costs and the overhead of the offices in the United Kingdom are denominated in Pounds Sterling. The sales invoicing for the LK Technology business is done in Brazilian Real. The Company’s U.S. operations, with U.S. dollar operating costs, serve to reduce the exposure to fluctuations in the value of the Pound Sterling, the Euro, or the Brazilian Real. To the extent that the Company adjusts its invoicing practices for its PTL and LK Technology businesses, or if the remainder of its business (or any portion thereof) ceases to be conducted primarily in U.S. dollars, the Company’s exposure to the market’s currency conditions could present a greater risk to it.
As a result, foreign exchange rate fluctuations may adversely affect the Company’s business, operating results and financial condition.
The Company’s ability to use its net operating loss carryforwards to offset future taxable income for U.S. federal income and U.K. business tax purposes may be limited as a result of “ownership changes” of PhotoMedex caused by the merger. In addition, the amount of such NOL carryforwards could be subject to adjustment in the event of an IRS examination.
If a corporation undergoes an “ownership change” under Section 382 of the U.S. Internal Revenue Code, the amount of its pre-change net operating losses, which we refer to in this report as “NOLs”, that may be utilized to offset future taxable income is subject to an annual limitation. In general, an ownership change occurs if the aggregate stock ownership of certain stockholders increases by more than 50 percentage points over such stockholders’ lowest percentage ownership during the applicable testing period (generally three years).
The annual limitation generally is determined by multiplying the value of the corporation’s stock immediately before the ownership change by the applicable long-term tax-exempt rate. Any unused annual limitation may, subject to certain limits, be carried over to later years, and the limitation may under certain circumstances be increased by recognized built-in gains or reduced by recognized built-in losses in the assets held by the corporation at the time of the ownership change. Similar rules and limitations may apply for state income tax purposes.
The reverse merger, effected on December 13, 2011, did result in an ownership change of PhotoMedex. The Company estimated that it would have approximately $56.8 million of U.S. net operating loss carryforwards that can be utilized through the annual limitations and also through the realization of its built-in gains through amortization in the first 5 years following December 13, 2011. The balance of the net operating loss carryforwards of pre-merged PhotoMedex amounts was estimated to be approximately $53.5 million. This balance could only be utilized through realization of the built-in gains other than by means of amortization. On December 27, 2012, PhotoMedex made an internal realignment of its operations by selling its operating businesses to a wholly-owned, non-consolidated U.S. subsidiary, and thereby realized sufficient gain to offset approximately $45 million of such balances of the $53.5 million of net operating losses.
In addition, the amount of the NOL carryforwards is subject to review and audit by the Internal Revenue Service (the “IRS”). There can therefore be no assurance that the benefit of such NOL carryforwards will be fully realized.
Likewise, if a corporation undergoes an “ownership change” and/or a “change in trade or business” under various standards of Her Majesty’s Revenue Code (HMRC, U.K.), the amount of a company’s pre-change NOLs that may be utilized to offset future taxable income in the U.K. may be limited or not available for offset against that income. After evaluating the effects of the reverse merger and integration of Radiancy’s business on its U.K. NOLs; management determined that the NOLs remain usable against future income of the UK subsidiary. However, the amount of the NOL carryforwards remains subject to review and audit by the HMRC. There can therefore be no assurance that the benefit of such NOL carryforwards will be fully realized.
Radiancy will incur increased costs as a result of being a majority-owned subsidiary of a public company.
As a result of the merger, Radiancy, Inc. is now a majority-owned subsidiary of the Company. Radiancy Ltd., a wholly owned subsidiary of Radiancy, Inc., continued to own 137,056 shares of Radiancy common stock, or approximately 1.8% of Radiancy, immediately following the merger. As a subsidiary of a public company, Radiancy will incur significant legal, accounting and other expenses that it did not incur as a private company. The U.S. Sarbanes-Oxley Act of 2002, Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and related rules of the SEC, regulate corporate governance practices of public companies.
Radiancy expects that compliance with these public company requirements will increase its costs and make some activities more time-consuming. For example, Radiancy will be subject to the Company’s internal controls and disclosure controls and procedures. These requirements will require Radiancy to carry out activities it has not done previously. Furthermore, if Radiancy and/or the Company identify any issues in complying with Radiancy’s requirements (for example, if a material weakness or significant deficiency in internal control over financial reporting is identified), we could incur additional costs rectifying those issues, and the existence of those issues could adversely affect our reputation or investor perceptions of us.
Risks Related to the Company’s Intellectual Property Matters
If the Company is unable to adequately protect or enforce its rights to intellectual property or secure patents right to technologies that it develops, the Company may, experience reduced market share, assuming any, or incur costly litigation to enforce, maintain or protect such rights.
The Company’s success depends in part on its ability to maintain and defend patent protection for its products, to preserve its trade secrets and to operate without infringing the proprietary rights of third parties. However, the Company cannot guarantee that the patents covering certain of its technologies and processes will not be contested, found to be invalid, unenforceable or owned by another or circumventable. There can be no assurance that its pending patent applications will result in patents being issued, or that its competitors will not circumvent, or challenge the validity of, any patents issued to the Company. Any such objections and rejections may adversely affect the Company’s other patents and patent applications. There can be no assurance that measures taken by the Company to protect its proprietary information will prevent the unauthorized disclosure or use of this information or that others will not be able to independently develop such information. In addition, in the event that another party infringes its patent rights or other proprietary rights, the enforcement of such rights can be a lengthy and costly process, with no guarantee of success. Moreover, there can be no assurance that claims alleging infringement by the Company of the proprietary rights of others will not be brought against the Company in the future or that any such claims will not be successful. If the Company is unable to maintain the proprietary nature of its technologies, its ability to market or be competitive with respect to some or all of its products may be affected, which could reduce its sales and affect its profitability. Also, as the Company’s patents expire, competitors may utilize the technology found in such patents to commercialize their own products. Moreover, while the Company seeks to secure additional patents on commercially desirable improvements, there can be no assurance that the Company will be successful in securing such patents, or that such additional patents will adequately offset the effect of expiring patents. Further, pending patent applications are not enforceable.
The Company’s policy is to file patent applications and to protect certain technology, inventions and improvements that are commercially important to the development of the Company’s business. The Company’s strategy has been to apply for and maintain patent protection for inventions and their applications which it believes has potential commercial value in countries that offer significant market potential. The Company is unable to file patent applications covering all of its products in every country and as a result its patents are also limited in scope and geographic coverage and may not protect the Company from competing products in those markets.
The Company will rely on certain of its PTL patents to protect the home-use market for two of its PTL hand-held devices. If the patents prove unenforceable or circumventable, the Company may not attain growth and may lose market share from these PTL products.
The Company’s success may depend, in part, on its ability to continue to use certain software in its products and in its business. This software may have been created by contractors to the Company or may include third-party software such as open source software. There is a possibility that claims will be made that this software infringes the copyright and/or trade secret rights of one or more third parties and that such claims may affect the Company’s right to use the software.
From an international perspective, protection of intellectual property outside of the U.S. is uncertain to the Company. The laws of some countries may not protect the Company’s intellectual property rights to the same extent as laws in the U.S. The intellectual property rights the Company enjoys in one country or jurisdiction may be rejected in other countries or jurisdictions, or, if recognized there, the rights may be significantly diluted. This may affect the Company’s ability to commercialize its products, grow its product sales and maintain market share in countries outside the U.S. It may be necessary or useful for the Company to participate in proceedings to determine the validity of its foreign intellectual property rights, or those of its competitors, which could result in substantial cost and divert its resources, efforts and attention from other aspects of its business.
The Company’s trademarks are limited in scope and geographic coverage and may not significantly distinguish the Company from its competition. The Company’s trade secrets are also limited in scope and geographic coverage and may not adequately protect the Company from products offered by our competitors.
The Company owns several key federal and international trademark registrations and has federal trademark applications pending in the United States and abroad for additional trademarks. Even if federal registrations are granted to the Company, its trademark rights may be challenged. Further, as registration is usually a requirement for protection in most foreign countries, if the Company has not registered its marks, it may not have any enforceable rights. It is also possible that its competitors will adopt trademarks similar to the Company’s, thus impeding its ability to build brand identity and possibly leading to customer confusion. Third parties could register trademarks that are similar to the Company’s in the United States and overseas. The Company could incur substantial costs in prosecuting or defending trademark infringement suits. If the Company fails to effectively enforce its trademark rights, its competitive position and brand recognition may be diminished.
Furthermore, the Company’s skincare business seeks to establish customer loyalty, in part, by means of its use of trademarks. It can be difficult and costly to defend trademarks from encroachment, especially on the Internet, or misappropriation overseas. Third parties may also challenge the validity of the Company’s trademarks. In either eventuality, the Company’s customers may become confused and direct their purchases to competitors. Third parties may independently discover trade secrets and proprietary information that allow them to develop technologies and products that are substantially equivalent or superior to the Company’s own. Without the protection afforded by the Company’s patent, trade secret and proprietary information rights, the Company may face direct competition from others commercializing their products using the Company’s technology, which may have a material adverse effect on the Company’s business and its prospects. Trade secrets and other proprietary information which are not protected by patents are also critical to the Company’s business. The Company attempts to protect its trade secrets by, among other steps, entering into confidentiality agreements with third parties, employees and consultants. However, such other steps may be ineffective, may be found to be invalid by the laws of a particular state or country, and these agreements can be breached and, if they are and even if the Company is able to prove the breach or that its technology has been misappropriated under applicable state law, there may not be an adequate remedy available to the Company.
The Company must monitor and protect its internet domain names to preserve their value. The Company may be unable to prevent third parties from acquiring domain names that are similar to, infringe on or otherwise decrease the value of its trademarks.
Third parties may acquire substantially similar domain names that decrease the value of the Company’s domain names and trademarks and other proprietary rights which may hurt its business. Moreover, the regulation of domain names in the United States and foreign countries is subject to change. Governing bodies could appoint additional domain name registrars or modify the requirements for holding domain names. Governing bodies could also establish additional “top-level” domains, which are the portion of the Web address that appears to the right of the “dot,” such as “com,” “gov” or “org.” As a result, the Company may not maintain exclusive rights to all potentially relevant domain names in the United States or in other countries in which the Company conducts business, which could harm its business or reputation.
Claims that the Company misuses the intellectual property of others could subject the Company to significant liability and disrupt its business.
The Company may become subject to material legal proceedings and claims relating to intellectual property matters, including claims of infringement by competitors and other third parties with respect to current or future products, e-commerce and other web-related technologies, online business methods, trademarks or other proprietary rights. Its competitors, some of which may have substantially greater resources than the Company has and may have made significant investments in competing products and technologies, may have, or seek to apply for and obtain, patents, copyrights or trademarks that will prevent, limit or interfere with its ability to make, use and sell its current and future products and technologies. The Company may not be successful in defending allegations of infringement of these patents, copyrights or trademarks. Further, the Company may not be aware of all of the patents and other intellectual property rights owned by third parties that may be potentially adverse to its interests. The Company may need to resort to costly and time-consuming litigation to protect and/or enforce its proprietary rights or to determine the scope and validity of a third party’s patents or other proprietary rights, including whether any of its products, technologies or processes infringe the patents or other proprietary rights of third parties. Any failure to enforce or protect its rights could cause the Company to lose the ability to exclude others from using its technologies to develop or sell competing products. The Company may incur substantial expenses in defending against third-party infringement claims regardless of the merit of such claims. In addition, while the Company maintains insurance for certain risks, the amount of its insurance coverage may not be adequate to cover the total amount of all insured claims and liabilities. It also is not possible to obtain insurance against all potential risks and liabilities. The outcome of any such proceedings is uncertain and, if unfavorable, could force the Company to discontinue sales of the affected products or impose significant penalties or restrictions on its business. The Company does not conduct comprehensive patent searches to determine whether the technologies used in its products infringe upon patents held by others. In addition, product development is inherently uncertain in a rapidly evolving technological environment in which there may be numerous patent applications pending, many of which are confidential when filed, with regard to similar technologies.
If the Company is unable to defend its intellectual property rights internationally, it may face increased competition outside the U.S., which could materially and adversely affect its future business, prospects, operating results and financial results and financial condition.
Risks Related to the Company’s Regulatory Matters
The Company’s failure to obtain and maintain FDA clearances or approvals on a timely basis, or at all, would prevent the Company from commercially distributing and marketing current or upgraded products in the United States, which could severely harm our business.
The Company’s products, including the no!no!® family of products, are subject to rigorous regulation by the FDA and numerous other federal, state and foreign governmental authorities. The process of obtaining regulatory clearances or approvals to market a medical device can be costly and time consuming, and we may not be able to obtain these clearances or approvals on a timely basis, if at all. In particular, the FDA permits commercial distribution of a new medical device only after the device has received clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act, or is the subject of an approved premarket approval application, or PMA, unless the device is specifically exempt from those requirements. Should the FDA require, or a change in current regulations occur, that our products be FDA-cleared for marketing and sale in the U.S. we may be required to incur significant expense and engage in a time consuming process seeking such approvals. If we were unable to obtain the required FDA approvals for these products or as necessary to make certain claims about the efficacy of the products, our sales of these products in the U.S. could be materially adversely affected.
The FDA clears marketing of lower-risk medical devices through the 510(k) process if the manufacturer demonstrates that the new product is substantially equivalent to other 510(k)-cleared products. High risk devices deemed to pose the greatest risk, such as life-sustaining, life-supporting, or implantable devices, or devices not deemed substantially equivalent to a previously cleared device, require the pre-market approval (PMA). The PMA process is more costly, and more lengthy, than the 510(k) clearance process. A PMA application must be supported by extensive data, including, but not limited to, technical, preclinical, clinical trial, manufacturing and labeling data, to demonstrate to the FDA’s satisfaction the safety and efficacy of the device for its intended use.
The Company does not currently have any products approved for market through the PMA process. Several products are cleared for market through the 510(k) pathway or are class I products which have been designated as exempt from premarket 510(k) notification requirements. The marketing and sale of our no!no!® family of consumer products in the United States (excluding no!no! Skin and no!no! Glow which have FDA clearance), a market that accounted for approximately 61% of the total sales of this line of products for the year ended December 31, 2013, does not currently require FDA marketing clearance. Accordingly, our no!no!® line of products does not currently have any FDA-cleared indications as to their efficacy in terms of long-term or permanent hair removal or reduction in hair re-growth. Accordingly, we are subject to limitations on the advertising claims we are allowed to make regarding the hair removal and hair reduction effects of our products.
The Company’s failure to comply with U.S. federal, state and foreign governmental regulations could lead to the issuance of warning letters or untitled letters, the imposition of injunctions, suspensions or loss of regulatory clearance or approvals, product recalls, or corrective action, termination of distribution, product seizures or civil penalties. In the most extreme cases, criminal sanctions or closure of the manufacturing facility are possible.
If required, clinical trials necessary to support a 510(k) notice or PMA application will be expensive and will require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Delays or failures in our clinical trials will prevent us from commercializing any modified or new products and will adversely affect our business, operating results and prospects.
Initiating and completing clinical trials necessary to support a 510(k) notice or a PMA application will be time-consuming and expensive and the outcome uncertain. Moreover, the results of early clinical trials are not necessarily predictive of future results, and any product the Company advances into clinical trials may not have favorable results in early or later clinical trials.
Conducting successful clinical studies will require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Patient enrollment in clinical trials and completion of patient participation and follow-up depend on many factors, including the size of the patient population, the nature of the trial protocol, the attractiveness of, or the discomforts and risks associated with, the treatments received by patients enrolled as subjects, the availability of appropriate clinical trial investigators, support staff, and proximity of patients to clinical sites and ability to comply with the eligibility and exclusion criteria for participation in the clinical trial and patient compliance. For example, patients may be discouraged from enrolling in our clinical trials if the trial protocol requires them to undergo extensive post-treatment procedures or follow-up to assess the safety and effectiveness of our products or if they determine that the treatments received under the trial protocols are not attractive or involve unacceptable risks or discomforts. Patients may also not participate in our clinical trials if they choose to participate in contemporaneous clinical trials of competitive products. In addition, patients participating in clinical trials may die before completion of the trial or suffer adverse medical events unrelated to investigational products.
Development of sufficient and appropriate clinical protocols to demonstrate safety and efficacy may be required and the Company may not adequately develop such protocols to support clearance and approval. Further, the FDA may require the Company to submit data on a greater number of patients than it originally anticipated and/or for a longer follow-up period or change the data collection requirements or data analysis for any clinical trials. Delays in patient enrollment or failure of patients to continue to participate in a clinical trial may cause an increase in costs and delays in the approval and attempted commercialization of our products or result in the failure of the clinical trial. The FDA may not consider our data adequate to demonstrate safety and efficacy. Such increased costs and delays or failures could adversely affect our business, operating results and prospects.
The Company’s medical device operations are subject to pervasive and continuing FDA regulatory requirements.
Medical devices regulated by the FDA are subject to “general controls” which include: registration with the FDA; listing commercially distributed products with the FDA; complying with good manufacturing practices under the quality system regulations; filing reports with the FDA of and keeping records relative to certain types of adverse events associated with devices under the medical device reporting regulation; assuring that device labeling complies with device labeling requirements; reporting certain device field removals and corrections to the FDA; and obtaining premarket notification 510(k) clearance for devices prior to marketing. Some devices known as “510(k)-exempt” can be marketed without prior marketing clearance or approval from the FDA. In addition to the “general controls,” some Class II medical devices are also subject to “special controls,” including adherence to a particular guidance document and compliance with the performance standard. Instead of obtaining 510(k) clearance, some Class III devices are subject to premarket approval (PMA). In general, obtaining premarket approval to achieve marketing authorization from the FDA is a more onerous process than seeking 510(k) clearance.
Many medical devices, such as medical lasers, are also regulated by the FDA as “electronic products.” In general, manufacturers and marketers of “electronic products” are subject to certain FDA regulatory requirements intended to ensure the radiological safety of the products. These requirements include, but are not limited to, filing certain reports with the FDA about the products and defects/safety issues related to the products as well as complying with radiological performance standards.
Noncompliance with applicable medical device controls or requirements and electronic product requirements causes the medical devices and/or electronic products to violate FDA law, which may expose the Company to legal action initiated by the Department of Justice (on behalf of the FDA) and/or various forms of FDA enforcement and compliance actions. These legal, enforcement and compliance actions include, but are not limited to the issuance of Warning Letters, untitled letters, recalls, fines, penalties, injunctions, seizures, prosecutions, adverse publicity (FDA press release), or other adverse actions.
Additionally, the Company must have the appropriate FDA clearances and/or approvals in order to lawfully market devices and or/drugs. The FDA may disagree that the Company has such clearance and/or approvals for all of its products.
Healthcare policy changes, including pending proposals to reform the U.S. healthcare system, may have a material adverse effect on the Company.
Healthcare costs have risen significantly over the past decade. There have been and continue to be proposals by legislators, regulators and third-party payors to keep these costs down. Certain proposals, if passed, would impose limitations on the prices the Company will be able to charge for its products, or the amounts of reimbursement available for its products from governmental agencies or third-party payors. These limitations could have a material adverse effect on the Company’s financial position and results of operations.
Changes in the healthcare industry in the U.S. and elsewhere could adversely affect the demand for the Company’s products as well as the way in which the Company conducts its business. From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the clearance or approval, manufacture and marketing of medical devices. On March 23, 2010, health reform legislation was approved by Congress and has been signed into law, but the legislation has been subject to judicial challenge and political opposition. The reform legislation provides that most individuals must have health insurance, will establish new regulations on health plans, and create insurance pooling mechanisms and other expanded public health care measures. The Company anticipates that out of the reform legislation will come a reduction in Medicare spending on services provided by hospitals and other providers and a form of sales or excise tax on the medical device manufacturing sector.
In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. The FDA is currently exploring ways to modify its 510(k) clearance process. In addition, due to changes at the FDA in general, it has become increasingly more difficult to obtain 510(k) clearance as data requirements have increased. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be. However, any changes could make it more difficult for the Company to maintain or attain clearance or approval to develop and commercialize our products and technologies.
Various healthcare reform proposals have also emerged at the state level. The Company cannot predict what healthcare initiatives, if any, will be implemented at the federal or state level, or the effect any future legislation or regulation will have on the Company. However, an expansion in government’s role in the U.S. healthcare industry may lower reimbursements for the Company’s products, reduce medical procedure volumes and adversely affect the Company’s business, possibly materially. In addition, if the excise taxes contained in the House or Senate health reform bills are enacted into law, the Company’s operating expenses resulting from such an excise tax and results of operations would be materially and adversely affected.
If the effectiveness and safety of the Company’s devices are not supported by long-term data, the Company’s revenues could decline.
The Company’s products may not be accepted in the market if the Company does not produce clinical data supported by the independent efforts of clinicians. The Company received clearance from the FDA for the use of the XTRAC system to treat psoriasis based upon the Company’s study of a limited number of patients. Safety and efficacy data presented to the FDA for the XTRAC system was based on studies on these patients. For the treatment of vitiligo, atopic dermatitis and leukoderma, the Company has received clearance from the FDA for the use of the XTRAC system based primarily on a showing of substantial equivalence to other previously cleared predicate devices. However, the Company may discover that physicians will expect clinical data on such treatments with the XTRAC system. The Company also may find that data from longer-term psoriasis patient follow-up studies may be inconsistent with those indicated by the Company’s relatively short-term data. If longer-term patient studies or clinical experience indicate that treatment with the XTRAC system does not provide patients with sustained benefits or that treatment with the Company’s product is less effective or less safe than the Company’s current data suggests, the Company’s revenues could decline. In addition, the FDA could then bring legal or regulatory enforcement actions against the Company and/or its products including, but not limited to, recalls or requirements for pre-market 510(k) authorizations. The Company can give no assurance that its data will be substantiated in studies involving more patients. In such a case, the Company may never achieve significant revenues or profitability.
Certain indications for use for the PTL light-based products are permitted in Europe and elsewhere in the world, but are not approved or cleared for marketing in the U.S. Such approvals/clearances in the U.S. could be costly and take significant time to obtain. If the Company is ultimately not approved or cleared to market the devices for these additional indications for use in the U.S., it is uncertain whether the products will be successful in the U.S.
If the Company is found to be promoting the use of its devices for unapproved or “off-label” uses or engaging in other noncompliant activities, the Company may be subject to recalls, seizures, fines, penalties, injunctions, adverse publicity, prosecution, or other adverse actions, resulting in damage to its reputation and business.
The Company’s labeling, advertising, promotional materials and user training materials must comply with the FDA and other applicable laws and regulations, including the prohibition of the promotion of a medical device for a use that has not been cleared or approved by the FDA. Obtaining 510(k) clearance or PMA approval only permits the Company to promote its products for the uses specifically cleared by the FDA. Use of a device outside its cleared or approved indications is known as “off-label” use. Physicians and consumers may use the Company’s products off-label because the FDA does not restrict or regulate a physician’s choice of treatment within the practice of medicine nor is there oversight on patient use of over-the-counter devices. Although the Company may request additional cleared indications for our current products, the FDA may deny those requests, require additional expensive clinical data to support any additional indications or impose limitations on the intended use of any cleared product as a condition of clearance. Even if regulatory clearance or approval of a product is granted, such clearance or approval may be subject to limitations on the intended uses for which the product may be marketed and reduce our potential to successfully commercialize the product and generate revenue from the product.
If the FDA determines that the Company’s labeling, advertising, promotional materials, or user training materials, or representations made by Company personnel, include the promotion of an off-label use for the device, or that the Company has made false or misleading or inadequately substantiated promotional claims, or claims that could potentially change the regulatory status of the product, the agency could take the position that these materials have misbranded the Company’s devices and request that the Company modifies its labeling, advertising, or user training or promotional materials and/or subject the Company to regulatory or legal enforcement actions, including the issuance of an Untitled Letter or a Warning Letter, injunction, seizure, recall, adverse publicity, civil penalties, criminal penalties, or other adverse actions. It is also possible that other federal, state, or foreign enforcement authorities might take action if they consider the Company’s labeling, advertising, promotional, or user training materials to constitute promotion of an unapproved use, which could result in significant fines, penalties, or other adverse actions under other statutory authorities, such as laws prohibiting false claims for reimbursement. In that event, we would be subject to extensive fines and penalties and the Company’s reputation could be damaged and adoption of the products would be impaired. Although the Company intends to refrain from statements that could be considered off-label promotion of its products, the FDA or another regulatory agency could disagree and conclude that the Company has engaged in off-label promotion. For example, the Company has made statements regarding some of its devices that the FDA may view as off-label promotion. In addition, any such off-label use of the Company’s products may increase the risk of injury to patients, and, in turn, the risk of product liability claims, and such claims are expensive to defend and could divert the Company’s management’s attention and result in substantial damage awards against the Company.
The Company currently markets the no!no!® product for hair removal. Based on previous feedback received from the FDA, this product is not considered a medical device so long as the Company does not promote the product for medical claims. Promotion of this product for claims beyond those agreed upon by the FDA may subject the product to regulation by the FDA, and may require clearance of a 510(k) notice to continue marketing the product.
The Company may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws and regulations and could face substantial penalties if the Company is unable to fully comply with such laws.
While the Company does not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors, many healthcare laws and regulations apply to the Company’s business. For example, the Company could be subject to healthcare fraud and abuse and patient privacy regulation and enforcement by both the federal government and the states in which the Company conducts its business. The healthcare laws and regulations that may affect the Company’s ability to operate include:
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the federal healthcare programs’ Anti-Kickback Law, which prohibits, among other things, persons or entities from soliciting, receiving, offering or providing remuneration, directly or indirectly, in return for or to induce either the referral of an individual for, or the purchase order or recommendation of, any item or service for which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs;
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federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent, or are for items or services not provided as claimed and which may apply to entities like the Company to the extent that the Company’s interactions with customers may affect their billing or coding practices;
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the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which established new federal crimes for knowingly and willfully executing a scheme to defraud any healthcare benefit program or making false statements in connection with the delivery of or payment for healthcare benefits, items or services, as well as leading to regulations imposing certain requirements relating to the privacy, security and transmission of individually identifiable health information; and
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state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers, and state laws governing the privacy of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
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Recently, the medical device industry has been under heightened scrutiny as the subject of government investigations and regulatory or legal enforcement actions involving manufacturers who allegedly offered unlawful inducements to potential or existing customers in an attempt to procure their business, including arrangements with physician consultants. If the Company’s operations or arrangements are found to be in violation of any of the laws described above or any other governmental regulations that apply to the Company, the Company may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from the Medicare and Medicaid programs and the curtailment or restructuring of its operations. Any penalties, damages, fines, exclusions, curtailment or restructuring of the Company’s operations could adversely affect its ability to operate its business and its financial results. The risk of the Company being found in violation of these laws is increased by the fact that many of these laws are broad and their provisions are open to a variety of interpretations. Any action against the Company for violation of these laws, even if the Company successfully defends against that action and the underlying alleged violations, could cause the Company to incur significant legal expenses and divert its management’s attention from the operation of its business. If the physicians or other providers or entities with whom the Company does business are found to be non-compliant with applicable laws, they may be subject to sanctions, which could also have a negative impact on the Company’s business.
The Company or its subsidiaries’ failure to obtain or maintain necessary FDA clearances or approvals, or equivalents thereof in the U.S. and relevant foreign markets, could hurt our ability to distribute and market our products.
In both the Company’s and its subsidiaries’ United States and foreign markets, the Company and its subsidiaries are affected by extensive laws, governmental regulations, administrative determinations, court decisions and similar constraints. Such laws, regulations and other constraints may exist at the federal, state or local levels in the United States and at analogous levels of government in foreign jurisdictions.
For example, the Company’s laser products are considered medical devices and are subject to extensive regulation in the U.S. and in foreign countries where we intend to do business. In addition, certain of the Company’s skincare products and product candidates may fall under the regulatory purview of various centers at the FDA and in other countries by similar health and regulatory authorities. As the Company seeks to expand sales of its skincare products outside the U.S., we may encounter requirements that we did not anticipate or that we may not be able to satisfy.
In addition, the formulation, manufacturing, packaging, labeling, distribution, importation, sale and storage of the Company’s and its subsidiaries’ products are subject to extensive regulation by various federal agencies, including, but not limited to, the FDA, the FTC, State Attorneys General in the United States, the Ministry of Health, Labor and Welfare in Japan, as well as by various other federal, state, local and international regulatory authorities in the countries in which its products are manufactured, distributed or sold. If the Company or its manufacturers fail to comply with those regulations, the Company and its subsidiaries could become subject to significant penalties or claims, which could harm its results of operations or its ability to conduct its business. In addition, the adoption of new regulations or changes in the interpretations of existing regulations may result in significant compliance costs or discontinuation of product sales and may impair the marketing of its products, resulting in significant loss of net sales. The Company’s failure to comply with federal or state regulations, or with regulations in foreign markets that cover its product claims and advertising, including direct claims and advertising by the Company or its subsidiaries, may result in enforcement actions and imposition of penalties or otherwise harm the distribution and sale of its products. Further, the Company and its subsidiaries’ businesses are subject to laws governing our accounting, tax and import and export activities. Failure to comply with these requirements could result in legal and/or financial consequences that might adversely affect its sales and profitability. Each medical device that the Company wishes to market in the U.S. must first receive either 510(k) clearance or premarket approval from the FDA unless an exemption applies. Either process can be lengthy and expensive. The FDA’s 510(k) clearance process may take from three to twelve months, or longer, and may or may not require human clinical data. The premarket approval process is much more costly and lengthy. It may take from eleven months to three years, or even longer, and will likely require significant supporting human clinical data. Delays in obtaining regulatory clearance or approval could adversely affect the Company’s revenues and profitability. Although the Company has obtained 510(k) clearances for its XTRAC system for use in treating psoriasis, vitiligo, atopic dermatitis and leukoderma, and 510(k) clearances for its Omnilux devices as well as extensive 510(k) clearances for its surgical products, these clearances may be subject to revocation if post-marketing data demonstrates safety issues or lack of effectiveness. Similar clearance processes may apply in foreign countries. Further, more stringent regulatory requirements or safety and quality standards may be issued in the future with an adverse effect on the Company’s business.
Although cosmetic products are not subject to any FDA premarket approval or clearance process, they must, nonetheless, comply with the FDA’s formulation, manufacturing and labeling requirements or such products may be considered adulterated or misbranded by the agency which could subject the Company to potential regulatory or legal enforcement actions. Similar, or more stringent, requirements may apply in foreign jurisdictions as well. The Company may also find that if its cosmetic products compete with a third-party’s drug product, competitive and regulatory pressure may be applied against the cosmetic products. Some cosmetic products may be viewed by the FDA as drugs or devices to a large extent based upon the promotional claims or ingredients. Because there is a degree of subjectivity in determining whether marketing materials or statements constitute product claims and whether they involve drug claims, the Company’s claims and interpretation of applicable regulations may be challenged, which could harm its business.
Sunscreen products that contain ingredients or make claims beyond those identified by the FDA in its sunscreen monograph and corresponding guidance documents are considered over-the-counter drugs. The cosmetics containing sunscreen ingredients are required to conform with the FDA’s sunscreen monograph as well as other international regulatory requirements for sunscreen products. The FDA may view some of the Company’s sunscreen products as new drugs if the FDA determines that its formula and/or claims are not in compliance with the monograph or applicable guidance.
Certain indications for use for the Company’s PTL light-based products are permitted in Europe and elsewhere in the world, but are not cleared or approved for marketing in the U.S. Such clearances or approvals could be costly and take significant time to obtain. If the Company is not approved or cleared to market the indications for use in the U.S., it is uncertain whether the products will be successful in the U.S.
The Company has modified some of its products and sold them under prior 510(k) clearances. The FDA could decide the modifications required new 510(k) clearances and require the Company to cease marketing and/or recall the modified products.
Any modification to one of the Company’s 510(k) cleared devices that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, requires a new 510(k) clearance or a pre-market approval. The Company may be required to submit pre-clinical and clinical data depending on the nature of the changes and the product. The Company may not be able to obtain additional 510(k) clearances or pre-market approvals for modifications to, or additional indications for, its existing products in a timely fashion, or at all. Delays in obtaining future clearances or approvals would adversely affect its ability to introduce new or enhanced products into the market in a timely manner, which in turn would harm its revenue and operating results. The Company has modified some of its marketed devices, but the Company has determined, and may make such additional determinations in the future, that new 510(k) clearances or pre-market approvals are not required. The FDA requires every manufacturer to make this determination in the first instance, but the FDA may review the manufacturer’s decision. The Company cannot be certain that the FDA would agree with any of its prior or future decisions not to seek new 510(k) clearances or pre-market approvals. If the FDA requires the Company to seek new 510(k) clearance or a pre-market approval for any modification, the Company also may be required to cease marketing, distributions and/or recall the modified device until the Company obtains such 510(k) clearance or pre-market approval, and may be subject to significant regulatory fines or penalties. The FDA could also bring legal or regulatory enforcement action against the Company or its products.
Any recall or FDA requirement that the Company seek additional approvals or clearances could result in significant delays, fines, increased costs associated with modification of a product, loss of revenue and potential operating restrictions imposed by the FDA. New submissions to obtain 510(k) clearance or PMA approval could require additional pre-clinical and/or clinical testing which could be expensive and time consuming.
There is no guarantee that the FDA will grant 510(k) clearance or PMA approval of our future products and failure to obtain necessary clearances or approvals for our future products would adversely affect our ability to grow our business.
Some of the Company’s new or modified products may require the FDA clearance of a 510(k) notice. In addition some of the products may require clinical trials to support regulatory approval and we may not successfully complete these clinical trials. The FDA may not approve or clear these products for the indications that are necessary or desirable for successful commercialization. Indeed, the FDA may refuse requests for 510(k) clearance or premarket approval of new products. Failure to receive clearance or approval for new products would have an adverse effect on the Company’s ability to expand our business.
The results of the Company’s clinical trials may not support our product candidate claims or may result in the discovery of adverse side effects.
Even if any of the Company’s clinical trials are completed as planned, it cannot be certain that study results will support product candidate claims or that the FDA or foreign regulatory authorities will agree with our conclusions regarding them. Success in pre-clinical evaluation and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the later trials will replicate the results of prior trials and pre-clinical studies. The clinical trial process may fail to demonstrate that our product candidates are safe and effective for the proposed indicated uses, which could cause us to abandon a product candidate and may delay development of others. Any delay or termination of our clinical trials will delay the filing of our product submissions and, ultimately, our ability to commercialize our product candidates and generate revenues. It is also possible that patients enrolled in clinical trials will experience adverse side effects that are not currently part of the product candidate’s profile.
The Company’s market acceptance in international markets requires regulatory approvals from foreign governments and may depend on third party reimbursement of participants’ cost.
The Company has introduced its XTRAC system into markets in more than 30 countries in Europe, the Middle East, the Far East Asia, Southeast Asia, Australia, South Africa and parts of Central and South America. The Company intends to expand the number of countries in these markets where the Company distributes its products through the network of distributors which PTL and GlobalMed have built. The Company cannot be certain that its distributors will be successful in marketing XTRAC systems in these or other countries or that its distributors will purchase XTRAC systems beyond their current contractual obligations or in accordance with the Company’s expectations.
Even if the Company obtains and maintains the necessary foreign regulatory registrations or approvals, market acceptance of the Company’s products in international markets may be dependent, in part, upon the availability of reimbursement within applicable healthcare payment systems. Reimbursement and healthcare payment systems in international markets vary significantly by country, and include both government-sponsored healthcare and private insurance. The Company may seek international reimbursement approvals for its products, but the Company cannot assure you that any such approvals will be obtained in a timely manner, if at all. Failure to receive international reimbursement approvals in any given market could have a material adverse effect on the acceptance or growth of the Company’s products in that market or others.
If the Company or its third-party manufacturers or suppliers fail to comply with the FDA’s Quality System Regulation or any applicable state equivalent, the Company’s manufacturing operations could be interrupted and the Company’s potential product sales and operating results could suffer.
The Company and some of its third-party manufacturers and suppliers are required to comply with some or all of the FDA’s drug Good Manufacturing Practices or its QSR, which delineates the design controls, document controls, purchasing controls, identification and traceability, production and process controls, acceptance activities, nonconforming product requirements, corrective and preventive action requirements, labeling and packaging controls, handling, storage, distribution and installation requirements, records requirements, servicing requirements, and statistical techniques potentially applicable to the production of the Company’s medical devices. The Company and its manufacturers and suppliers are also subject to the regulations of foreign jurisdictions regarding the manufacturing process if the Company markets its products overseas. The FDA enforces the QSR through periodic and announced or unannounced inspections of manufacturing facilities. The Company’s facilities have been inspected by the FDA and other regulatory authorities, and the Company anticipates that it and certain of its third-party manufacturers and suppliers will be subject to additional future inspections. If the Company’s facilities or those of its manufacturers or suppliers are found to be in non-compliance or fail to take satisfactory corrective action in response to adverse QSR inspectional findings, FDA could take legal or regulatory enforcement actions against the Company and/or its products, including but not limited to the cessation of sales or the recall of distributed products, which could impair the Company’s ability to produce its products in a cost-effective and timely manner in order to meet its customers’ demands. The Company may also be required to bear other costs or take other actions that may have a negative impact on its future sales and its ability to generate profits.
Current regulations depend heavily on administrative interpretation. If the FDA does not believe that the Company is in substantial compliance with applicable FDA regulations, the agency could take legal or regulatory enforcement actions against the Company and/or its products. The Company is also subject to periodic inspections by the FDA, other governmental regulatory agencies, as well as certain third-party regulatory groups. Future interpretations made by the FDA or other regulatory bodies made during the course of these inspections may vary from current interpretations and may adversely affect the Company’s business and prospects. The FDA’s and foreign regulatory agencies’ statutes, regulations, or policies may change, and additional government regulation or statutes may be enacted, which could increase post-approval regulatory requirements, or delay, suspend, prevent marketing of any cleared / approved products or necessitate the recall of distributed products. The Company cannot predict the likelihood, nature or extent of adverse governmental regulation that might arise from future legislative or administrative action, either in the U.S. or abroad.
Recently, the medical device industry has been under heightened FDA scrutiny as the subject of government investigations and enforcement actions. If the Company’s operations and activities are found to be in violation of any FDA laws or any other governmental regulations that apply to the Company, the Company may be subject to penalties, including civil and criminal penalties, damages, fines and other legal and/or agency enforcement actions. Any penalties, damages, fines, or curtailment or restructuring of the Company’s operations or activities could adversely affect its ability to operate its business and its financial results. The risk of the Company being found in violation of FDA laws is increased by the fact that many of these laws are broad and their provisions are open to a variety of interpretations. Any action against the Company for violation of these laws, even if the Company successfully defends against that action and its underlying allegations, could cause the Company to incur significant legal expenses and divert its management’s attention from the operation of its business. Where there is a dispute with a federal or state governmental agency that cannot be resolved to the mutual satisfaction of all relevant parties, the Company may determine that the costs, both real and contingent, are not justified by the commercial returns to the Company from maintaining the dispute or the product.
Various claims, design features or performance characteristics of Company drugs, medical devices and cosmetic products, that the Company regarded as permitted by the FDA without marketing clearance or approval, may be challenged by the FDA or state regulators. The FDA or state regulatory authorities may find that certain claims, design features or performance characteristics, in order to be made or included in the products, may have to be supported by further studies and marketing clearances or approvals, which could be lengthy, costly and possibly unobtainable.
The Lumiere Excel and Lumiere Spa products are LED therapy products sold to tanning salons and spas. In 2011, the Texas Department of State Health Services (DSHS) challenged the Company’s and its customers’ right to make certain marketing claims for its Lumiere LED products. Texas DSHS had requested that the Company seek FDA feedback on the regulatory/marketing status of the Lumiere products. Prior to the Company engaging the FDA on this topic, the FDA issued a December 21, 2011 letter to the Indoor Tanning Association indicating that products, similar to the Lumiere, require 510(k) clearance. Despite the fact that the FDA issued a November 18, 2004 letter stating that the Lumiere did not require 510(k) clearance, the Company is in the early stages of obtaining a 510(k) clearance for the Lumiere products to continue marketing them. In March, 2012, the Company sent letters to all Lumiere customers throughout the United States, requested that they discontinue using any promotional literature made by PhotoMedex that includes therapeutic claims for red-light therapy now prohibited by the FDA (as described in the letter from FDA to the Indoor Tanning Association). The Company has, as of February 2012, suspended the marketing of, and shipments of throughout the United States, pending resolution of the Lumiere issues.
In January 2012, the FDA issued a Warning Letter to PhotoMedex, which further documented the findings from the FDA Inspection and the issues regarding certain marketing claims made at the time of the inspection in 2011 for one particular product family. The Warning Letter is a publicly available document. Considerable follow-up activities and consultation with outside counsel have since been employed to address the issues identified in the Warning Letter. Subsequently the FDA conducted an inspection of one of the Company’s facilities in the fourth quarter of 2012, to follow-up to the Inspection in 2011 and the above-mentioned Warning Letter issued in January 2012. A new Form FDA-483 (list of inspectional observations) related to complete closure of certain good manufacturing practice issues identified in the previous inspection and Warning Letter was issued to the Company during the follow-up inspection. The January 2012 Warning Letter and follow-up inspection in the fourth quarter 2012 were closed by FDA in March 2013. A second facility of PhotoMedex was inspected by FDA in September 2013. Form FDA-483 was issued, with all issues addressed and closed by FDA in January 2014. All pending regulatory matters have been successfully closed with FDA as of March, 2014.
The FDA determines whether a product is a cosmetic or a drug to a large extent based upon the claims made for the product. Because there is a degree of subjectivity in determining whether marketing materials or statements constitute product claims and whether they involve improper drug claims, our claims and our interpretation of applicable regulations may be challenged, which could harm our business.
If the Company fails to comply with ongoing regulatory requirements, or if it experiences unanticipated problems with products, these products could be subject to restrictions or withdrawal from the market.
The Company is also subject to similar state requirements and licenses. Failure by the Company to comply with statutes and regulations administered by the FDA and other regulatory bodies, discovery of previously unknown problems with its products (including unanticipated adverse events or adverse events of unanticipated severity or frequency), manufacturing problems, or failure to comply with regulatory requirements, or failure to adequately respond to any FDA observations concerning these issues, could result in, among other things, any of the following actions:
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warning letters or untitled letters issued by the FDA;
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fines, civil penalties, injunctions and criminal prosecution;
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unanticipated expenditures to address or defend such actions;
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delays in clearing or approving, or refusal to clear or approve, our products;
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withdrawal or suspension of clearance or approval of our products by the FDA or other regulatory bodies;
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product recall or seizure;
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orders for physician or customer notification or device repair, replacement or refund;
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interruption of production; and
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operating restrictions.
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If any of these actions were to occur, it would harm the Company’s reputation and adversely affect its business, financial condition and results of operations.
The Company’s medical products may in the future be subject to product recalls that could harm its reputation, business and financial results.
The FDA has the authority to require the recall of commercialized medical device products in the event of material deficiencies or defects in design or manufacture. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the device would cause serious injury or death. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. A government-mandated or voluntary recall by the Company or one of its distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of the Company’s products would divert managerial and financial resources and have an adverse effect on its financial condition and results of operations. The FDA requires that certain classifications of recalls be reported to the FDA within ten (10) working days after the recall is initiated. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA. The Company may initiate voluntary recalls involving its products in the future that the Company determines do not require notification of the FDA. If the FDA disagrees with the Company’s determinations, they could require the Company to report those actions as recalls. A future recall announcement could harm the Company’s reputation with customers and negatively affect its sales. In addition, the FDA could take enforcement action for failing to report the recalls when they were conducted. No recalls of the Company’s medical products have been reported to the FDA.
If the Company’s medical products cause or contribute to a death or a serious injury, or malfunction in certain ways, we will be subject to medical device reporting regulations, which can result in voluntary corrective actions or agency enforcement actions.
Under the FDA medical device reporting regulations, medical device manufacturers are required to report to the FDA information that a device has or may have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or contribute to death or serious injury if the malfunction of the device or one of our similar devices were to recur. If the Company fails to report these events to the FDA within the required timeframes, or at all, the FDA could take enforcement action against the Company. Any such adverse event involving its products also could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection or enforcement action. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of the Company’s time and capital, distract management from operating our business, and may harm its reputation and financial results.
Risk Factors Relating to Acquisition or Merger of other entities
The business operations of PhotoMedex and any other company acquired by or merged into PhotoMedex (the “target company”) in the future may not be successfully integrated and therefore PhotoMedex may not be able to realize the anticipated benefits of the acquisition or merger.
Realization of the anticipated benefits of an acquisition or merger will depend on PhotoMedex’s ability to successfully integrate the businesses and operations of PhotoMedex and the target company. PhotoMedex will be required to devote significant management attention and resources to integrating its business practices, operations and support functions. The challenges we may encounter include the following:
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preserving customer, supplier and other important relationships and resolving potential conflicts that may arise as a result of the merger;
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consolidating and integrating duplicative facilities and operations, including back-office systems necessary for internal and disclosure controls and timely financial reporting;
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addressing differences in business cultures, preserving employee morale and retaining key employees while maintaining focus on providing consistent, high-quality customer service and meeting the operational and financial goals of the Company; and
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adequately addressing business integration issues.
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The process of integrating the target company’s operations could cause an interruption of, or loss of momentum in, PhotoMedex’s business and financial performance, and in the business and financial performance of the target company as well. The diversion of management’s attention and any delays or difficulties encountered in connection with the merger or acquisition and the integration of the two companies’ operations could have an adverse effect on the business, financial results, financial condition, or stock price of PhotoMedex. The integration process may also result in additional and unforeseen expenses. There can be no assurance that the contemplated operating efficiencies, synergies in technology, and cross-benefits in sales and marketing activities anticipated from the merger will be realized.
The ability of PhotoMedex and/or the target company to use their net operating loss carryforwards to offset future taxable income.
The ability of PhotoMedex and/or the target company to use their net operating loss carryforwards to offset future taxable income for U.S. federal income, U.K. business or another country’s business or income tax purposes may be limited as a result of “ownership changes” of PhotoMedex or the target company caused by the merger. In addition, the amount of such NOL carryforwards could be subject to adjustment in the event of an IRS examination.
With regard to U.S. federal income taxation, if a corporation undergoes an “ownership change” under Section 382 of the U.S. Internal Revenue Code, the amount of its pre-change net operating losses, which we refer to in this report as “NOLs” that may be utilized to offset future taxable income is subject to an annual limitation. In general, an ownership change occurs if the aggregate stock ownership of certain stockholders increases by more than 50 percentage points over such stockholders’ lowest percentage ownership during the applicable testing period (generally three years).
The annual limitation generally is determined by multiplying the value of the corporation’s stock immediately before the ownership change by the applicable long-term tax-exempt rate. Any unused annual limitation may, subject to certain limits, be carried over to later years, and the limitation may under certain circumstances be increased by recognized built-in gains or reduced by recognized built-in losses in the assets held by the corporation at the time of the ownership change.
In addition, the amount of the NOL carryforwards is subject to review and audit by the Internal Revenue Service (the “IRS”). There can therefore be no assurance that the benefit of such NOL carryforwards will be fully realized.
Likewise, if a corporation undergoes an “ownership change” and/or a “change in trade or business” under various standards of Her Majesty’s Revenue Code (HMRC, U.K.), the amount of a company’s pre-change NOLs that may be utilized to offset future taxable income in the U.K. may be limited or not available for offset against that income.
Similar rules and limitations may apply for U.S. state income tax purposes or for the purposes of other countries’ business or income taxes.
PhotoMedex may incur substantial expenses related to any merger or acquisition and the integration of the target company’s business operations.
PhotoMedex may incur substantial expenses related to any acquisition or merger, both in connection with the acquisition or merger and in the integration of the target company’s business operations into PhotoMedex, both in the year of acquisition or merger and in subsequent years. There are a large number of processes, policies, procedures, operations, technologies and systems that may need to be integrated, including purchasing, accounting and finance, sales, payroll, pricing, revenue management, marketing and benefits. While a certain level of expenses may be assumed to be incurred in any acquisition or merger, there are many factors beyond PhotoMedex’s control that could affect the total amount or the timing of such integration expenses. Moreover, many of the expenses that may be incurred are, by their nature, difficult to estimate accurately. Such expenses may also continue for several years following the acquisition or merger, due to ongoing transitions and processes. These expenses could, particularly in the near term, exceed the savings that PhotoMedex expects to achieve from the elimination of duplicative expenses and the realization of economies of scale and cost savings in any acquisition or merger.
The need to integrate PhotoMedex’s and the target company’s respective workforces and other factors of production and distribution following the merger presents the potential for delay in achieving expected efficiencies, synergies and other cross-benefits that could adversely affect PhotoMedex’s operations.
The successful integration of any target company and achievement of the anticipated benefits of an acquisition or merger depend in part on integrating the target company’s and PhotoMedex’s employees into a mutually tolerant, collaborative and cross-pollinating team. Failure to do so presents the potential for delays in achieving expected synergies and other benefits of integration that could adversely affect both PhotoMedex’s and the target company’s operations.
PhotoMedex or the target company may be unable to retain key employees.
The success of PhotoMedex following any acquisition or merger will depend in part upon its ability to retain key employees of PhotoMedex and the target company. Key employees may depart because of issues relating to the uncertainty and difficulty of any remaining integration issues or a desire not to remain with PhotoMedex or the target company following the merger. Accordingly, no assurance can be given that PhotoMedex and the target company would be able to retain key employees to the same extent as prior to the acquisition or merger.
Risk Factors Relating to the Merger with LCA
In addition to the general risk factors stated beginning on page 51, PhotoMedex faces certain additional risk factors with regard to the proposed acquisition of LCA.
PhotoMedex may not obtain financing for the acquisition of LCA.
PhotoMedex has obtained an $85 million financing commitment from J.P. Morgan Chase Bank, N.A.. The commitment is contingent upon certain stated conditions, including conditions related to the conduct and results of PhotoMedex’s business. If there are changes in the operations of PhotoMedex prior to the acquisition of LCA, J.P. Morgan Chase may not provide the funding under the commitment. Even if funding is not received from J.P. Morgan Chase, PhotoMedex may still be obligated to consummate the merger. In that event PhotoMedex may need to rely on alternative sources of financing, which it may not be able to obtain on a reasonable terms, and/or may need to rely on its cash reserves, which may divert funding from other needs of PhotoMedex. Additionally, the failure to obtain financing from J.P. Morgan Chase may cause PhotoMedex to not be able to complete the acquisition of LCA.
Failure to complete the merger could negatively impact the stock prices and the future business and financial results of PhotoMedex and LCA.
There is no assurance that the proposals relating to the merger will be approved by LCA’s shareholders, and there is no assurance that PhotoMedex and LCA will receive any necessary regulatory approvals or satisfy the other conditions to the completion of the merger. If the merger is not completed for any reason, PhotoMedex and will be subject to the risk of having had the focus of its management directed toward the merger and integration planning and diverted from its core business and other opportunities that could have been beneficial to it.
In addition, PhotoMedex would not realize any of the expected benefits of having completed the merger and would continue to face risks that it currently faces as an independent company.
If the merger is not completed, the price of PhotoMedex common stock may decline to the extent that the current market price of that stock reflects a market assumption that the merger will be completed and that the related benefits and synergies will be realized, or as a result of the market’s perceptions that the merger was not consummated due to an adverse change in PhotoMedex’s or LCA’s business. In addition, PhotoMedex’s business may be harmed, and the prices of PhotoMedex stock may decline as a result, to the extent that employees, customers, suppliers, and others believe that it cannot compete in the marketplace as effectively without the merger or otherwise remain uncertain about its future prospects in the absence of the merger.
In addition, if the merger is not completed and the PhotoMedex board of directors determines to seek another merger or business combination, there can be no assurance that a transaction creating PhotoMedex stockholder value comparable to the value perceived to be created by the merger will be available to PhotoMedex.
Even if the merger were completed, PhotoMedex may not be able to successfully integrate the business of LCA and realize the anticipated benefits of the merger. In such situation, the risks described above may also apply.
The merger agreement provides LCA a 30-day “go shop” window.
The merger agreement provides LCA a 30-day “go shop” window in which it may solicit, initiate, encourage, or facilitate other acquisition proposals with any third party, subject to exceptions set forth in the merger agreement. As a result, there is no guarantee that a competing, higher or more advantageous offer will not be made to LCA, and that the acquisition of LCA by PhotoMedex will proceed.
Limitation on use of net operating losses
The ability of PhotoMedex and LCA to use their respective net operating loss (“NOL”) carryforwards to offset future taxable income in a separate or combined tax filing for U.S. federal income tax purposes may be limited as a result of the merger. In particular, LCA’s ability to use its NOL carryforwards will be limited as a result of its “ownership change” following the merger. In addition, the amount of such NOL carryforwards could be subject to adjustment in the event of an IRS examination. There can be no assurance that the benefit of such NOL carryforwards will be fully realized.
If the merger closes, LCA will undergo an “ownership change” under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). If a corporation undergoes such an “ownership change”, the amount of its pre-change NOL that may be utilized to offset future taxable income is subject to an annual limitation. The annual limitation generally is determined by multiplying the value of the corporation’s stock immediately before the ownership change by the applicable long-term tax-exempt rate. Any unused annual limitation may, subject to certain limits, be carried over to later years, and the limitation may under certain circumstances be increased by recognized built-in gains or reduced by recognized built-in losses in the assets held by the corporation at the time of the ownership change. Similar rules and limitations may apply for state income tax purposes.
Litigation or governmental order may prevent the completion of the acquisition.
Litigation against PhotoMedex, Gatorade Acquisition Corp., LCA and/or the directors of PhotoMedex, Gatorade Acquisition Corp. or LCA could result in an injunction preventing completion of the merger, the payment of damages in the event the merger is completed and/or may adversely affect the combined company’s business, financial condition or results of operations following the merger. As of March 17, 2014, four such suits have been brought in either the Court of Chancery for the State of Delaware and in the Court of Common Pleas for Hamilton County, Ohio, seeking injunctive relief and unspecified damages (see Legal Proceedings – page 58 for further information).
One of the conditions to the closing of the merger is that no order issued by a governmental authority of competent jurisdiction or law or other legal restraint or prohibition making the merger illegal or permanently restraining, enjoining, or otherwise prohibiting or preventing the consummation of the merger or the other transactions contemplated by the merger agreement be in effect. Consequently, if any plaintiffs in a litigation against PhotoMedex, Gatorade Acquisition Corp. or LCA, or any of their respective directors, secures injunctive or other relief prohibiting, delaying, or otherwise adversely affecting the defendants’ ability to complete the merger, then such injunctive or other relief may prevent the merger from becoming effective within the expected time frame or at all. If completion of the merger is prevented or delayed, it could result in substantial costs to PhotoMedex and LCA. In addition, PhotoMedex and LCA could incur significant costs in connection with the lawsuits, including costs associated with the indemnification of LCA’s directors and officers.
Following the merger, the combined company may be unable to retain key employees.
The success of PhotoMedex after the merger will depend in part upon its ability to retain key LCA and PhotoMedex employees. Key employees may depart either before or after the merger because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with PhotoMedex or LCA following the merger. While PhotoMedex has retained the services of certain key LCA employees under new Employment Agreements with PhotoMedex post-merger, there can be no assurance given that PhotoMedex and LCA will be able to retain key employees to the same extent as in the past.
Risk Factors Relating to an Investment in our Securities
Potential fluctuations in the Company’s operating results could lead to fluctuations in the market price for the Company’s common stock.
The Company’s results of operations are expected to fluctuate significantly from quarter to quarter, depending upon numerous factors, including:
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the present macro-economic uncertainty in the global economy and financial industry and governmental monetary and fiscal programs to stimulate better economic conditions;
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healthcare reform and reimbursement policies;
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demand for the Company’s products;
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changes in the Company’s pricing policies or those of its competitors;
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increases in the Company’s manufacturing costs;
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the number, timing and significance of product enhancements and new product announcements by the Company and its competitors;
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the termination or expiration of significant royalty-generating licensing contracts to which the Company is party;
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the expiration of certain of the Company’s patents, the issuance of certain the Company’s patent applications, and/or if certain of the Company’s patent applications fail to issue and prosecution has terminated;
|
|
•
|
The Company’s ability to develop, introduce and market new and enhanced versions of its products on a timely basis considering, among other things, delays associated with the FDA and other regulatory approval processes and the timing and results of future clinical trials;
|
|
•
|
Acts of terrorism in Israel or in other countries in which we do business;
|
|
•
|
developments in existing or new litigation; and
|
|
•
|
product quality problems, personnel changes and changes in the Company’s business strategy.
|
Variations in the above operating factors could lead to significant fluctuations in the market price of the Company’s stock.
The Company’s stock price has been and continues to be volatile.
The market price for the Company’s common stock could fluctuate due to various factors. In addition to other factors described in this section, these factors may include, among others:
|
•
|
conversion of outstanding stock options or warrants;
|
|
•
|
announcements by the Company or its competitors of new contracts, products, or technological innovations;
|
|
•
|
developments in existing or new litigation;
|
|
•
|
changes in government regulations;
|
|
•
|
fluctuations in the Company’s quarterly and annual operating results; and
|
|
•
|
general market and economic conditions.
|
In addition, the stock markets have, in recent years, experienced significant price fluctuations. These fluctuations often have been unrelated to the operating performance of the specific companies whose stock is traded. Market fluctuations, as well as economic conditions, have adversely affected, and may continue to adversely affect, the market price of the Company’s common stock.
The Company’s program to repurchase its securities, partially in relation to short-selling of its securities, may not be successful to stem such short-selling.
The Company embarked on a program of limited repurchases of its securities in 2012 and 2013. Short-selling of its securities was believed to have caused investors with a long-term interest in the Company to demand that the company share their long-term view. The Company believes that the effects of its repurchase program will demonstrate the long-term view of its long-term investors. However, there can be no guarantee that the program will be regarded as successful.
Shares eligible for future sale by the Company’s current or future stockholders may cause the Company’s stock price to decline.
If the Company’s stockholders or holders of the Company’s other securities sell substantial amounts of the Company’s common stock in the public market, including shares issued in completed acquisitions or upon the exercise of outstanding options and warrants, then the market price of the Company’s common stock could fall.
Issuance of shares of the Company’s common stock upon the exercise of options or warrants will dilute the ownership interest of the Company’s existing stockholders and could adversely affect the market price of the Company’s common stock.
As of March 14, 2014, the Company had outstanding stock options to purchase an aggregate of 1,192,679 shares of common stock and warrants to purchase an aggregate of 1,058,679 shares of common stock. The exercise of the stock options and warrants and the sales of stock issuable pursuant to them would further reduce a stockholder’s percentage voting and ownership interest. Further, the stock options and warrants are likely to be exercised when the Company’s common stock is trading at a price that is higher than the exercise price of these options and warrants and the Company would be able to obtain a higher price for the Company’s common stock than the Company would receive under such options and warrants. The exercise, or potential exercise, of these options and warrants could adversely affect the market price of the Company’s common stock and the terms on which the Company could obtain additional financing. The ownership interest of the Company’s existing stockholders may be further diluted through adjustments to certain outstanding warrants under the terms of their anti-dilution provisions.
Securities analysts may not initiate coverage for the Company’s common stock or may issue negative reports and this may have a negative impact on the market price of the Company’s common stock.
The trading market for the Company’s common stock may be affected in part by the research and reports that industry or financial analysts publish about the Company or the Company’s business. It may be difficult for companies such as the Company, with smaller market capitalizations, to attract a sufficient number of securities analysts that will cover the Company’s common stock. If one or more of the analysts who elect to cover the Company downgrades the Company’s stock, the Company’s stock price would likely decline rapidly. If one or more of these analysts ceases coverage of the Company, the Company could lose visibility in the market, which in turn could cause its stock price to decline. This could have a negative effect on the market price of the Company’s stock.
Our management will have broad discretion over the use of the proceeds from the future sale of the securities.
In connection with the future sale of our securities, our management will have broad discretion to use the net proceeds from such sale, and investors will be relying on the judgment of our management regarding the application of such proceeds. Our management might not be able to yield a significant return, if any, on any investment of the net proceeds.
The Company has not paid dividends in the past and does not expect to pay dividends in the future.
The Company has never declared or paid cash dividends on its capital stock. The Company currently intends to retain all future earnings for the operation and expansion of its business and, therefore, does not anticipate declaring or paying cash dividends in the foreseeable future. The payment of dividends will be at the discretion of the Company’s board of directors and will depend on the Company’s results of operations, capital requirements, financial condition, prospects, contractual arrangements, any limitations on payments of dividends present in any of the Company’s future debt agreements and other factors the Company’s board of directors may deem relevant. If the Company does not pay dividends, a return on your investment will only occur if the Company’s stock price appreciates.
The Company’s future capital needs could result in dilution of your investment.
The Company’s board of directors may determine from time to time that there is a need to obtain additional capital through the issuance of additional shares of the Company’s common stock or other securities. These issuances would likely dilute the ownership interests of the Company’s current investors and may dilute the net tangible book value per share of the Company’s common stock. Investors in subsequent offerings may also have rights, preferences and privileges senior to the Company’s current stockholders which may adversely impact the Company’s current stockholders.
Our directors, executive officers and principal stockholders currently have substantial control over us and could delay or prevent a change in corporate control.
As of March 14, 2014, our directors, executive officers and holders of more than 5% of our common stock, together with their affiliates, beneficially own, in the aggregate, approximately 46.8% of our outstanding common stock. As a result, these stockholders, if they were to act together, could have significant influence over the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, if they were to act together, could have significant influence over the management and affairs of our company. Accordingly, this concentration of ownership might harm the market price of our common stock by:
|
•
|
delaying, deferring or preventing a change in corporate control;
|
|
•
|
impeding a merger, consolidation, takeover or other business combination involving us; or
|
|
•
|
discouraging a potential acquiror from making a tender offer or otherwise attempting to obtain control of us.
|
Nevada law and the Company’s charter documents contain provisions that could delay or prevent actual and potential changes in control, even if they would benefit stockholders.
As of December 30, 2010, the Company became a corporation chartered in the State of Nevada. The Company is subject to provisions of the Nevada corporate statutes which prohibit a business combination between a corporation and an interested stockholder, which is generally a stockholder holding 10% or more of a company’s stock.
The Company’s articles of incorporation authorize the issuance of preferred shares which may be issued with dividend, liquidation, voting and redemption rights senior to our common stock without prior approval by the stockholders. The preferred stock may be issued for such consideration as may be fixed from time to time by the Board of Directors. The Board of Directors may issue such shares of preferred stock in one or more series, with such designations, preferences and rights or qualifications, limitations or restrictions thereof as shall be stated in the resolution of resolutions.
The issuance of preferred stock could adversely affect the voting power and other rights of the holders of common stock. Preferred stock may be issued quickly with terms calculated to discourage, make more difficult, delay or prevent a change in control of the Company or make removal of management more difficult. As a result, the Board of Directors’ ability to issue preferred stock may discourage the potential hostile acquirer, possibly resulting in beneficial negotiations. Negotiating with an unfriendly acquirer may result in, among other things, terms more favorable to the Company and its stockholders. Conversely, the issuance of preferred stock may adversely affect any market price of, and the voting and other rights of the holders of the common stock. The Company presently has no plans to issue any preferred stock.
These and other provisions in the Nevada corporate statutes and our charter documents could delay or prevent actual and potential changes in control, even if they would benefit the Company’s stockholders.
|
Unresolved Staff Comments
|
There are no unresolved comments from the staff of the Securities and Exchange Commission.
|
Properties
|
We leased a 42,000 sq. ft. facility in Montgomeryville, Pennsylvania that housed our executive offices and our domestic revenue segments and surgical laser manufacturing operations. The lease terminated February 2014 and the inventory was moved to a third party warehouse. We lease a 10,672 sq. ft. facility in Horsham, Pennsylvania that houses our executive offices and marketing. The term of the lease runs through November 30, 2015. In addition, we lease a 7,140 sq. ft. facility in Orangeburg, New York that houses parts of sales and operations. The term of the lease runs until September 30, 2016.
We lease a 17,222 sq. ft. building in Hod-Hasharon, Israel, that is used for marketing, operations and research and development. The term of the lease runs until April 19, 2014. We have an option to extend the lease for this office in Hod-Hasharon for a period of 3 months commencing April 20, 2014, and we may exercise this option up to four times.
We lease an 11,300 sq. ft. facility consisting of office, manufacturing and warehousing space in Carlsbad, California. The lease expires on September 30, 2015. Our Carlsbad facility houses the manufacturing and development operations for our excimer laser business.
|
Legal Proceedings
|
During the year ended December 31, 2013, Radiancy, Inc., a wholly-owned subsidiary of PhotoMedex, commenced legal action against Viatek Consumer Products Group, Inc., over Viatek’s Pearl and Samba hair removal products which Radiancy believes infringe the intellectual property covering its no!no! hair removal devices. The first suit, which was filed in the United States Federal Court, Southern District of New York, includes claims against Viatek for patent infringement, trademark and trade dress infringement, and false and misleading advertising. A second suit against Viatek was filed in Canada, where the Pearl is offered on that country’s The Shopping Channel, alleging trademark and trade dress infringement, and false and misleading advertising. Viatek’s response contains a variety of counterclaims and affirmative defenses against both Radiancy and its parent company PhotoMedex, including, among other counts, claims regarding the invalidity of Radiancy’s patents and antitrust allegations regarding Radiancy’s conduct.
As of March 17, 2014, the case has proceeded into the discovery phase of the litigation. Radiancy, and PhotoMedex, have moved to dismiss PhotoMedex from the case, and to dismiss the counterclaims and affirmative defenses asserted by Viatek. Radiancy has also moved for sanctions against Viatek for failure to provide meaningful and timely responses to Radiancy’s discovery requests. No decision has yet been rendered on these motions. At this time, the amount of any loss, or range of loss, cannot be reasonably estimated as the case is still in the early stages of discovery to determine the validity of any claim or claims made by Viatek. Therefore, the Company has not recorded any reserve or contingent liability related to this particular legal matter. However, in the future, as the case progresses, the Company may be required to record a contingent liability or reserve for this matter.
On December 20, 2013, PhotoMedex, Inc. was served with a putative class action lawsuit filed in the United States District Court for the Eastern District of Pennsylvania against the Company and its two top executives, Dolev Rafaeli, Chief Executive Officer, and Dennis M. McGrath, President and Chief Financial Officer. The suit, filed by Mr. Guy Ratz, a former employee of Radiancy (Israel) Ltd., a wholly-owned subsidiary of the Company, alleges various violations of the Federal securities laws between November 7, 2012 and November 14, 2013, including that the Company and its officers made false and misleading statements or failed to disclose material facts concerning the Company’s business. Two other shareholders filed suit through other firms; the Asbestos Workers Local 14 Pension Fund was appointed the lead plaintiff in this case. The complaint seeks certification of the putative class as well as an unspecified amount of monetary damages, pre-and post-judgment interest and attorneys’ fees, expert witness fees and other costs. The Company and its officers intend to vigorously defend themselves against this lawsuit. At this time, the amount of any loss, or range of loss, cannot be reasonably estimated as the cases have only been initiated and no discovery has been conducted to determine the validity of any claim or claims made by plaintiffs. Therefore, the Company has not recorded any reserve or contingent liability related to these particular legal matters. However, in the future, as the cases progress, the Company may be required to record a contingent liability or reserve for these matters.
Four putative class-action lawsuits have been filed in connection with PhotoMedex’s proposed acquisition of LCA-Vision, Inc. Two of those suits have been filed in the Court of Chancery of the State of Delaware and two have been filed in the Court of Common Pleas of Hamilton County, Ohio. All cases assert claims against LCA-Vision, Inc., its chief executive officer and directors, PhotoMedex, and Gatorade Acquisition Corp., a wholly owned subsidiary of PhotoMedex. The complaints allege that the proposed acquisition undervalues LCA and deprives LCA’s shareholders of the opportunity to participate in LCA’s long-term financial prospects, that the “go shop” provisions of the Merger Agreement are intended to prevent LCA from soliciting or receiving competing offers, that LCA’s Board has breached its fiduciary duties and failed to maximize that company’s stockholder value, and that LCA, PhotoMedex, and Gatorade have aided and abetted the LCA defendants’ alleged breaches of duty. The complaints seek injunctive relief, unspecified damages, and other relief. As of March 17, 2014, defendants have not responded to the complaints in any of the actions. Defendants intend to vigorously defend themselves in the lawsuits. At this time, the amount of any loss, or range of loss, cannot be reasonably estimated as the cases have only been initiated and no discovery has been conducted to determine the validity of any claim or claims made by plaintiffs. Therefore, the Company has not recorded any reserve or contingent liability related to these particular legal matters. However, in the future, as the cases progress, the Company may be required to record a contingent liability or reserve for these matters.
We and certain of our subsidiaries are involved in certain other legal actions and claims, including product liability, consumer, commercial, tax and governmental matters, which arise from time to time in the ordinary course of our business. We believe, based on discussions with legal counsel, that these other litigations and claims will likely be resolved without a material effect on our consolidated financial position, results of operations or liquidity. However, litigation is inherently unpredictable, and excessive verdicts can result from litigation. Although we believe we have substantial defenses in these matters, we may, in the future, incur judgments or enter into settlements of claims that could have a material adverse effect on our results of operations in a particular period.
|
Mine Safety Disclosures
|
None.
PART II
|
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|
As of March 14, 2014, we had 18,903,245 shares of common stock issued and outstanding, including 183,826 shares of issued and outstanding restricted stock. This did not include (i) options to purchase 1,192,679 shares of common stock, of which 367,679 were vested as of March 14, 2014, or (ii) warrants to purchase up to 1,058,679 shares of common stock, all of which warrants were vested.
Our common stock is listed on the Nasdaq Global Select Market (“Nasdaq”) under the symbol "PHMD." The following table sets forth, for the periods indicated, the high and low closing sale prices per share of our common stock:
|
High
|
Low
|
|||||||
|
Year Ended December 31, 2013:
|
||||||||
|
Fourth Quarter
|
$ | 15.86 | $ | 11.53 | ||||
|
Third Quarter
|
16.59 | 14.62 | ||||||
|
Second Quarter
|
16.95 | 14.71 | ||||||
|
First Quarter
|
16.47 | 13.95 | ||||||
|
Year Ended December 31, 2012:
|
||||||||
|
Fourth Quarter
|
$ | 15.05 | $ | 11.18 | ||||
|
Third Quarter
|
14.55 | 10.93 | ||||||
|
Second Quarter
|
18.34 | 10.69 | ||||||
|
First Quarter
|
14.55 | 10.83 | ||||||
On March 14, 2014, the last reported sale price for our common stock on Nasdaq was $16.39 per share. As of March 14, 2013, we had approximately 658 stockholders of record, without giving effect to determining the number of stockholders who held shares in “street name” or other nominee accounts.
Dividend Policy
We have not declared or paid any dividend on our common stock, since our inception. We do not anticipate that any dividends on our common stock will be declared or paid in the future.
Overview of Equity Compensation Plans
The following is a summary of all of our equity compensation plans, including plans that were assumed through acquisitions and individual arrangements that provide for the issuance of equity securities as compensation, as of December 31, 2013. See Notes 1 and 11 to the consolidated financial statements for additional discussion.
|
EQUITY COMPENSATION PLAN INFORMATION
|
||||||||||||
|
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights
|
Weighted-
Average Exercise
Price of
Outstanding
Options,
Warrants and
Rights
|
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(excluding securities
reflected in column (A))
|
||||||||||
|
(A)
|
(B)
|
(C)
|
||||||||||
|
Equity compensation plans approved by security holders
|
2,191,357 | $ | 18.15 | 1,210,078 | ||||||||
|
Equity compensation plans not approved by security holders
|
- | - | - | |||||||||
|
Total
|
2,191,357 | $ | 18.15 | 1,210,078 | ||||||||
Options have been granted to employees and/or consultants out of our 2005 Equity Compensation Plan. Options to our outside directors will be made from our 2000 Non-Employee Director Stock Option Plan. Most warrants issued by us have been to investors or placement agents, and no warrants have been issued pursuant to equity compensation plans. Additionally, all outstanding options were granted as compensation for benefits inuring to us other than for benefits from capital-raising activities. With limited exceptions under Nasdaq membership requirements, we intend in the future to issue options pursuant to equity compensation plans which have already been approved by our stockholders.
Recent Issuances of Unregistered Securities
None.
Purchases of Equity Securities
On August 18, 2012, the Board of Directors approved a stock repurchase program up to a maximum to $25 million. In August 2013, the Board of Directors has authorized an additional $30 million share re-purchase program of its common shares in the open market over the next twelve months, at such times and prices as determined appropriate by the Company's management in collaboration with the Board of Directors. To date, we have repurchased 2,933,288 shares at an average price of $13.98 per share for a total of $41,150 million. The shares will be purchased with cash on hand.
|
Period
|
(a)
Total Number
of Shares Purchased
|
(b)
Average Price Paid per Share
|
(c)
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (1)
|
(d)
Maximum Number
(or Approximate
Dollar Value of
Shares) that may Yet
Be Purchased Under
the Plans or
Programs (1)
|
||||||||||||
|
October 1, 2013 – October 31, 2013
|
0 | 0 | 0 | N/A | ||||||||||||
|
November 1, 2013 – November 30, 2013
|
314,500 | $ | 12.23 | 314,500 | N/A | |||||||||||
|
December 1, 2013 – December 31, 2013
|
658,270 | 12.46 | 604,145 | N/A | ||||||||||||
|
Total
|
972,770 | $ | 12.38 | 918,645 | $ | 13,849,611 | ||||||||||
(1) Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for a description of our stock repurchase program.
|
Selected Financial Data
|
You should read the following selected historical consolidated financial data in conjunction with our consolidated financial statements included elsewhere in this Report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning in Item 7 below. The selected historical consolidated statements of operations data for the years ended December 31, 2013, December 31, 2012 and December 31, 2011, and the selected historical consolidated balance sheet data as of December 31, 2013 and December 31, 2012, are derived from our audited consolidated financial statements included in this Report. The selected historical consolidated statements of operations data for the years ended December 31, 2010 and December 31, 2009 and the selected historical consolidated balance sheet data as of December 31, 2011, December 31, 2010 and December 31, 2009 are derived from our audited consolidated financial statements not included in this Report. The historical results presented here are not necessarily indicative of future results. Results of the operations of Pre-merged PhotoMedex are not included in the Statements of Operations prior to the reverse merger on December 13, 2011. The financial position of the Company reflects the completion of the reverse acquisition only in the Balance Sheets at December 31, 2013, 2012 and 2011.
|
Year Ended December 31,
|
||||||||||||||||||||
|
(In thousands, except per-share data)
|
||||||||||||||||||||
|
2013
|
2012
|
2011
|
2010
|
2009
|
||||||||||||||||
|
Statement of Operations Data:
|
||||||||||||||||||||
|
Revenues
|
$ | 224,664 | $ | 220,651 | $ | 132,082 | $ | 70,071 | $ | 16,037 | ||||||||||
|
Costs of revenues
|
45,035 | 46,642 | 26,296 | 16,465 | 6,181 | |||||||||||||||
|
Gross profit
|
179,629 | 174,009 | 105,786 | 53,606 | 9,856 | |||||||||||||||
|
Selling, general and administrative
|
154,278 | 143,817 | 107,377 | 34,596 | 7,568 | |||||||||||||||
|
Engineering and product development
|
3,306 | 2,914 | 1,057 | 839 | 711 | |||||||||||||||
|
Income (loss) from operations before financing income (expense) and interest
|
22,045 | 27,278 | (2,648 | ) | 18,171 | 1,577 | ||||||||||||||
|
Interest and other financing income (expenses), net
|
702 | (351 | ) | (68 | ) | (283 | ) | 65 | ||||||||||||
|
Income (loss) before tax expense (benefit)
|
22,747 | 26,927 | (2,716 | ) | 17,888 | 1,642 | ||||||||||||||
|
Income tax (expense) benefit
|
(4,370 | ) | (4,438 | ) | 2,022 | (6,287 | ) | 3,643 | ||||||||||||
|
Net income (loss)
|
$ | 18,377 | $ | 22,489 | $ | ( 694 | ) | $ | 11,601 | $ | 5,285 | |||||||||
|
Net income (loss) per share:
|
||||||||||||||||||||
|
Basic
|
$ | 0.90 | $ | 1.10 | $ | (0.06 | ) | $ | 1.13 | $ | 0.51 | |||||||||
|
Diluted
|
$ | 0.89 | $ | 1.08 | $ | (0.06 | ) | $ | 0.99 | $ | 0.45 | |||||||||
|
Shares used in computing net income (loss) per share
|
||||||||||||||||||||
|
Basic
|
20,455 | 20,356 | 11,602 | 10,256 | 10,332 | |||||||||||||||
|
Diluted
|
20,657 | 20,764 | 11,602 | 11,725 | 11,646 | |||||||||||||||
|
Balance Sheet Data (At Period End):
|
||||||||||||||||||||
|
Cash, cash equivalents and short-term deposits
|
$ | 59,501 | $ | 62,348 | $ | 16,549 | $ | 22,081 | $ | 10,449 | ||||||||||
|
Working capital
|
83,058 | 95,677 | 30,768 | 27,511 | 12,949 | |||||||||||||||
|
Total assets
|
220,929 | 211,890 | 144,331 | 46,387 | 24,833 | |||||||||||||||
|
Long-term debt (net of current portion)
|
82 | - | 8 | - | - | |||||||||||||||
|
Long-term liabilities
|
3,640 | 4,067 | 2,405 | 837 | 402 | |||||||||||||||
|
Stockholders’ equity
|
$ | 160,361 | $ | 167,327 | $ | 110,725 | $ | 28,900 | $ | 16,907 | ||||||||||
|
Management's Discussion and Analysis of Financial Condition and Results of Operations
|
The following financial data, in this narrative, are expressed in thousands, except for the earnings per share. The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and related notes included elsewhere in this Report.
Introduction, Outlook and Overview of Business Operations
Our current strategic focus is built upon four key components:
|
•
|
Skilled direct sales force to target Physician and Professional Segments;
|
|
•
|
Expertise in global consumer marketing;
|
|
•
|
A full product life cycle model representing the ability to develop and commercialize innovative products from concept through regulatory and physician acceptance, and ultimately marketed directly to the consumer as dictated by normal product life-cycle evolution; and
|
|
•
|
Establishing XTRAC centers of excellence in key markets by acquiring a fully paid infrastructure of existing clinics with established high customer service standards and culture.
|
We believe that we are one of only a few aesthetic companies to have succeeded in taking professional technologies geared toward physicians and med spas and adapting them for the home-use market. Our professional- and consumer-use products are listed below, noting that this is not an exhaustive listing of our product portfolio but represents our current key areas of focus.
Key Technology Platforms
|
•
|
Thermicon® brand Heat Transfer Technology. In this technique, a patented thermodynamic wire gently singes and burns off the hair above the skin’s surface. It conducts heat pulses, which enables longer-lasting hair removal. This technology drives our home-use no!no! Hair Removal 8800™ device, which is designed to reduce hair growth. Product variations include devices designed for men and for sensitive, small areas such as the face, among other versions.
|
|
•
|
LHE® brand Technology. LHE® combines direct heat and a full-spectrum light source to give a greater treatment advantage for psoriasis and acne care, skin tightening, skin rejuvenation, wrinkle reduction, collagen renewal, vascular and pigmented lesion treatments, and hair removal. Using LHE®, the Mistral intelligent phototherapy medical device can treat a larger spot size than a laser with less discomfort. In addition, our research finds that LHE offers meaningful results for thin, light hair. The technology is used in the no!no! Skin™, a handheld consumer product sold worldwide under the no!no!® brand. The no!no! Skin™ is a 510(k)-cleared product that has been clinically shown to reduce acne by 81% over 24 hours. The technology is also used in the no!no! Glow™, a miniaturized LHE device also delivering ant-aging benefits.
|
|
•
|
Kyrobak®. Kyrobak uses clinically proven, proprietary technology to treat unspecified, lower back pain. The unique combination of Continuous Passive Motion (CPM) and Oscillation therapy is a non-invasive, relaxing method for long lasting relief of back pain. Used for better than 3 decades in professional rehabilitation and chiropractic settings, CPM has been proven to increase mobility of the joints, draw more oxygen and blood flow to the area, allowing the muscles to relax and release pressure between the vertebrae allowing the spine to open up and decompress.
|
|
•
|
XTRAC® Excimer Laser. XTRAC received an FDA clearance in 2000 and has since become a widely recognized treatment among dermatologists for psoriasis and other skin conditions for which there are no cures. The machine delivers narrow ultraviolet B (“UVB”) light to affected areas of skin, leading to psoriasis remission in an average of 8 to 12 treatments and of vitiligo after 48 treatments. XTRAC is endorsed by the National Psoriasis Foundation, and its use for psoriasis is covered by nearly all major insurance companies, including Medicare. More than half of all major insurance companies now offer reimbursement for vitiligo as well, a figure that is increasing.
|
|
•
|
NEOVA®. This line of topical formulations is designed to prevent premature skin aging due to UV-induced DNA damage. The therapy seeks to repair photo-damaged skin using a novel combination of two key ingredients: DNA repair enzymes and our Copper Peptide Complex®. The NEOVA line includes DNA Damage Control SILC SHEER SPF 45, an award-winning tinted sunscreen. The DNA repair enzymes of this sunscreen are clinically shown to reduce UV damage by 45% and increase UV protection by 300% in one hour.
|
|
•
|
Light-emitting Diode (LED) Technology. PhotoMedex’s LED technology is used in both its Omnilux™ and Lumière Light Therapy systems. Omnilux is FDA cleared to treat wrinkles, acne, minor muscle pain and pigmented lesions, and is applicable to all skin types. Lumière is designed for use in non-medical applications and combines the LED light with a line of topical lotions to improve the appearance of fine lines, wrinkles, skin tone and blemishes, giving aesthetic professionals a complete non-invasive skin care solution.
|
Our revenue generation is categorized as Consumer, Physician Recurring or Professional. Each segment benefits from the combination of our proprietary global consumer marketing engine with our direct sales force for U.S. physicians.
Consumer
The global consumer market is our largest business unit due to our success at bringing professional technologies into the home-use arena. Cumulatively, we have sold more than 5 million no!no!® products to consumers, the majority of whom have been in Japan and North America.
Even at this level of sales, we believe we have ample opportunity for further expansion, as Japan’s 2013 population was over 127 million people and North America’s was approximately 529 million people—far greater than the 5million who have already purchased our products. In addition, we have recently launched our consumer marketing platform in Germany (population of approximately 83 million people) and to the recent launch in Brazil (population of approximately 198 million people)
Our consumer marketing platform is built upon a proprietary direct-to-consumer sales engine and creative marketing programs that drive brand awareness.
Sales Channels
Our multi-channel marketing and distribution model consists of television, online, print and radio direct-response advertising, as well as high-end retailers. We believe that this marketing and distribution model, through which each channel complements and supports the others, provides:
|
•
|
greater brand awareness across channels;
|
|
•
|
cost-effective consumer acquisition and education;
|
|
•
|
premium brand building; and
|
|
•
|
improved convenience for consumers.
|
Direct to Consumer. Our direct-to-consumer channel consists of sales generated through infomercials, websites and call centers. We utilize several forms of advertising to drive our direct-to-consumer sales and brand awareness, including print, online, television and radio.
Retailers and Home Shopping Channels. Our retailers and home shopping channels enable us to provide additional points of contact to educate consumers about our solutions, expand our presence beyond our direct to consumer activity and further strengthen and enhance our brand image.
Distributors. In some territories, we operate through exclusive distribution agreements with leading distribution companies that are dominant in their respective market and have the ability to promote our products through their existing retail and home shopping networks.
Markets
North America. Our consumer distribution segment in North America had sales of approximately $147.7 million, $141.5 million and $89.6 million for the years ended December 31, 2013, 2012 and 2011, respectively. We use a mix of direct-to-consumer advertising that includes infomercials, commercials, catalog and internet-based marketing campaigns, coupled with select retail resellers, such as Neiman Marcus, Henri Bendel, Planet Beauty, Bed, Bath & Beyond and others; home shopping channels such as HSN; and online retailers such as Dermadoctor.com and Drugstore.com. We believe these channels complement each other, as consumers that have seen our direct-to-consumer advertising may purchase at our retailers, and those who have seen our solutions demonstrated at our retailers may purchase solutions through our websites or call centers.
International (excluding North America). Outside North America sales were approximately $40.6 million, $47.0 million and $36.0 million for the years ended December 31, 2013, 2012 and 2011, respectively. We utilize various sales and marketing methods including sales by direct-to-consumer, sales to retailers and home shopping channels. Our main international markets are Japan, United Kingdom Argentina and Australia with the recent additions of Germany and Brazil.
Physician Recurring
Physician recurring sales primarily include those generated from two of our product lines: (1) XTRAC® lasers, a noninvasive, FDA-cleared solution for psoriasis and vitiligo, and (2) NEOVA® skin care, a topical therapy combining DNA repair enzymes and copper peptide complexes to prevent premature skin aging. Both XTRAC and NEOVA represent recurring revenue streams with significant market opportunities. In addition, our expertise in direct-to-consumer advertising and innovative marketing programs is anticipated to drive greater brand awareness and adoption for both XTRAC and NEOVA products.
XTRAC®
The XTRAC business is considered a recurring revenue stream given its pay-per-use model, where the machines are provided to professionals who then pay us based on the number of treatments administered with the device.
NEOVA®
Sales of the NEOVA skin care products at present are driven by physicians, who act as spokespersons to their patients in support of the NEOVA line. We have historically marketed to physicians in the dermatology and plastic surgery field, but plan to supplement these efforts with a direct-to-consumer approach to lead patients into those practices. NEOVA addresses a sizeable global market for anti-aging skin care products.
Professional
Sales under the professional business segment are mainly generated from capital equipment, such as our XTRAC-Velocity and VTRAC equipment, our LHE® brand products and our Omnilux and Lumière Light Therapy systems.
We view this segment as an area of opportunity for us since the reverse acquisition with Radiancy, Inc. or Radiancy, completed on December 13, 2011. We now possess a greatly expanded product offering for the physician community. In addition, following the December 2011 reverse acquisition, we inherited from Pre-merged PhotoMedex a 48-person, experienced direct sales force that already reaches a network of approximately 3,000 physician locations in the U.S. We are now also distributing through this direct sales force the LHE-based professional products in addition to our other equipment to physicians, dermatologists, salons, spas, and other aesthetic practitioners. We view this fully trained sales staff as a resource in expanding the Professional segment of our revenues.
Sales and Marketing
As of December 31, 2013, our sales and marketing personnel consisted of 68 full-time positions.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations in this Report are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and disclosures at the date of the financial statements. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to revenue recognition, accounts receivable, inventories, impairment of property and equipment and of intangibles and accruals for warranty claims. We use authoritative pronouncements, historical experience and other assumptions as the basis for making estimates. Actual results could differ from those estimates.
Management believes that the following critical accounting policies affect our more significant judgments and estimates in the preparation of our Consolidated Financial Statements. These critical accounting policies and the significant estimates made in accordance with these policies have been discussed with our Audit Committee.
Revenue Recognition. We recognize revenues from the product sales when the following four criteria have been met: (i) the product has been shipped and we have 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 probable. Revenues from product sales are recorded net of provisions for estimated chargebacks, rebates, expected returns and cash discounts.
We ship most of our products FOB shipping point, although from time to time certain customers, for example governmental customers, will insist upon FOB destination. Among the factors we take into account when determining the proper time at which to recognize revenue are when title to the goods transfers and when the risk of loss transfers. Shipments to distributors or physicians that do not fully satisfy the collection criterion are recognized when invoiced amounts are fully paid or fully assured.
For revenue arrangements with multiple deliverables within a single contractually binding arrangement (usually sales of products with separately priced extended warranty), each element of the contract is accounted for as a separate unit of accounting when it provides the customer value on a stand-alone basis and there is objective evidence of the fair value of the separate, but 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 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; we do 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.
We provide 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 right of return exists. As of December 31, 2013, accrued sales returns provision was $16,042 or 7.1% of total recognized revenues of $224,664. As of December 31, 2012, accrued sales returns provision was $11,901 or 5.4% of total recognized revenues of $220,651. The return provisions are influenced by product mix and in 2013 there was higher rate toward the direct channel.
Revenues received with respect to extended warranty on consumer products are recognized over the duration of the warranty period. As of December 31, 2013, deferred revenues for the extended warranties amounted to $8,496 or 3.8% on total recognized revenues. As of December 31, 2012, deferred revenues for the extended warranties amounted to $7,766 or 3.5% on total recognized revenues. During 2013, we began to sell extended warranties in both UK and Germany.
We have two distribution channels for our phototherapy treatment equipment. We either (i) sell our lasers through a distributor or directly to a physician or (ii) place our lasers in a physician’s office (at no charge to the physician) and generally charge the physician a fee for an agreed upon number of treatments. In some cases, the customer and we stipulate to a quarterly or other periodic target of procedures to be performed, and accordingly revenue is recognized ratably over the period.
When we place a laser in a physician’s office, we generally recognize service revenue based on the number of patient treatments performed, or purchased under a periodic commitment, by the physician. Treatments to be performed through random laser-access codes that are sold to physicians free of a periodic commitment, but not yet used, are deferred and recognized as a liability until the physician performs the treatment. Unused treatments remain an obligation of the Company because the treatments can only be performed on equipment which we own and place with the customer. Once the treatments are delivered to a patient, this obligation has been satisfied. We defer substantially all sales of treatment codes ordered by and delivered to its customers within the last two weeks of the period in determining the amount of procedures performed by its physician-customers. Management believes this approach closely approximates the actual amount of unused treatments that existed at the end of a period. As of December 31, 2013, we have deferred treatment code revenues of $172 or 1.1% of total recognized treatment revenues of $15,489. As of December 31, 2012, we have deferred treatment code revenues of $504 or 6.0% of total recognized treatment revenues of $8,441. As of December 31, 2011, we have deferred treatment code revenues of $539. Recognized treatment revenues for the year ended December 31, 2011 was $298. As we completed the reverse acquisition on December 13, 2011, Pre-merged PhotoMedex revenues are included only from the completion date forward.
Revenue from maintenance service agreements is deferred and recognized on a straight-line basis over the term of the agreements. Revenue from billable services, including repair activity, is recognized when the service is provided.
Inventory. We account for inventory at the lower of cost or market. Cost is determined to be purchased cost for raw materials and the production cost (materials, labor and indirect manufacturing cost) for work-in-process and finished goods. For our consumer and LHE products, cost is determined on the weighted-average method. For the pre-merged PhotoMedex’s products, cost is determined on the first-in, first-out method. Throughout the laser manufacturing process, the related production costs are recorded within inventory. Work-in-process is immaterial, given the typically short manufacturing cycle, and therefore is disclosed in conjunction with raw materials. We perform full physical inventory counts for XTRAC and cycle counts on the other inventory to maintain controls and obtain accurate data.
Our XTRAC laser is either (i) sold to distributors or physicians directly or (ii) placed in a physician's office and remains our property. The cost to build a laser, whether for sale or for placement, is accumulated in inventory. When a laser is placed in a physician’s office, the cost is transferred from inventory to “lasers in service” within property and equipment. At times, units are shipped to distributors, but revenue is not recognized until all of the Criteria have been met, and until that time, the unit is carried on our books as inventory. Revenue is not recognized from these distributors until payment is either assured or paid in full.
Reserves for slow-moving and obsolete inventories are provided based on historical experience and product demand. Management evaluates the adequacy of these reserves periodically based on forecasted sales and market trends.
Allowance for Doubtful Accounts. Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. From time to time, our customers dispute the amounts due to us, and, in other cases, our customers experience financial difficulties and cannot pay on a timely basis. In certain instances, these factors ultimately result in uncollectible accounts. The determination of the appropriate reserve needed for uncollectible accounts involves significant judgment. Such factors include changes in the financial condition of our customers as a result of industry, economic or customer-specific factors. A change in the factors used to evaluate collectability could result in a significant change in the reserve needed. As of December 31, 2013 and 2012, allowance for doubtful accounts was $10,734 and $6,917 or 4.8% and 3.1%, respectively of the total recognized revenues of each year. The allowance for doubtful accounts provisions are influenced by product mix and in 2013 there was higher rate toward the direct channel.
Property and Equipment. As of December 31, 2013 and 2012, we had net property and equipment of $10,489 and $6,759, respectively. The most significant component relates to the XTRAC lasers placed by us in physicians’ offices. We own the equipment and charge the physician on a per-treatment basis for use of the equipment. The recoverability of the net carrying value of the lasers is predicated on continuing revenues from the physicians’ use of the lasers. If the physician does not generate sufficient treatments, then we may remove the laser from the physician’s office and redeploy elsewhere. XTRAC lasers placed in service are depreciated on a straight-line basis over the estimated useful life of five-years. For other property and equipment depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, primarily three to seven years for computer hardware and software, furniture and fixtures, automobiles and machinery and equipment. Leasehold improvements are amortized over the lesser of the useful lives or lease terms. Useful lives are determined based upon an estimate of either physical or economic obsolescence, or both.
Goodwill and Intangibles Assets. Our balance sheet includes goodwill and other intangible assets which affect the amount of future period amortization expense and possible impairment expense that we will incur. Management’s judgments regarding the existence of impairment indicators are based on various factors, including market conditions and operational performance of our business. As of December 31, 2013 and 2012, we had $45,463 and $48,027 of goodwill and other intangibles, accounting for 21% and 24% of our total assets, respectively. The goodwill is not amortizable; the other intangibles are. The determination of the value of such intangible assets requires management to make estimates and assumptions that affect our consolidated financial statements. We test our goodwill for impairment, which was acquired as part of the reverse acquisition on December 13, 2011, at least annually. This test is usually conducted in December of each year in connection with the annual budgeting and forecast process. Also, on a quarterly basis, we evaluate whether events have occurred that would negatively impact the realizable value of our intangibles or goodwill.
We reorganized our business into three operating units which resulted in a change in reporting segments effective December 13, 2011. For the purposes of goodwill impairment testing, our reporting units are defined as Consumer, Physician Recurring and Professional Equipment. The balance of our goodwill for each of our segments as of December 31, 2013 is as follows: Consumer $20,850, Physician Recurring $4,080 and Professional Equipment $0. We completed our annual goodwill impairment analysis as of December 31, 2013. Our assessment concluded that there was not any impairment of goodwill. Our analysis employed the use of both a market and income approach, with each method given equal weighting. Significant assumptions used in the income approach include growth and discount rates, margins and the Company’s weighted average cost of capital. We used historical performance and management estimates of future performance to determine margins and growth rates. Discount rates selected for each reporting unit varied. Our weighted average cost of capital included a review and assessment of market and capital structure assumptions. Of the two reporting units with goodwill, Consumer has a fair value that is in excess of its carrying value by approximately 435%, while Physician Recurring has a fair value that is approximately 50% in excess of its carrying value. Considerable management judgment is necessary to evaluate the impact of operating changes and to estimate future cash flows. Changes in our actual results and/or estimates or any of our other assumptions used in our analysis could result in a different conclusion.
In connection with the reverse acquisition of Pre-merged PhotoMedex on December 31, 2011, we acquired certain intangibles recorded at fair value as of the date of acquisition. The balances of these acquired intangibles, net of amortization, were:
|
December 31, 2013
|
||||
|
Customer Relationships
|
$ | 5,107 | ||
|
Tradename
|
4,594 | |||
|
Product and Core Technologies
|
10,832 | |||
|
Goodwill
|
24,930 | |||
|
Total
|
$ | 45,463 | ||
Income taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process requires us to estimate our actual current tax exposure and make an assessment of temporary differences resulting from differing treatment of items, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we establish a valuation allowance. After evaluating the effects of the reverse merger and integration of Radiancy’s business on its net operating losses in the U.K., management determined that the NOLs remain usable against future income of the U.K. subsidiary. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the consolidated statement of operations. Significant management judgment is required in determining our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. In the event that we generate taxable income in the jurisdictions in which we operate and in which we has net operating loss carry-forwards, we may be required to adjust our valuation allowance.
We implemented ASC Topic 740-10, “Income Taxes” which clarify the accounting for uncertainty in tax positions. ASC Topic 740-10 requires that we recognize in our financial statements the impact of a tax position, if that position will more likely than not be sustained upon examination, based on the technical merits of the position, without regard the likelihood that the tax position may be challenged. If an uncertain tax position meets the “more-likely-than-not” threshold, the largest amount of tax benefit that is greater than 50% likely to be recognized upon ultimate settlement with the taxing authority is recorded.
Stock-based compensation. We account for stock based compensation to employees in accordance with “Share-Based Payment” accounting standard. The standard requires estimating the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in our consolidated statement of operations.
The fair value of employee stock options is estimated using a Black-Scholes valuation model. Compensation costs are recorded using the graded vesting attribution method over the vesting period, net of estimated forfeitures. The total share-based compensation expense was $4,985 and $6,197 for the years ended December 31, 2013 and 2012, respectively.
Results of Operations
Revenues
The following table illustrates revenues from our three business segments for the periods listed below:
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For the Year Ended December 31,
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||||||||||||
|
2013
|
2012
|
2011
|
||||||||||
|
Consumer
|
$ | 188,259 | $ | 188,425 | $ | 125,581 | ||||||
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Physician Recurring
|
28,548 | 21,284 | 829 | |||||||||
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Professional
|
7,857 | 10,942 | 5,672 | |||||||||
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Total Revenues
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$ | 224,664 | $ | 220,651 | $ | 132,082 | ||||||
We completed the reverse acquisition on December 13, 2011 and as such, our Pre-merged PhotoMedex revenues are included only from the completion date forward. There are, therefore, no corresponding activities from the Pre-Merged PhotoMedex in the results up to and including December 13, 2011.
Consumer Segment
The following table illustrates the key changes in the revenues of the Consumer segment, by sales channel, for the periods reflected below:
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For the Year Ended December 31,
|
||||||||||||
|
2013
|
2012
|
2011
|
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|
Direct-to-consumer
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$ | 130,785 | $ | 125,208 | $ | 75,904 | ||||||
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Distributors
|
15,553 | 24,851 | 28,948 | |||||||||
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Retailers and home shopping channels
|
41,921 | 38,366 | 20,729 | |||||||||
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Total Consumer Revenues
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$ | 188,259 | $ | 188,425 | $ | 125,581 | ||||||
For the year ended December 31, 2013, consumer products revenues were $188,259 compared to $188,425 in the year ended December 31, 2012. The revenues remained consistent between the years but the sales channels changed mainly due to the following reasons:
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•
|
Direct to Consumer. Revenues for the year ended December 31, 2013 were $130,785 compared to $125,208 for the year ended December 31, 2012. The increase of 4% was mainly due to our successful marketing programs which have led to year-over-year revenue growth. Additionally, in 2013, we launched marketing programs in Germany, resulting in approximately $712 in revenues, and Brazil, resulting in approximately $421 in revenues, for the year ended December 31, 2013.
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|
•
|
Retailers and Home Shopping Channels. Revenues for the year ended December 31, 2013 were $41,921 compared to $38,366 for the year ended December 31, 2012. The increase of 9% was also mainly due to our successful marketing programs to the various home shopping channel customers, mainly in the United States (“US”) and the United Kingdom (“UK”) and to the additional retailers added to this channel.
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|
•
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Distributors Channels. Revenues for the year end December 31, 2013 were $15,553 compared to $24,851 for the same period in 2012. The decrease in revenues of 37% was due to our distributor in Japan who modified its business model during 2013, affecting its role in the supply chain between its manufacturers and the Japan retailers they supply and causing revenues from our Japan distributor to decrease to $10,920 from $19,276. During the fourth quarter of 2013, we cancelled our distribution agreement with the Japan distributor.
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For the year ended December 31, 2012, consumer products revenues were $188,425 compared to $125,581 in the year ended December 31, 2011. The increase of 50% in the year was mainly due to the following reasons:
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•
|
Direct to Consumer. Revenues for the year ended December 31, 2012 were $125,208 compared to $75,904 for the year ended December 31, 2011. The increase of 65% was mainly due to our successful marketing programs which have led to rapid year-over-year revenue growth. Additionally, in May 2011, we launched marketing programs in the UK resulting in approximately $21,884 in revenues for the year ended December 31, 2012 compared to $3,413 in revenues for the year ended December 31, 2011.
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|
•
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Retailers and Home Shopping Channels. Revenues for the year ended December 31, 2012 were $38,366 compared to $20,729 for the year ended December 31, 2011. The increase of 85% was also mainly due to our successful marketing programs to the various home shopping channel customers, mainly in the US and the UK.
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•
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Distributors Channels. Revenues for the year end December 31, 2012 were $24,851 compared to $28,948 for the same period in 2011. The decrease in revenues of 14% was mainly attributed to a key partner’s desire to reduce its inventory levels on all product lines carried over from 2011 and into 2012.
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The following table illustrates the key changes in the revenues of the Consumer segment, by markets, for the periods reflected below:
|
For the Year Ended December 31,
|
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|
2013
|
2012
|
2011
|
||||||||||
|
North America
|
$ | 147,682 | $ | 141,478 | $ | 89,571 | ||||||
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International
|
40,577 | 46,947 | 36,010 | |||||||||
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Total Consumer Revenues
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$ | 188,259 | $ | 188,425 | $ | 125,581 | ||||||
Physician Recurring Segment
The following table illustrates the key changes in the revenues of the Physician Recurring segment for the periods reflected below:
|
For the Year Ended December 31,
|
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|
2013
|
2012
|
2011
|
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XTRAC Treatments
|
$ | 15,489 | $ | 8,441 | $ | 298 | ||||||
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Neova skincare
|
8,243 | 8,156 | 385 | |||||||||
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Other
|
4,816 | 4,687 | 146 | |||||||||
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Total Physician Recurring Revenues
|
$ | 28,548 | $ | 21,284 | $ | 829 | ||||||
All revenues in this segment are generated through the Pre-merged PhotoMedex products. Since we completed the reverse acquisition on December 13, 2011 and in accordance with United States generally accepted accounting principles (“GAAP”) revenues for the year ended December 31, 2011 include only the period of December 14, 2011 through December 31, 2011. There are, therefore, no corresponding activities up to and including December 13, 2011.
XTRAC Treatments
Recognized treatment revenue for the year ended December 31, 2013 was $15,489, which approximates 221,000 treatments with prices between $65 and $95 per treatment compared to recognized treatment revenue for the year ended December 31, 2012 was $8,441, which approximates 125,000 treatments with prices between $65 and $85 per treatment. Recognized treatment revenue for the period, beginning with the merger date on December 13, 2011 through December 31, 2011, was $298. Increases in procedures are dependent upon building market acceptance with our physician partners and their patients that the XTRAC procedures will be of clinical benefit and will be generally reimbursed by insurers.
We have a program to support certain physicians who may be denied reimbursement by private insurance carriers for XTRAC treatments. We recognize service revenue during this program from the sale of XTRAC procedures or equivalent treatments to physicians participating in this program only to the extent the physician has been reimbursed for the treatments. In addition, we defer substantially all sales of treatment codes ordered by and delivered to the customer within the last two weeks of the period in determining the amount of procedures performed by our physician-customers. Management believes this approach closely approximates the actual amount of unused treatments that existed at the end of a period. For the year ended December 31, 2013, we recognized net revenues of $312 under this approach. For the year ended December 31, 2012, we deferred net revenues of $283 under this approach.
NEOVA skincare
For the year ended December 31, 2013 revenues were $8,243 compared to $8,156 for the year ended December 31, 2012. For the period beginning with the merger date on December 13, 2011 through December 31, 2011 revenues were $385. These revenues are generated from the sale of various skin, hair and wound care products to physicians in both the domestic and international markets.
Surgical products
For the year ended December 31, 2013, revenues were $2,094 compared to $2,147 for the year ended December 31, 2012. For the period beginning with the Merger Date on December 13, 2011 through December 31, 2011 revenues were $101. These revenues are generated from the sale of various related laser fibers and laser disposables in both the domestic and international markets.
The following table illustrates the key changes in the revenues of the Physicians Recurring segment, by markets, for the periods reflected below:
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For the Year Ended December 31,
|
||||||||||||
|
2013
|
2012
|
2011
|
||||||||||
|
North America
|
$ | 25,260 | $ | 18,607 | $ | 806 | ||||||
|
International
|
3,288 | 2,677 | 23 | |||||||||
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Total Physicians Recurring Revenues
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$ | 28,548 | $ | 21,284 | $ | 829 | ||||||
Professional Segment
The following table illustrates the key changes in the revenues of the Professional segment for the periods reflected below:
|
For the Year Ended December 31,
|
||||||||||||
|
2013
|
2012
|
2011
|
||||||||||
|
Dermatology equipment
|
$ | 3,962 | $ | 4,174 | $ | 429 | ||||||
|
LHE equipment
|
2,240 | 4,241 | 5,000 | |||||||||
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Omnilux/Lumiere equipment
|
1,510 | 2,124 | 150 | |||||||||
|
Surgical lasers
|
145 | 403 | 93 | |||||||||
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Total Professional Revenues
|
$ | 7,857 | $ | 10,942 | $ | 5,672 | ||||||
The Dermatology equipment, Omnilux/Lumiere equipment and Surgical laser revenues in this segment are all generated through the Pre-merged PhotoMedex products. Since we completed the reverse acquisition on December 13, 2011 and in accordance with United States generally accepted accounting principles (“GAAP”) revenues for these product lines for the year ended December 31, 2011 include only the period of December 14, 2011 through December 31, 2011. There are, therefore, no corresponding activities up to and including December 13, 2011.
Dermatology equipment
For the years ended December 31, 2013 and 2012, dermatology equipment revenues were $3,962 and $4,174, respectively. Included in the December 31, 2012 amount were domestic XTRAC laser sales of $899 on 20 lasers sold. There were no domestic XTRAC laser sales for the year ended December 31, 2013. We sell the laser directly to the customer for certain reasons, including the costs of logistical support and customer preference. Our preference is to consign lasers to customers which will thrive under the per-procedure model. Internationally, we sold 115 systems for the year ended December 31, 2013, 64 of which were VTRAC systems, a lamp-based alternative UVB light source that has a wholesale sales price that is below our competitors’ international dermatology equipment and below that of our XTRAC laser. We sold 121 systems for the year ended December 31, 2012, 82 of which were VTRAC systems. The international sales of our XTRAC and VTRAC systems were $3,275 for the year ended December 31, 2012.
For the period beginning with the merger date on December 13, 2011 through December 31, 2011 dermatology equipment revenues were $429. Included in this were domestic XTRAC laser sales of $304 on 4 lasers sold. The international sales of our XTRAC and VTRAC systems were $125 for the year ended December 31, 2011. We sold 5 systems for the year ended December 31, 2011, all of which were VTRAC systems, a lamp-based alternative UVB light source that has a wholesale sales price that is below our competitors’ international dermatology equipment and below our XTRAC laser.
LHE® brand products
LHE® brand products revenues include revenues derived from the sales of mainly Mistral™, Kona™, FSD™, SpaTouch Elite™ and accessories. These devices are sold to physicians, spas and beauty salons.
For the years ended December 31, 2013 and 2012, LHE® brand products revenues were $2,240 and $4,241, respectively. For the year ended December 31, 2011 revenues were $5,000.
Omnilux/Lumiere equipment
For the years ended December 31, 2013 and 2012 Omnilux/Lumiere equipment revenues were $1,510 and $2,124, respectively. For the period beginning with the merger date on December 13, 2011 through December 31, 2011, Omnilux/Lumiere equipment revenues were $150. These revenues are generated from the sale of LED devices. The Omnilux units are sold for medical applications and the Lumière is a sister technology to Omnilux with the same patent protection, but It is designed for use in non-medical applications, especially at salons and spas.
Surgical lasers
Surgical lasers revenues include revenues derived from the sales of surgical laser systems. For the years ended December 31, 2013 and 2012 surgical lasers revenues were $145, representing five laser systems, and $403, representing 13 laser systems. For the period beginning with the merger date on December 13, 2011 through December 31, 2011, surgical lasers revenues were $93, comprising of three laser systems.
The following table illustrates the key changes in the revenues of the Professional segment, by markets, for the periods reflected below:
|
For the Year Ended December 31,
|
||||||||||||
|
2013
|
2012
|
2011
|
||||||||||
|
North America
|
$ | 2,012 | $ | 3,026 | $ | 2,624 | ||||||
|
International
|
5,845 | 7,916 | 3,048 | |||||||||
|
Total Professional Revenues
|
$ | 7,857 | $ | 10,942 | $ | 5,672 | ||||||
Cost of Revenues: all segments
The following table illustrates cost of revenues from our three business segments for the periods listed below:
|
For the Year Ended December 31,
|
||||||||||||
|
2013
|
2012
|
2011
|
||||||||||
|
Consumer
|
$ | 26,794 | $ | 28,965 | $ | 23,309 | ||||||
|
Physician Recurring
|
13,022 | 11,512 | 456 | |||||||||
|
Professional
|
5,219 | 6,165 | 2,531 | |||||||||
|
Total Revenues
|
$ | 45,035 | $ | 46,642 | $ | 26,296 | ||||||
Overall, cost of revenues changed in each segment due to the related changes in revenues. Included in cost of revenues above are certain inventory excess and obsolete reserves of $698, $336 and $0 for the years ended December 31, 2013, 2012 and 2011, respectively.
As we completed the reverse acquisition on December 13, 2011 the Pre-merged PhotoMedex cost of revenues are included only for the period of December 14, 2011 through December 31, 2011 for the year ended December 31, 2011.
Gross Profit Analysis
Gross profit increased to $179,629 for the year ended December 31, 2013 from $174,009 during the same period in 2012. As a percentage of revenues, the gross margin increased to 80.0% for the year ended December 31, 2013 from 78.9% for the same period in 2012.
Gross profit increased to $174,009 for the year ended December 31, 2012 from $105,786 during the same period in 2011. As a percentage of revenues, the gross margin decreased to 78.9% for the year ended December 31, 2012 from 80.1% for the same period in 2011.
The following table analyzes changes in our gross margin for the periods presented below:
|
Company Profit Analysis
|
For the Year Ended December 31,
|
|||||||||||
|
2013
|
2012
|
2011
|
||||||||||
|
Revenues
|
$ | 224,664 | $ | 220,651 | $ | 132,082 | ||||||
|
Percent increase
|
1.8 | % | 67.1 | % | 88.5 | % | ||||||
|
Cost of revenues
|
45,035 | 46,642 | 26,296 | |||||||||
|
Percent (decrease)/increase
|
(3.4 | %) | 77.4 | % | 59.7 | % | ||||||
|
Gross profit
|
$ | 179,629 | $ | 174,009 | $ | 105,786 | ||||||
|
Gross margin percentage
|
80.0 | % | 78.9 | % | 80.1 | % | ||||||
The primary reasons for the changes in gross profit and the gross margin percentage for the year ended December 31, 2013, compared to the same period in 2012 were due to a change in the sales mix within the Consumer segment with the direct channel, having the highest product gross margins, growing faster than the distributor and retail channels. In addition the Physician Recurring segment had 34% greater revenues than the prior year period with a greater gross margin percentage driven by greater utilization of our installed base of XTRAC equipment.
The primary reasons for the changes in gross profit and the gross margin percentage for the year ended December 31, 2012, compared to the same period in 2011 were due to a change in the sales mix within the Consumer segment with the direct channel, having the highest product gross margins, growing faster than the distributor and retail channels. Offsetting this, both the Physician Recurring and Professional segments, which have lower gross margins than the Consumer segment, had increases in revenues over the comparable prior year period and, therefore, representing a higher percentage of the sales mix. As a result of purchase accounting rules, the operating results of the Pre-merged PhotoMedex, which are mainly attributable to the Physician recurring and Professional segments for the year ended December 31, 2012 are only included in the above table for the period between December 14, 2011 and December 31, 2011.
The following table analyzes the gross profit for our Consumer segment for the periods presented below:
|
Consumer Segment
|
For the Year Ended December 31,
|
|||||||||||
|
2013
|
2012
|
2011
|
||||||||||
|
Revenues
|
$ | 188,259 | $ | 188,425 | $ | 125,581 | ||||||
|
Percent (decrease)/increase
|
(0.1 | %) | 50.0 | % | 88.4 | % | ||||||
|
Cost of revenues
|
26,794 | 28,965 | 23,309 | |||||||||
|
Percent (decrease)/increase
|
(7.5 | %) | 24.3 | % | 55.0 | % | ||||||
|
Gross profit
|
$ | 161,465 | $ | 159,460 | $ | 102,272 | ||||||
|
Gross margin percentage
|
85.8 | % | 84.6 | % | 81.4 | % | ||||||
Gross profit for the year ended December 31, 2013 increased by $2,005 from the comparable period in 2012. The key factor for this increase was an increase in the direct to consumer channel in North America via infomercial and online campaigns. Gross margin percentage for the year ended December 31, 2013 was 85.8%, compared to 84.6% for the year ended December 31, 2012. The improvement in gross margin was due to a increase in the direct to consumer sales channel, which has a higher gross margin compared to the other sales channels.
Gross profit for the year ended December 31, 2012 increased by $57,188 from the comparable period in 2011. The key factor for this increase was an increase in the direct to consumer channel in North America via infomercial and online campaigns. Gross margin percentage for the year ended December 31, 2012 was 84.6%, compared to 81.4% for the year ended December 31, 2011. The improvement in gross margin was due to a significant increase in the direct to consumer sales channel, which has a higher gross margin compared to the other sales channels.
The following table analyzes the gross profit for our Physician Recurring segment for the periods presented below:
|
Physician Recurring Segment
|
For the Year Ended December 31,
|
|||||||||||
|
2013
|
2012
|
2011
|
||||||||||
|
Revenues
|
$ | 28,548 | $ | 21,284 | $ | 829 | ||||||
|
Percent increase
|
34.1 | % | 2,467.4 | % | 100 | % | ||||||
|
Cost of revenues
|
13,022 | 11,512 | 456 | |||||||||
|
Percent increase
|
13.1 | % | 2,425 | % | 100 | % | ||||||
|
Gross profit
|
$ | 15,526 | $ | 9,772 | $ | 373 | ||||||
|
Gross margin percentage
|
54.4 | % | 45.9 | % | 45.0 | % | ||||||
Gross profit for the year ended December 31, 2013 increased by $5,754 from the year ended December 31, 2012. The primary reason for the increased gross profit and gross margin is the increase in XTRAC treatments on the existing installed laser base of equipment. Incremental treatments delivered on existing equipment incur negligible incremental costs.
All revenues/costs for this segment are generated through the Pre-merged PhotoMedex products. Since we completed the reverse acquisition on December 13, 2011 and in accordance with United States generally accepted accounting principles (“GAAP”) revenues and expenses for the year ended December 31, 2011 include only the period of December 14, 2011 through December 31, 2011. There are, therefore, no corresponding activities up to and including December 13, 2011.
The following table analyzes the gross profit for our Professional segment for the periods presented below:
|
Professional Segment
|
For the Year Ended December 31,
|
|||||||||||
|
2013
|
2012
|
2011
|
||||||||||
|
Revenues
|
$ | 7,857 | $ | 10,942 | $ | 5,672 | ||||||
|
Percent (decrease)/increase
|
(28.2 | %) | 92.9 | % | 66.0 | % | ||||||
|
Cost of revenues
|
5,219 | 6,165 | 2,531 | |||||||||
|
Percent increase
|
(15.3 | %) | 143.5 | % | 77.5 | % | ||||||
|
Gross profit
|
$ | 2,638 | $ | 4,777 | $ | 3,141 | ||||||
|
Gross margin percentage
|
33.6 | % | 43.7 | % | 55.4 | % | ||||||
Gross profit for the year ended December 31, 2013 decreased by $2,139 from the comparable period in 2012. For the year ended December 31, 2013, the gross margin percentage was 33.6% compared to 43.7% for the year ended December 31, 2012. The key factor for the decreases was the decreases in revenues for each product type and the gross margin change is affected by the mix of products sold and the mix of channels where they are sold.
Gross profit for the year ended December 31, 2012 decreased by $1,636 from the comparable period in 2011. The key factor for the increase was the increase in revenues. For the year ended December 31, 2012, the gross margin percentage was 43.7% compared to 55.4% for the year ended December 31, 2011. The decrease was due to the addition of the Pre-merged PhotoMedex products. The Dermatology equipment, Omnilux/Lumiere equipment and Surgical laser revenues in this segment are all generated through the Pre-merged PhotoMedex products and carried a lower gross margin per product line than the LHE products from Pre-merged Radiancy which made up most of the 2011 revenues. As we completed the reverse acquisition on December 13, 2011 these revenues/costs are included only for the period of December 14, 2011 through December 31, 2011 for the year ended December 31, 2011.
Engineering and Product Development
Engineering and product development expenses for the year ended December 31, 2013 increased to $3,306 from $2,914 for the year ended December 31, 2012. The majority of this expense relates to the salaries of our worldwide engineering and product development team and are in line with the prior year.
Engineering and product development expenses for the year ended December 31, 2012 increased to $2,914 from $1,057 for the year ended December 31, 2011. The majority of this expense relates to the salaries of our worldwide engineering and product development team. $1,904 of the increase is directly related to engineering and product development expenses related to the Pre-merged PhotoMedex products. The reverse merger occurred on December 13, 2011 therefore only expenses from the completion date forward are included.
Selling and Marketing Expenses
For the year ended December 31, 2013, selling and marketing expenses increased to $127,528 from $116,487 for the year ended December 31, 2012 for the following reasons:
|
•
|
We increased no!no! Hair Removal direct to consumer activities in North America, the UK and Germany via infomercial, online campaigns, radio and print media, which resulted in an increase in advertising, media buying, and other related selling and marketing expenses. Additionally we have increased the marketing activities of the XTRAC laser system in the US market.
|
|
•
|
Overall media buying and advertising expenses in the year ended December 31, 2013 were 32.0% of total revenues compared to 27.5% of total revenues in the year ended December 31, 2012. This percentage increase is due to the factors listed above as well as the change in mix of revenues particularly as a result of the decrease in revenues from our Japan distributor. These distributor revenues require substantially less sales and marketing costs than what is required in the direct channel. Direct to consumer revenues are 58.2% of total revenues for the year ended December 31, 2013 compared to 56.6% of total revenues for the year ended December 31, 2012. In addition, we added new initiatives to support our XTRAC therapy for psoriasis and vitiligo spending approximately $2,356.
|
For the year ended December 31, 2012, selling and marketing expenses increased to $116,487 from $62,185 for the year ended December 31, 2011 for the following reasons:
|
•
|
We increased no!no! Hair Removal direct to consumer activities in North America and the UK via infomercial, online campaigns, radio and print media, which resulted in an increase in advertising, media buying, and other related selling and marketing expenses. There was a 73% increase in direct to consumer revenues between the periods, which was the result of an increase in the consumer advertising and selling activities (media buying, advertisement, public relations, production of commercials and relevant marketing materials).
|
|
•
|
There was an increase of approximately $11,345 in costs related to our Pre-merged PhotoMedex expenses for the year ended December 31, 2012. As we completed the reverse acquisition on December 13, 2011, these expenses were included only from the completion date forward.
|
General and Administrative Expenses
For the year ended December 31, 2013, general and administrative expenses decreased to $26,750 from $27,330 for the year ended December 31, 2012 for the following reasons:
|
•
|
There was a decrease of $4,813 for the year ended December 31, 2013 in legal expense due to the completion of major litigation during 2012.
|
|
•
|
Offsetting the above decrease, there was an increase in bad debt expenses of $1,329 related to the increase in direct to consumer revenues and an international distributor.
|
For the year ended December 31, 2012, general and administrative expenses decreased to $27,330 from $45,192 for the year ended December 31, 2011 for the following reasons:
|
•
|
The decrease was mainly due to a stock based compensation expense of $ 27.1 million including the cash bonus of $12.3 million for the year ended December 31, 2011, as follows, which was not granted in the year ended December 31, 2012. On June 30, 2011, the Radiancy board of directors awarded its Chief Executive Officer (i) a stock award of up to 1,017,065 shares of the Radiancy's common stock and (ii) a $12.3 million cash bonus as a "gross-up" for reimbursement of tax payments (tax obligations, withholdings and other tax-related liabilities in connection with the stock bonus and cash award).
|
|
•
|
Offsetting the above decreases, in part, was an increase of $1,797 in legal expense due to the completion of major litigation.
|
|
•
|
There was an increase of approximately $11,225 in the year ended December 31, 2012 in costs related to our Pre-merged PhotoMedex expenses. As we completed the reverse acquisition on December 13, 2011, these expenses were included only from the completion date forward and therefore there were no such activities in the results of 2011 prior to the merger date.
|
Interest and Other Financing Expense, Net
Net interest and other financing income for the year ended December 31, 2013 increased to $702, as compared to net interest and other financing expense of $351 for the year ended December 31, 2012. The increase of $1,053 is due to a decrease in interest expense of $399. The interest expense related to the term note that was assumed in the reverse merger. The remaining change was due to currency fluctuation of the U.S. Dollar versus the New Israeli Shekel, the Euro, the GBP and the Australian Dollar. The functional currency of all members of the group is the U.S. Dollar, except for Photo Therapeutics, Ltd, which has a functional currency of GBP and LK Technology, which has a functional currency of the Brazilian Real.
Net interest and other financing expense for the year ended December 31, 2012 increased to $351, as compared to $68 for the year ended December 31, 2011. The increase of $283 in financing expenses is mainly due to an increase in interest expense of $414. The interest expense related to the term note that was assumed in the reverse merger. There was no corresponding expense in the year ended December 31, 2011. The remaining change was due to currency fluctuation of the U.S. Dollar versus the New Israeli Shekel, the Euro, the GBP and the Australian Dollar.
Taxes on Income, Net
For the year ended December 31, 2013, net taxes on income amounted to $4,370 as compared to $4,438 for the year ended December 31, 2012. Partially offsetting the tax expense for the year ended December 31, 2012, we recorded a carryback of Radiancy, Inc’s 2011 net operating loss to its 2010 tax return. The refund was received on February 28, 2013.
For the year ended December 31, 2012, net taxes on income amounted to $4,438 as compared to net benefit from taxes on income of $2,022 for the year ended December 31, 2011. During 2012, we recorded a carryback of Radiancy, Inc’s 2011 net operating loss to its 2010 tax return.
Net Income (Loss)
The factors discussed above resulted in a net income of $18,377 during the year ended December 31, 2013, as compared to $22,489 during the year ended December 31, 2012.
To supplement our consolidated financial statements presented elsewhere within this report, in accordance with GAAP, management provides certain non-GAAP measures of financial performance. These non-GAAP measures include non-GAAP adjusted income.
Management’s reference to these non-GAAP measures should be considered in addition to results prepared under current accounting standards, but are not a substitute for, nor superior to, GAAP measures. These non-GAAP measures are provided to enhance readers’ overall understanding of our current financial performance and to provide further information for comparative purposes.
Specifically, management believes the non-GAAP measures provide useful information to management and investors by isolating certain expenses, gains and losses that may not be indicative of our core operating results and business outlook. In addition, management believes non-GAAP measures enhance the comparability of results against prior periods. Reconciliation to the most directly comparable GAAP measure of all non-GAAP measures included in this report is as follows:
|
For the Year ended December 31,
|
||||||||||||
|
2013
|
2012
|
Change
|
||||||||||
|
Net income
|
$ | 18,377 | $ | 22,489 | $ | (4,112 | ) | |||||
|
Adjustments:
|
||||||||||||
|
Depreciation and amortization
|
6,119 | 5,611 | 508 | |||||||||
|
Interest expense, net
|
10 | 398 | (388 | ) | ||||||||
|
Income tax expense
|
4,370 | 4,438 | (68 | ) | ||||||||
|
EBITDA
|
28,876 | 32,936 | (4,060 | ) | ||||||||
|
Stock-based compensation expense
|
4,985 | 6,197 | (1,212 | ) | ||||||||
|
Non-GAAP adjusted income
|
$ | 33,861 | $ | 39,133 | $ | (5,272 | ) | |||||
The factors discussed above resulted in a net income of $22,489 during the year ended December 31, 2012, as compared to net loss of $694 during the year ended December 31, 2011.
Reconciliation to the most directly comparable GAAP measure of all non-GAAP measures included in this report is as follows s:
|
For the Year ended December 31,
|
||||||||||||
|
2012
|
2011
|
Change
|
||||||||||
|
Net income (loss)
|
$ | 22,489 | $ | (694 | ) | $ | 23,183 | |||||
|
Adjustments:
|
||||||||||||
|
Depreciation and amortization
|
5,611 | 590 | 5,021 | |||||||||
|
Interest expense, net
|
398 | 24 | 374 | |||||||||
|
Income tax expense
|
4,438 | (2,022 | ) | 6,460 | ||||||||
|
EBITDA
|
32,936 | (2,102 | ) | 35,038 | ||||||||
|
Stock-based compensation expense
|
6,197 | 34,001 | (27,804 | ) | ||||||||
|
Non-GAAP adjusted income
|
$ | 39,133 | $ | 31,899 | $ | 7,234 | ||||||
Liquidity and Capital Resources
At December 31, 2013, our current ratio was 2.46 compared to 3.36 at December 31, 2012. As of December 31, 2013 we had $83,058 of working capital compared to $95,677 as of December 31, 2012. Cash and cash equivalents were $45,388 as of December 31, 2013, as compared to $44,348 as of December 31, 2012. In addition, we had $14,113 and $18,000 in short term bank deposits as of December 31, 2013 and 2012, respectively.
On April 27, 2012, we closed on a two-tranche registered offering in which we sold an aggregate of 3,023,432 shares of its common stock at an offering price of $13.23 per share. The sale resulted in net proceeds of approximately $37.8 million. The net proceeds will be used for general corporate purposes, including capital expenditures, continued product development, sales and marketing initiatives and working capital.
On August 18, 2012, the Board of Directors approved a stock repurchase program up to a maximum to $25 million. In August 2013, the Board of Directors has authorized an additional $30 million share re-purchase program of its common shares in the open market over the next twelve months, at such times and prices as determined appropriate by the Company's management in collaboration with the Board of Directors. To date, we have repurchased 2,987,413 shares at an average price of $13.98 per share for a total of $41,757. The shares will be purchased with cash on hand.
We believe our existing balances of cash and cash equivalents will be sufficient to satisfy our working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with our existing operations through and beyond the first quarter of 2014.
Net cash and cash equivalents provided by operating activities was $25,270 for the year ended December 31, 2013 compared to $25,065 for the year ended December 31, 2012.
Net cash and cash equivalents provided by operating activities was $25,065 for the year ended December 31, 2012 compared to $13,459 for the year ended December 31, 2011. The increase was mostly due to the overall increase in net income.
Net cash and cash equivalents used in investing activities was $2,681 for the year ended December 31, 2013 compared to $21,863 for the year ended December 31, 2012. This was primarily due to the increase in the placement of lasers into service for the year ended December 31, 2013 compared to the purchase of short term deposits of $18,000 for the year ended December 31, 2012.
Net cash and cash equivalents used in investing activities was $21,863 for the year ended December 31, 2012 compared to $4,653 for the year ended December 31, 2011. This was primarily due to the purchase of short term deposits of $18,000 and an increase in the placement of lasers into service for the year ended December 31, 2012 compared to costs, net of cash received, of $18,729 in connection with the reverse acquisition reduced by proceeds from short term deposits of $14,500 for the year ended December 31, 2011.
When we retire a laser from service that is no longer useable, we write off the net book value of the laser, which is typically negligible. Over the last few years, such retirements of lasers from service have been immaterial.
Net cash and cash equivalents used in financing activities was $21,672 for the year ended December 31, 2013 compared to Net cash and cash equivalents provided by financing activities of $24,592 for the year ended December 31, 2012. In the year ended December 31, 2013, we had repurchased company stock for $31,029 and repayments of $623 for certain notes payable, which was partially offset by a draw on credit facility of $10,000. In the year ended December 31, 2012, we had proceeds from issuance of common stock, net of $37,514, which was partially offset by repayments of $2,000 on long-term debt and $465 for certain notes payable.
Net cash and cash equivalents provided by financing activities was $24,592 for the year ended December 31, 2012 compared to $160 for the year ended December 31, 2011. In the year ended December 31, 2012, we had proceeds from issuance of common stock, net of $37,514, which was partially offset by the repurchase of common stock of $10,756, repayments of $2,000 on long-term debt and $465 for certain notes payable.
Contractual Obligations
Set forth below is a summary of our current obligations as of December 31, 2013 to make future payments due by the period indicated below, excluding payables and accruals. We expect to be able to meet our obligations in the ordinary course. Operating lease and rental obligations are respectively for personal and real property which we use in our business.
|
Payments due by period
|
||||||||||||||||
|
Contractual Obligations
|
Total
|
Less than 1 year
|
1 – 3 years
|
4 – 5 years
|
||||||||||||
|
Credit facility obligations
|
$ | 10,000 | $ | 10,000 | $ | - | $ | - | ||||||||
|
Rental and Operating lease obligations
|
926 | 535 | 391 | - | ||||||||||||
|
Notes payable
|
919 | 837 | 82 | - | ||||||||||||
|
Total
|
$ | 11,845 | $ | 11,372 | $ | 391 | $ | - | ||||||||
Off-Balance Sheet Arrangements
At December 31, 2013, we had no off-balance sheet arrangements.
Impact of Inflation
We have not operated in a highly inflationary period, and we do not believe that inflation has had a material effect on our sales or expenses.
|
Quantitative and Qualitative Disclosure about Market Risk
|
Foreign Exchange Risk
We are exposed to foreign currency exchange rate fluctuations related to the operation of our international subsidiaries. The Company’s United Kingdom, PTL, subsidiary’s main operating currency is pounds sterling. At the end of each reporting period, revenue and expense of PTL are converted into U.S. dollars using the average currency rate in effect for the period and assets and liabilities are converted into U.S. dollars using the exchange rate in effect at the end of the period. The Company’s Brazilian, LK Technology, subsidiary’s main operating currency is Brazilian Real. At the end of each reporting period, revenue and expense of LK Technology are converted into U.S. dollars using the average currency rate in effect for the period and assets and liabilities are converted into U.S. dollars using the exchange rate in effect at the end of the period.
The functional currency for our Israeli subsidiary, Radiancy, Ltd. is the US Dollar, but certain day-to-day transactions in Israel (for example, payment of salaries to Israeli employees) are transacted in New Israeli Shekels, therefore , we face some risk from fluctuations in the foreign exchange rates when accounting for these transactions. Additionally, we are exposed to foreign currency exchange rate fluctuations relating to payments we make to vendors and suppliers using foreign currencies. We currently do some hedging against the New Israeli Shekels. Fluctuations in exchange rates may impact our financial condition and results of operations.
See our Risk Factors regarding foreign currency exchange related risks.
|
Financial Statements and Supplementary Data.
|
The financial statements required by this Item 8 are included in this Report and begin on page F-1.
|
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|
None.
|
Controls and Procedures
|
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures, (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)), as of December 31, 2013. Based on that evaluation, management has concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level described below.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Management’s Report on Internal Control over Financial Reporting
Our Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework established in the 1992 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, our management has determined that the Company’s internal control over financial reporting was effective as of December 31, 2013.
Fahn Kanne & Co. Grant Thornton Israel, our independent registered public accounting firm, has issued an attestation report on our internal control over financial reporting, and such report is included elsewhere in this Form 10-K.
Because of the inherent limitations in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our Company have been detected. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Management does not expect that the Company’s disclosure controls and procedures or its internal control over financial reporting will prevent or detect all errors and all fraud.
The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting in our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
Fahn Kanne & Co.
Head Office
|
|
Board of Directors and Shareholders
|
Levinstein Tower
|
| PhotoMedex, Inc. |
23 Menachem Begin Road
|
|
Tel-Aviv 66184, ISRAEL
|
|
|
P.O.B. 36172, 61361
|
|
| T +972 3 7106666 | |
|
F +972 3 7106660
|
|
|
www.gtfk.co.il
|
We have audited the internal control over financial reporting of PhotoMedex, Inc. and Subsidiaries (“the Company”) as of December 31, 2013, based on criteria established in the 1992 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management’s report on internal control over financial reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in the 1992 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended December 31, 2013 and our report dated March 17, 2014, expressed an unqualified opinion on those financial statements.
/s/FAHN KANNE & CO. GRANT THORNTON ISRAEL
Tel-Aviv, Israel
March 17, 2014
|
Other Information
|
None.
PART III
|
Directors, Executive Officers and Corporate Governance
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Our directors currently have terms which will end at our next annual meeting of the stockholders or until their successors are elected and qualify, subject to their prior death, resignation or removal. Officers serve at the discretion of the Board of Directors. There are no family relationships among any of our directors and executive officers. Members of our Board of Directors are encouraged to attend meetings of the Board of Directors and the Annual Meeting of Stockholders. The Board of Directors held five meetings and executed two unanimous written consents in lieu of a meeting in 2013.
The following sets forth certain biographical information concerning our current directors and our executive officers as of March 17, 2014.
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Position
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Age
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Lewis C. Pell
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Non-Executive Chairman of the Board of Directors
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70
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Yoav Ben-Dror
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Non-Executive Vice Chairman of the Board of Directors
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61
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Dolev Rafaeli
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Chief Executive Officer and Director
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50
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Dennis M. McGrath
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President, Chief Financial Officer and Director
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57
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James W. Sight
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Director
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58
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Stephen P. Connelly
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Director
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62
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Katsumi Oneda
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Director
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76
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Trevor Harris
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Director (February 2014)
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59
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Nahum D. Melumad (deceased)
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Director
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58
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Directors and Executive Officers
Lewis C. Pell was appointed to our Board of Directors and was unanimously elected to serve as Non-Executive Chairman of the Board on December 12, 2011. Mr. Pell was a member of Radiancy’s Board since 1998. Mr. Pell has founded over a dozen successful medical technology companies during the past three decades. In 1979, he founded Pentax Precision Instruments, which was sold to Asahi Optical Co. in 1990. In 1983, he founded American Endoscopy Inc., which was sold to C.R. Bard, Inc. (BCR-NYSE) in 1986. In 1984, he founded Versaflex Inc., which was sold to Medtronic in 1988. In 1989, he founded Heart Technology Corp., which went public in the U.S. in 1992 and was sold to Boston Scientific Corp. (BSX-NYSE) in 1995. In 1991, he founded InStent Inc., which became a public company in 1995 and was sold to Medtronic in 1996. In 1994, he founded Influence Inc., which was sold to American Medical Systems Inc. in 1999. Working with Dr. Shlomo Ben-Haim, Mr. Pell founded Biosense Inc. in 1994, which was sold to Johnson & Johnson in 1997. He is currently chairman and an investor for a number of private medical device companies. In 1992, he founded and remains the chairman of Vision-Sciences, Inc. (VSCI-NASDAQ). Mr. Pell has a B.S. in political science from Brooklyn College and over 20 years of experience in the medical technology industry. Mr. Pell was selected to serve on the Company’s board because of his over thirty-years’ experience in leadership roles in the medical device industry.
Yoav Ben-Dror was appointed to our Board of Directors and was elected to serve as Non-Executive Vice Chairman on December 12, 2011. Dr. Ben-Dror was the chairman of Radiancy’s Board since 2006. He is an entrepreneur with more than 30 years of experience in technology, medical devices and financial innovations. He currently serves on the Board of Dagon Batey-Mamguroth Le-Israel Ltd (silo houses), Final Inc. (high-frequency financial algorithm technology), Fitango Inc. (social network), Neurotech Solutions Ltd. (human cognition and behavior with an emphasis on attention deficit/hyperactivity disorder (ADHD)), and Impact First Investments Ltd. (investment management firm that specializes in social investing). He is a director at Keren Shemesh Foundation for the Encouragement of Young Entrepreneurs (in association with YBI (Youth Business International), a foundation assisting young entrepreneurs in transforming an idea into a successful sustainable small business), a director at Hatnuah Hezrachit Hachadasha Ltd. (social activity), a member of the Board of Trustees of the Holon Institute of Technology (H.I.T.), and a trustee at the Hecht-Zilzer Trust (charity). Dr. Ben Dror previously served on the Board of Cellcom Israel Ltd. (CEL-NYSE), Dubek Ltd. (tobacco) and Magic Box Ltd. (financial algorithm technology), and was a member of the Board of H.I.T. He was also involved with InStent Inc., Influence Medical Technologies Ltd. and Disc-O-Tech Medical Technologies Ltd. Dr. Ben Dror is a member of the Israel Bar and holds a Doctor of the Science of Jurisprudence (J.S.D.) from the School of Law (Boalt Hall), University of California, Berkeley. Dr. Ben-Dror was selected to serve on the Company’s board because of his extensive background in business and financial entrepreneurship.
Dolev Rafaeli was appointed as our Chief Executive Officer and director in December 2011. Dr. Rafaeli joined Radiancy in February 2006 as president and CEO. He has over 22 years of experience managing international operations. Prior to joining Radiancy, Dr. Rafaeli served from 2004 to 2006 as president and CEO of the USR Group, a consumer electronics products manufacturer, managing operations in Israel, China, Hong Kong and the U.S. Between 2000 and 2004, Dr. Rafaeli founded and served as general manager of Orbotech Ltd. (ORBK-NASDAQ), an automated optical inspection capital equipment manufacturer for the electronics industry in China and Hong Kong, where he was instrumental in building these operations into a $100 million a year business. Between 1997 and 2000, Dr. Rafaeli served as CEO of USR Ltd., a global electronics contract manufacturing company providing design, supply chain and manufacturing services to dozens of clients in the communications, consumer and medical device fields. USR Ltd. employed approximately 1,000 individuals. Dr. Rafaeli previously served as director of operations and manager of the Arad manufacturing facility for Motorola in its Land Mobile Product Solutions division, manufacturing and distributing communications, consumer and other infrastructure electronics products in excess of $400 million annually. Dr. Rafaeli graduated with a B.Sc. in industrial engineering and management cum laude and a M.Sc. in operations management from the Technion-Israel Institute of Technology, and holds a Ph.D. in business management from Century University. Dr. Rafaeli was selected to serve on the Company’s board because of his over twenty-years’ experience in consumer marketing and international sales and operations.
Dennis M. McGrath upon completion of the merger with Radiancy, reassumed his role of Chief Financial Officer in addition to president and director of PhotoMedex, to which he was appointed in July 2009. Mr. McGrath had previously served as CFO and vice president, finance and administration from January 2000 through June 2009. He has held several senior-level positions in prior endeavors, including, from February 1999 to January 2000, serving as the COO of Internet Practice, the largest division for AnswerThink Consulting Group, Inc., a company specializing in business consulting and technology integration. Concurrently, from August 1999 until January 2000, Mr. McGrath served as CFO of Think New Ideas, Inc., a company specializing in interactive marketing services and business solutions. In addition to the financial reporting responsibilities, he was responsible for the merger integration of Think New Ideas, Inc. and AnswerThink Consulting Group, Inc. Prior to that, from September 1996 to February 1999, Mr. McGrath was CFO and executive vice-president, operations of TriSpan, Inc., an internet commerce solutions and technology consulting company that was acquired by AnswerThink Consulting Group, Inc. in 1999. Mr. McGrath is currently a director of Noninvasive Medical Technologies, Inc. and LabStyle, Inc. Mr. McGrath graduated with a B.S. in accounting from LaSalle University in 1979. Mr. McGrath was selected to serve on the Company’s board because of his twenty year’s experience in the development and implementation of innovative business and marketing practices.
James W. Sight was appointed to our Board of Directors on May 26, 2010. Mr. Sight, an investor serving on the board of directors of various other public companies, has over 20 years of experience in corporate restructurings and financings. Within his experience Mr. Sight has been, since November 2007, a significant shareholder of Feldman Mall Properties, Inc., a real estate investment trust formerly listed on the New York Stock Exchange under the symbol FLMP, and has served in the office of the REIT’s President; acted since 1998 to the present as a consultant to LSB Industries (NYSE: LXU); and from 1995 to 2006, was a large shareholder in Westmoreland Coal (AMEX: WLB), and was active on its board of directors in directing the reorganization of the company and its emergence from Chapter 11. Mr. Sight was selected to serve on the Company’s board because of his twenty-years’ experience in business operations and management.
Stephen P. Connelly was appointed to our Board of Directors on May 3, 2007. Mr. Connelly joined Viasys Healthcare, Inc., a medical technology and device company in August 2001 and served as President and Chief Operating Officer from November 2002 until August 2004. In addition, Mr. Connelly was formerly Senior Vice President and General Manager of the Americas as well as a member of the Executive Committee of Rhone Poulenc Rorer. Mr. Connelly’s broad background includes over twenty-five years of experience in the planning, development and management of rapid-growth marketing-driven businesses in the medical device and pharmaceutical fields. Since 1999, Mr. Connelly has been an adjunct professor at St. Joseph’s University, teaching international management and global strategy in the MBA program in the Haub School of Business. In addition, Mr. Connelly has a diverse and comprehensive business background, with expertise in such areas as strategic and tactical business development, joint ventures, mergers, acquisitions and corporate partnering, structuring and finance. Mr. Connelly is well-versed in every aspect of marketing, sales, general management, research and development of high-technology products and processes. Mr. Connelly possesses extensive international experience, having lived in Asia and having had operational P&L responsibility in many developed countries. Mr. Connelly was selected to serve on the Company’s board because of his twenty-five years’ background in the medical device industry and his experience in business development.
Katsumi Oneda was appointed to our Board of Directors on December 12, 2011. Mr. Oneda co-founded Vision-Sciences Inc., served as its president and CEO from October 1993 to February 2003, and served as chairman from October 1993 to October 2005. He served as the vice-chairman of the Board of Directors of Vision-Sciences from May 1992 to October 1993, as honorary chairman of the Board of Directors from October 1991 to October 1993, and as the chairman of the Board of Directors from September 1990 to October 1991. He has been on the Board of Directors of Vision-Sciences since 1987. Mr. Oneda graduated from Sangyo Noritsu College in 1964. He has over 20 years of experience in the medical technology industry. Mr. Oneda was selected to serve on the company’s board of directors because of his twenty-years’ experience in the medical device industry.
Trevor Harris was appointed to our Board of Directors on February 27, 2014. Mr. Harris has been a faculty member of the Columbia Business School of Columbia University for more than 20 years, is former chair of the Accounting Division and has won numerous teaching awards. Currently he is The Arthur J. Samberg Professor of Professional Practice at Columbia and co-director of the Center for Excellence in Accounting and Security Analysis. Dr. Harris is a member of the Office of Financial Research’s Financial Research Advisory Committee, the Financial Reporting Policy Committee of the American Accounting Association and the editorial board of The Journal of Applied Corporate Finance. A respected consultant on national and international finance, investment and valuation matters, for two decades Dr. Harris has worked with and advised numerous corporations, including Morgan Stanley, Salomon Brothers, TIAA/CREF, Citicorp and the New York Stock Exchange. He has held a number of leadership and management positions with U.S. and global organizations, including serving as managing director and vice chairman of client services at Morgan Stanley. He has numerous publications to his credit and has made presentations on national and international accounting, finance and valuation issues. He received a Master of Commerce and Bachelor of Commerce degrees, and his Certificate of Accountancy, from the University of Cape Town, South Africa, and a doctorate in Business Administration from the University of Washington in 1983. Dr. Harris was selected to serve on the Company’s board because of his twenty years’ experience and his background in national and international financial and accounting matters.
Nahum Melumad was appointed to our Board of Directors on December 12, 2011; on January 15, 2014, Dr. Melumad passed away. He was the James Dohr Professor of Accounting and Business Law at the Columbia Business School (CBS). He had been a member of the CBS faculty since 1993. Between 2000 and 2006, he served as the chairman of the accounting division at CBS. Professor Melumad was the recipient of the 2005 Annual CBS Dean’s Award for Excellence in MBA/EMBA teaching. Between 2003 and 2008, he co-directed the CBS/NYSE Program for directors of public companies titled “Integrity in Financial Disclosure.” Prior to joining CBS, he was a member of faculty at the Stanford Business School. Professor Melumad had served as a consultant and advisor to many organizations, including Bristol-Myers Squibb Co. (BMY-NYSE), General Electric Co. (GE-NYSE), the NYSE and Morgan Stanley (MS-NYSE). Professor Melumad was a CPA and held both an MBA and Ph.D. from the University of California, Berkeley. Dr. Melumad had been selected to serve on the Company’s board because of his twenty years’ background in accounting and his financial expertise.
With respect to the incumbent members of the Board of Directors, none of the members has, in the past 10 years, been subject to a federal or state judicial or administrative order, judgment, decree or finding, not subsequently reversed, suspended or vacated, relating to any legal proceedings, which include judicial or administrative proceedings resulting from involvement in mail or wire fraud or fraud in connection with any business entity or based on violations of federal or state securities, commodities, banking, or insurance laws and regulations, or any settlement to such actions, and any disciplinary sanction or order imposed by a stock, commodities or derivatives exchange other self-regulatory organization.
Board Leadership Structure
In accordance with the provisions of our Bylaws, the total number of directors who serve on our Board of Directors is currently set at eight.
We choose to separate the position of our Chief Executive Officer from that of our Chairman of the Board of Directors. Our Board of Directors has made this decision based on their belief that an independent Chairman of the Board can act as a balance to the Chief Executive Officer, who also serves as a non-independent director. The Board of Directors also has provided for the post of Vice Chairman, who will fulfill the duties of the Chairman when circumstances preclude the Chairman from fulfilling the duties of the chairmanship.
Our Board of Directors administers its risk oversight function as a whole by making risk oversight a matter of collective consideration. While management is responsible for identifying risks, our Board of Directors has charged the Audit Committee of the Board of Directors with evaluating financial and accounting risk, the Compensation Committee of the Board of Directors with evaluating risks associated with employees and compensation. Investor-related risks are usually addressed by the Board as a whole. We believe an independent Chairman of the Board adds an additional layer of insight to our Board of Directors’ risk oversight process.
Compensation, Nominations and Corporate Governance and Audit Committees
General. Our Board of Directors maintains charters for select committees. In addition, our Board of Directors has adopted a written set of corporate governance guidelines and a code of business conduct and ethics and a code of conduct for our chief executive and senior financial officers that generally formalize practices that we already had in place. We have adopted a Code of Ethics on Interactions with Health Care Professionals, an Anti-Fraud Program and a policy for compliance with the Foreign Corrupt Practices Act. To view the charters of our Audit, Compensation and Nominations and Corporate Governance Committees, Code of Ethics, corporate governance guidelines, codes of conduct and whistle blower policy, please visit our website at www.photomedex.com, under the Corporate Governance section of the Investor Relations page (this website address is not intended to function as a hyperlink and the information contained on our website is not intended to be a part of this Report). In compliance with Nasdaq rules, the majority of our Board of Directors is comprised of independent directors. The Board of Directors determined in 2013 that, except for Messrs. Rafaeli and McGrath, who are our Chief Executive Officer and Chief Financial Officer, respectively, all current members of the Board of Directors are independent under the revised listing standards of Nasdaq.
Compensation Committee. Our Compensation Committee discharges the Board of Directors’ responsibilities relating to compensation of our Chief Executive Officer and other executive officers, produces an annual report on executive compensation for inclusion in our annual proxy statement that is included in this Report and provides general oversight of compensation structure. Other specific duties and responsibilities of the Compensation Committee include:
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reviewing and approving objectives relevant to executive officer compensation;
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evaluating performance and recommending to the Board of Directors the compensation, including any incentive compensation, of our Chief Executive Officer and other executive officers in accordance with such objectives;
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reviewing employment agreements for executive officers;
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recommending to the Board of Directors the compensation for our directors;
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administering our equity compensation plans (except the Non-Employee Director Plan) and other employee benefit plans;
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evaluating human resources and compensation strategies, as needed; and
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evaluating periodically the Compensation Committee charter.
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Our Board of Directors has adopted a written charter for the Compensation Committee. The Compensation Committee is currently composed of Messrs. Ben-Dror, Connelly and Pell. Dr. Ben-Dror serves as the Chairman of the Compensation Committee. Our Board of Directors determined that each member of the Compensation Committee in 2013 satisfies the independence requirements of Nasdaq. The Compensation Committee held two formal meetings during 2013.
The Compensation Committee reviews executive compensation from time to time and reports to the Board of Directors, which makes all final decisions with respect to executive compensation. The Compensation Committee adheres to several guidelines in carrying out its responsibilities, including performance by the employees, our performance, enhancement of stockholder value, growth of new businesses and new markets and competitive levels of fixed and variable compensation. The report of the Compensation Committee for 2013 is presented below.
Nominations and Corporate Governance Committee. Our Board of Directors has established a Nominations and Corporate Governance Committee for the purpose of reviewing all Board of Director-recommended and stockholder-recommended nominees, determining each nominee’s qualifications and making a recommendation to the full Board of Directors as to which persons should be our Board of Directors’ nominees. Our Board of Directors has adopted a written charter for the Nominations and Corporate Governance Committee. The Nominations and Corporate Governance Committee is composed of Messrs. Sight and Oneda. Mr. Sight serves as the Chairman of the Nominations and Corporate Governance Committee. Our Board of Directors determined in 2013 that each member of the Nominations and Corporate Governance Committee satisfies the independence requirements of Nasdaq. The Nominations and Corporate Governance Committee held one meeting during 2013 in conjunction with a meeting of the full Board of Directors.
The duties and responsibilities of the Nominations and Corporate Governance Committee include:
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identifying and recommending to our Board of Directors individuals qualified to become members of our Board of Directors;
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recommending to our Board of Directors the director nominees for the next annual meeting of stockholders;
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recommending to our Board of Directors director committee assignments;
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reviewing and evaluating succession planning for our Chief Executive Officer and other executive officers;
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monitoring the independence of our directors;
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developing and overseeing the corporate governance principles applicable to members of our Board of Directors, officers and employees;
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reviewing and approving director compensation and administering the Non-Employee Director Plan;
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monitoring the continuing education for our directors; and
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evaluating annually the Nominations and Corporate Governance Committee charter.
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The Nominations and Corporate Governance Committee considers these requirements when recommending nominees to our Board of Directors. Our Nominations and Corporate Governance Committee utilizes a variety of methods for identifying and evaluating nominees for our directors. Our Nominations and Corporate Governance Committee will regularly assess the appropriate size of our Board of Directors and whether any vacancies on the Board of Directors are expected due to retirement or other circumstances. When considering potential director nominees, the Nominations and Corporate Governance Committee also considers the candidate’s character, judgment, diversity, age, skills, including financial literacy and experience in the context of the needs of PhotoMedex and of our existing directors. The Nominations and Corporate Governance Committee also seeks director nominees who are from diverse backgrounds and who possess a range of experiences as well as a reputation for integrity. The Nominations and Corporate Governance Committee considers all of these factors to ensure that our Board of Directors as a whole possesses a broad range of skills, knowledge and experience useful to the effective oversight and leadership of the Company.
Audit Committee. Our Board of Directors has established an Audit Committee to assist it in fulfilling its responsibilities for general oversight of the integrity of our consolidated financial statements, compliance with legal and regulatory requirements, the independent auditors’ qualifications and independence, the performance of our independent auditors and an internal audit function and risk assessment and risk management. The duties of our Audit Committee include:
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appointing, evaluating and determining the compensation of our independent auditors;
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reviewing and approving the scope of the annual audit, the audit fee and the financial statements;
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reviewing disclosure controls and procedures, internal control over financial reporting, any internal audit function and corporate policies with respect to financial information;
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reviewing other risks that may have a significant impact on our financial statements;
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preparing the Audit Committee report for inclusion in the annual proxy statement;
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establishing procedures for the receipt, retention and treatment of complaints regarding accounting and auditing matters;
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approving all related party transactions, as defined by applicable Nasdaq Rules, to which the Company is a party; and
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evaluating annually the Audit Committee charter.
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The Audit Committee works closely with management as well as our independent auditors. The Audit Committee has the authority to obtain advice and assistance from, and receive appropriate funding from us for, outside legal, accounting or other advisors as the Audit Committee deems necessary to carry out its duties.
Our Board of Directors has adopted a written charter for the Audit Committee that meets the applicable standards of the Commission and Nasdaq. The members of the Audit Committee are Messrs. Ben-Dror and Connelly. Mr. Connelly serves as the acting Chairman of the Audit Committee. Dr. Melumad served as the Chairman of the Audit Committee until his death on January 15, 2014. Mr. Trevor Harris was appointed to the board of directors on February 27, 2014 and will serve as the Chairman of the Audit committee effective April 1, 2014. The Audit Committee meets regularly and held eight meetings during 2013.
The Board of Directors determined in 2013 that each member of the Audit Committee satisfies the independence and other composition requirements of the Securities and Exchange Commission (the “Commission”) and Nasdaq. Our Board has determined that each member of the Audit Committee qualifies as an “audit committee financial expert” under Item 407(d)(5) of Regulation S-K and has the requisite accounting or related financial expertise required by applicable Nasdaq rules.
Stockholder Communications with the Board of Directors
Our Board of Directors has established a process for stockholders to communicate with the Board of Directors or with individual directors. Stockholders who wish to communicate with our Board of Directors or with individual directors should direct written correspondence to Michele Pupach, Corporate Counsel at mpupach@photomedex.com or to the following address (our principal executive offices): Board of Directors, c/o Corporate Secretary, 100 Lakeside Drive, Horsham, Pennsylvania 19044. Any such communication must contain:
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a representation that the stockholder is a holder of record of our capital stock;
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the name and address, as they appear on our books, of the stockholder sending such communication; and
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the class and number of shares of our capital stock that are beneficially owned by such stockholder.
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Ms. Pupach or the Corporate Secretary, as the case may be, will forward such communications to our Board of Directors or the specified individual director to whom the communication is directed unless such communication is unduly hostile, threatening, illegal or similarly inappropriate, in which case Ms. Pupach or the Corporate Secretary, as the case may be, has the authority to discard the communication or to take appropriate legal action regarding such communication.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors and executive officers and beneficial holders of more than 10% of our common stock to file with the Commission initial reports of ownership and reports of changes in ownership of our equity securities. As of March 17, 2014, we believe, based solely on a review of the copies of such reports furnished to us and representations of these persons that no other reports were filed and that all reports needed to be filed have been filed for the year ended December 31, 2013.
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Executive Compensation
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COMPENSATION DISCUSSION AND ANALYSIS
Introduction
This Compensation Discussion and Analysis describes our compensation program and objectives for our Named Executive Officers for our fiscal year ending December 31, 2013, or fiscal 2013. Our Named Executive Officers for fiscal 2013 were Dr. Dolev Rafaeli, our Chief Executive Officer, and Dennis M. McGrath, our President and Chief Financial Officer.
The Compensation Committee of our Board of Directors is responsible for reviewing and approving the annual compensation of our Named Executive Officers. The Compensation Committee is composed solely of directors who are not our current or former employees, and each is independent under the revised listing standards of Nasdaq. Our Board of Directors has delegated to the Compensation Committee the responsibility to review and approve our compensation and benefits plans, programs and policies, including the compensation of our Chief Executive Officer and our President and Chief Financial Officer as well as middle-level management and other key employees. The Compensation Committee administers all of our executive compensation programs, incentive compensation plans and equity-based plans and provides oversight for all of our other compensation and benefit programs.
The key components of the compensation program for our Named Executive Officers are base salary, bonus and long-term incentives, which for fiscal 2013 was granted to the Named Executive Officers in the form of stock options under our 2005 Equity Plan. These components are administered with the goal of providing total compensation that is competitive in the marketplace, recognizes meaningful differences in individual performance and offers the opportunity to earn superior rewards when merited by individual and corporate performance.
Objectives of Compensation Program
The Compensation Committee governs and administers our compensation plans with the intent to support the achievement of our long-term strategic objectives, to enhance stockholder value, to attract, motivate and retain highly qualified employees by paying them competitively and rewarding them for their own success and ours. Included in this evaluation is an analysis whether the Company’s incentive compensation arrangements, including short-term (annual cash incentive) and long-term (equity awards) components, encourage unnecessary or excessive risks. Although incentive compensation is discretionary, the Compensation Committee typically considers overall performance of the Company when granting cash incentive awards and considers several factors, including each Named Executive Officer’s contributions to the growth of the Company for the benefit of the stockholders when granting incentive equity awards. We have no retirement plans or deferred compensation programs in effect for our Named Executive Officers, except for our 401(k) plan in which our Named Executive Officers are eligible to participate and is made generally available to all of our employees. We do not have a specific formula for allocating between cash and non-cash compensation, which has been in the form of stock options and awards of restricted stock.
In order to assess whether our compensation program is competitive and effective, the Compensation Committee relies on its own comparative review of peer companies. As an ongoing matter, the Compensation Committee does not regularly engage third-party consultants to advise on our compensation policies. Furthermore, our Compensation Committee does not delegate its responsibilities for reviewing and approving Named Executive Officer compensation.
What Our Compensation Program is Designed to Reward
The key components of the compensation program for our Named Executive Officers are base salary, bonus and long-term incentives under the 2005 Equity Plan. These components are administered with the goal of providing total compensation that is competitive in the marketplace, recognizes meaningful differences in individual performance and offers the opportunity to earn superior rewards when merited by individual and corporate performance.
Stock price performance has not been a factor in determining annual compensation insofar as the price of our common stock is subject to a number of factors outside of our control. We have endeavored through grants of stock options to our Named Executive Officers to incentivize individual and team performance by providing a meaningful stake in us that links their compensation to our overall success.
Elements of Company’s Compensation Plan and How Each Element Relates to Objectives
There are three primary elements in the compensation package of our executive officers: base salary, bonus and long-term incentives. Compensation payable in the event of the termination of an executive’s employment with the Company is a secondary but material element in the package.
Base Salaries. Base salaries for our Named Executive Officers are designed to provide a base pay opportunity that is appropriately competitive within the marketplace. As an officer’s level of responsibility increases, a greater proportion of his or her total compensation will be dependent on our financial performance and stock price appreciation rather than base salary. Adjustments to each individual’s base salary are made in connection with annual performance reviews and an assessment of market competitiveness. No adjustments were made for fiscal 2013 to the base salaries paid to Dr. Rafaeli and Mr. McGrath ($450,000 and $325,000, respectively).
Bonus. Generally, at the outset of a fiscal year, the Compensation Committee establishes a bonus program for our Named Executive Officers and other managers and key employees eligible to participate in the program. The program is based on a financial plan for the fiscal year and other business factors. The amount of bonus, if any, hinges on corporate performance and financial condition and on the performance of the participant in the program. A program will typically allow some partial or discretionary awards based on an evaluation of the relevant factors. Provision for bonus expense is typically made over the course of a fiscal year. The provision becomes fixed, based on the final review of the Compensation Committee, which is usually made after the financial results of the fiscal year have been reviewed by our independent accountants.
On January 24, 2013, the Board of Directors approved and adopted a 2013 annual bonus plan for employees, including Mr. McGrath. The 2013 bonus plan includes performance incentives for achievement of the corporate financial goals that are designed to motivate, retain and reward our employees based upon the achievement of corporate revenue and profitability objectives, as well as individual objectives in certain cases. The targeted incentive compensation and the revenue and profitability goals for each employee were established by the Compensation Committee at the outset of the year. At year-end and upon compilation of the financial results, the Compensation Committee met to review the Company’s financial results compared with plan goals and determine the level of performance incentive awards to be paid based upon the measurement of attainment of plan goals.
Mr. McGrath's target bonus under the 2013 bonus plan was 72% of his salary based on the Company's level of achievement of revenue and profitability goals as set out by the board of directors at the beginning of the year, as well as individual goals related to the efficient integration of the post merged companies and corporate development initiatives. Actual achievement of the Company's financial goals was substantially exceeded, resulting in a bonus of $195,000, or 60% of salary. In addition, the Compensation Committee determined to pay Mr. McGrath a discretionary bonus of $39,000, or 20% of the portion earned under the Company’s financial goals provision, based on exceeding his individual objectives.
Long-Term Incentives. Grants of stock options under our stock option plans are designed to provide our Named Executive Officers and other managers and key employees with an opportunity to share, along with stockholders, in our long-term performance. Stock option grants are generally made annually to all Named Executive Officers, with additional grants being made following a significant change in job responsibility, scope or title or a significant achievement. The size of the option grant to each Named Executive Officer is set by the Compensation Committee at a level that is intended to create a meaningful opportunity for stock ownership based upon several factors, including the individual’s current position with us, the individual’s personal performance in recent periods and his or her potential for future responsibility and promotion over the option term, but the Compensation Committee has the flexibility to make adjustments to those factors at its discretion. The Compensation Committee also takes into account the number of unvested options held by the Named Executive Officer in order to maintain an appropriate level of equity incentive for that individual. The relevant weight given to each of these factors varies from individual to individual.
We generally grant stock options with a five-year vesting schedule and 10 year term from the date of grant. The exercise price of options granted is at no less than 100% of the fair market value of the underlying stock on the date of grant. The options granted to Named Executive Officers as a rule have provisions by which vesting and exercisability are accelerated in the event of a change of control or a termination of employment initiated by us other than for cause. Such provisions are found in Dr. Rafaeli’s and Mr. McGrath’s employment agreements.
Similar criteria are applied in making awards of restricted shares of our common stock under the 2005 Equity Plan, but in the case of restricted stock, we can base the vesting schedule of the restricted stock on the price performance of our common stock.
Compensation on Termination of Employment or Change of Control. We have employment agreements with Dr. Rafaeli and Mr. McGrath. Each of these agreements provides for severance upon termination of employment, whether in context of a change of control or not. See “Potential Payments on Termination of Employment or Change of Control” below.
Perquisites. We provide our Named Executive Officers with certain perquisites that we do not consider to be a significant part of their compensation. Under their employment agreements, we provide Mr. McGrath with an automobile allowance of $1,000 per month. In addition, we provide Dr. Rafaeli with, and pay all expenses for, a telephone for his residence and he is eligible to receive the equivalent of economy round trip airfare tickets for all of his family members for an annual home leave between the US and Israel..
The Company pays the premiums for supplementary life insurance policies for both Dr. Rafaeli and Mr. McGrath. Both also receive a matching contribution from the Company to their 401(k) under the Company’s 401(k) Plan which is available to all employees.
How Amounts Were Selected for Each Element of an Executive’s Compensation
Each executive’s current and prior compensation is considered in setting future compensation. In addition, the Compensation Committee reviews from time to time the compensation practices of other companies, particularly our peer companies. To some extent, our compensation plan is based on the market and the companies we compete against for executives. Base salary and the long-term incentives are not set with reference to a formula.
An executive’s target bonus amount is set by an executive’s employment agreement, which was negotiated at arm’s length. A target bonus, or a portion thereof, is earned, based on fulfillment of conditions, which are set by the Compensation Committee at the outset of a fiscal year.
As a general rule, options and restricted stock awards are made after the financial results for the prior year have been audited and reported to our Board of Directors. Grants and awards are valued, and exercise prices are set, as of the date the grant or award is made. Exceptions to the general rule may arise for grants made to recognize a promotion or to address the effect of expiring options. The Compensation Committee may elect to defer a grant until after the Company has made public disclosure of its financial results, typically in a conference call on earnings. In such a case, the exercise price is set at the higher of the closing price on the approval date or the fixed grant date. In these deliberations, the Compensation Committee does not delegate any related function, unless to the Board of Directors as a whole, and the grants or awards made to the Named Executive Officers are valued under the same measurement standards as grants made to other grantees.
For fiscal 2013, our Compensation Committee granted stock options to Dr. Rafaeli and Mr. McGrath to purchase 47,500 and 35,000 shares of our common stock, respectively. The stock options have an exercise price of $20, which is a premium above the closing price on February 28, 2013 (the last trading date prior to the grant date) of $14.66. The premium exercise price is intended to incentivize our Named Executive Officers and align their interests with those of our stockholders. The stock options will vest and become exercisable in five equal installments on each of the first five anniversaries of the date of grant subject to the individuals continued employment with the Company, with accelerated vesting upon a change in control.
Accounting and Tax Considerations
We have adopted accounting standard, FASB ASC Topic 718 under which, we are required to value stock options granted and restricted stock awarded. We continue to follow this accounting standard after the reverse acquisition on December 13, 2011.
Under Section 162(m) of the Internal Revenue Code of 1986, as amended, the Code, there is a limit placed on tax deductions of any publicly-held corporation for individual compensation to certain executives of such corporation (other than its chief financial officer) exceeding $1,000,000 in any taxable year, unless the compensation is performance-based. Compensation resulting from options is indexed as performance-based. To the extent consistent with the objectives of our compensation program, we intend to maximize the deductibility of compensation for tax purposes. The Compensation Committee may however, decide to exceed the tax deductible limits established under Section 162(m) of the Code, when such a decision appears to be warranted based upon competitive and other factors.
Overview of Executive Employment Agreements and Option Awards
Employment Agreement with Dolev Rafaeli. We are party to an employment agreement with Dolev Rafaeli, pursuant to which he serves as the Chief Executive Officer of PhotoMedex and the Chief Executive Officer and President of Radiancy. The employment agreement has an initial term of three years that commenced on December 13, 2011, the date of the closing of our merger with Radiancy and will thereafter automatically renew for one-year periods, unless either party provides notice of nonrenewal at least 60 days prior to the end of the then-applicable term. Under the employment agreement, Dr. Rafaeli's salary is $450,000 per annum. In addition, Dr. Rafaeli is entitled to a bonus equal to 1% of the Company’s sales (calculated as 1% of recognized U.S. GAAP sales reported in our consolidated quarterly financial reports presented to our Board of Directors), which bonus, when combined with his other annual remuneration from the Company may not exceed a $1,000,000 annual threshold. Such bonus will be paid quarterly. The Company stockholders approved that Dr. Rafaeli shall be entitled to an additional quarterly cash bonus equal to 1% of the sales of the Company in excess of such target threshold amount as the Compensation Committee shall determine (the "Second-Tier Bonus"). Following the end of each quarterly performance period, the Compensation Committee shall determine the Second-Tier Bonus for that quarter by calculating 1% of the Company's U.S. GAAP sales in excess of the threshold amount. Upon the termination of Dr. Rafaeli's employment by PhotoMedex without cause or by Dr. Rafaeli for good reason, he will be entitled to severance benefits as described in the section below entitled “Potential Payments on Termination of Employment or Change of Control”.
Employment Agreement with Dennis M. McGrath. We are party to an employment agreement with Dennis M. McGrath pursuant to which he serves as our President and Chief Executive Officer. The employment agreement has an initial term of three years that commenced on December 13, 2011, the date of the closing of our merger with Radiancy, and will thereafter automatically renew for one-year periods, unless either party provides notice of non-renewal at least 60 days prior to the end of the then-applicable term. Mr. McGrath’s 2013 annual base salary under his employment agreement is $325,000 and he is eligible to receive an annual bonus of up to 60% of his base salary based on the attainment of individual and corporate goals determined and set by our Board of Directors. In addition, he is entitled to participate in the long-term equity incentive programs established by the Company for its senior level executives generally commensurate with his position. The severance arrangements contained in Mr. McGrath’s employment agreement are summarized in the section below entitled “Potential Payments upon Termination of Employment or Change in Control.”
SUMMARY COMPENSATION TABLE
The following table includes information for the years ended December 31, 2013, 2012 and 2011 concerning compensation for our Named Executive Officers. Mr. McGrath was Chief Executive Officer and President until December 13, 2011, at which time the Board of Directors appointed Dr. Rafaeli to serve as our Chief Executive Officer.
|
Name and Principal Position
|
Year
|
Salary ($)
|
Non-Equity
Incentive Plan
Compensation
($) (1)
|
Stock
Awards ($)
(2)
|
Option
Awards ($)
(2)
|
All Other
Compensation
($) (3)
|
Total ($)
|
|||||||||||||||||||
|
Dolev Rafaeli, Chief Executive
|
2013
|
450,000 | 2,246,640 | 0 | 451,345 | 35,673 | 3,183,658 | |||||||||||||||||||
| Officer (4) |
2012
|
450,000 | 2,206,982 | 0 | 1,106,000 | 40,549 | 3,803,531 | |||||||||||||||||||
|
2011
|
450,000 | 1,560,265 | 26,226,304 | 0 | 47,718 | 28,284,287 | ||||||||||||||||||||
|
Dennis M. McGrath, President and
|
2013
|
337,500 | 234,000 | 0 | 332,570 | 17,642 | 921,712 | |||||||||||||||||||
| Chief Financial Officer |
2012
|
325,000 | 234,000 | 0 | 711,000 | 18,487 | 1,288,487 | |||||||||||||||||||
|
2011
|
325,000 | 234,000 | 3,855,000 | 772,685 | 22,126 | 5,208,811 | ||||||||||||||||||||
|
(1)
|
“Non-Equity Incentive Plan Compensation” in the foregoing table is the bonus earned in 2013, 2012 and 2011, even though such bonus may have been paid in a subsequent period.
|
|
(2)
|
The amounts shown for option awards, restricted stock awards and stock purchase rights relate to shares granted under our 2005 Equity Plan. These amounts are equal to the aggregate grant-date fair value with respect to the awards made in 2013, 2012 and 2011, computed in accordance with FASB ASC Topic 718 (formerly SFAS 123R), before amortization and without giving effect to estimated forfeitures. For information regarding the number of shares subject to 2013 awards, other features of those awards and the grant-date fair value of the awards, see the Grants of Plan-Based Awards Table below.
|
|
(3)
|
“All Other Compensation” includes car allowance ($1,000 per month), premiums for supplementary life and/or disability insurance of $3,111 and matching 401(k) plan contributions of $2,531 for Mr. McGrath. For Dr. Rafaeli it includes matching 401(k) plan contributions of $29,124 and premiums for supplementary life and/or disability insurance of $6,549.
|
|
(4)
|
All of Dr. Rafaeli’s compensation in 2011 was paid by Radiancy, Inc., except for $93,460 of base salary.
|
|
(5)
|
The 2013 “Non-Equity Inventive Plan Compensation” for Mr. McGrath included a payment of $39,000 paid pursuant to discretion exercised by the Compensation Committee under that incentive plan.
|
Potential Payments on Termination of Employment or Change of Control
Potential payments to our Named Executive Officers on termination of employment or upon a change of control of the Company are governed by their respective employment agreements and by the terms of their option agreements and restricted stock agreements or plan document.
Pursuant to the terms of their employment agreements, should (1) the Company terminate Dr, Rafaeli’s or Mr. McGrath’s employment without cause, (2) Dr. Rafaeli or Mr. McGrath resign for good reason or (3) the Company fail to renew the applicable employment agreement (in each instance, whether in the context of a change in control or otherwise), then the affected individual will become entitled to the following benefits upon his delivery of an effective release to the Company:
|
(i)
|
Continued payment of his annual base salary in effect at the time of such termination for the remainder of the initial term or any renewal term, payable in installments in accordance with the Company’s payroll practices based on the terms of the agreement;
|
|
(ii)
|
For Dr. Rafaeli – continued payment of his First Tier Bonus, for the remainder of the initial term or any renewal term.
|
For Mr. McGrath - a pro-rated annual bonus for the year in which such termination occurs;
|
(iii)
|
continued medical and dental coverage for himself and his eligible dependents for the remainder of the initial term or any renewal term (or, if less, 18 months) following such termination;
|
|
(iv)
|
continued coverage under the Company’s long-term and short-term disability plans for the remainder of the initial term or any renewal term following such termination, or if such coverage is unavailable, a monthly payment equal to the monthly premium for such coverage;
|
|
(v)
|
a monthly cash payment for the remainder of the initial term or any renewal term equal to the premium cost to maintain the individual’s life insurance coverage at the level of coverage in effect at the time of such termination;
|
|
(vi)
|
a tax gross-up to the extent to which the amounts in subparagraphs (iv) or (v) above are taxable to the individual; and
|
|
(vii)
|
full acceleration of all outstanding equity awards held by the individual at the time of such termination. Each outstanding option will remain exercisable until the earlier of the 60-month, or 12-month, anniversary of his termination date for Dr. Rafaeli and Mr. McGrath, respectively, and the option’s expiration date.
|
If the Named Executive Officer does not timely execute and deliver a release, then in lieu of the foregoing payments and benefits he will only be entitled to any payments and benefits then available under the Company’s then current severance pay plan or arrangement for employees without delivery of a release.
In addition, pursuant to the terms of his employment agreement, upon termination Dr. Rafaeli's employment for any reason, we will pay for his household relocation costs between the US and Israel and reimburse him for all reasonable out of pocket relocation expenses. Additionally, we will pay for the equivalent of economy class airfare tickets of all family members between the US and Israel.
If any of the events set forth in the table below had occurred by December 31, 2013, then we estimate the value of the benefits that would have been triggered and thus accrued to Dr. Rafaeli and Mr. McGrath and had the triggering event occurred on December 31, 2013 and they timely delivered a release, would be as set forth below.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL TABLE
|
Name
|
Benefit
|
Before Change
in Control
Termination
w/o Cause or
for Good
Reason ($)
|
After Change
in Control
Termination
w/o Cause or
for Good
Reason ($)
|
Voluntary
Termination
|
Death
(1)
|
Disability
(1)
|
Change in
Control
|
|||||||||||||||||||
|
Dolev Rafaeli
|
Salary & bonus (1)(2)
|
$ | 431,250 | $ | 431,250 | 0 | 0 | 0 | N/A | |||||||||||||||||
|
Health continuation
|
15,387 | 15,387 | 0 | 0 | 0 | N/A | ||||||||||||||||||||
|
AD&D insurance
|
1,690 | 1,690 | 0 | 0 | 0 | N/A | ||||||||||||||||||||
|
Executive life ins.
|
6,276 | 6,276 | 0 | 0 | 0 | N/A | ||||||||||||||||||||
|
Accelerated vesting (3)
|
0 | 0 | 0 | 0 | 0 | N/A | ||||||||||||||||||||
|
Tax gross-up (4)
|
13,277 | 13,277 | 0 | 0 | 0 | N/A | ||||||||||||||||||||
|
TOTAL
|
$ | 467,880 | $ | 467,880 | 0 | 0 | 0 | N/A | ||||||||||||||||||
|
Dennis McGrath
|
Salary & bonus (1)(2)
|
$ | 311,458 | $ | 311,458 | 0 | 0 | 0 | N/A | |||||||||||||||||
|
Health continuation
|
15,387 | 15,387 | 0 | 0 | 0 | N/A | ||||||||||||||||||||
|
AD&D insurance
|
1,690 | 1,690 | 0 | 0 | 0 | N/A | ||||||||||||||||||||
|
Executive life ins.
|
2,981 | 2,981 | 0 | 0 | 0 | N/A | ||||||||||||||||||||
|
Accelerated vesting (3)
|
1,294,000 | 1,294,000 | 0 | 0 | 0 | N/A | ||||||||||||||||||||
|
Tax gross-up (4)
|
7,785 | 7,785 | 0 | 0 | 0 | N/A | ||||||||||||||||||||
|
TOTAL
|
$ | 1,633,301 | $ | 1,633,301 | 0 | 0 | 0 | N/A | ||||||||||||||||||
|
(1)
|
An executive’s salary and benefits are paid through the end of the month of termination due to death or disability, except that we will pay the disability premiums during the period of disability.
|
|
(2)
|
Severance based on 2013 salary and pro-rata bonus levels. In addition to the salary and pro-rata bonus listed above, Dr. Rafaeli would be entitled to a bonus of 1% of sales for the remainder of the initial term or any renewal term.
|
|
(3)
|
If upon a change of control, the acquirer does not desire the services of the executive, then any unvested restricted stock will vest. The closing price of our stock on December 31, 2013 was $12.95 per share.
|
The gain associated with the acceleration of a share of restricted stock upon a change of control is calculated as the difference between the closing price of our common stock on the date of such event and the purchase price of such share of restricted stock.
|
(4)
|
Tax gross-ups are with respect to supplementary executive life and/or disability insurance benefits.
|
Grants of Plan-Based Awards Table
The following table sets forth certain information with respect to the options granted and restricted stock awarded during or for the year ended December 31, 2013 to our Named Executive Officers. The stock awards and option grants reflected below were awarded under the 2005 Equity Plan.
GRANTS OF PLAN-BASED AWARDS TABLE
|
Estimated Possible Payouts Under
Non-Equity Incentive Plan Awards
|
All Other
Option
Awards:
Number of
Securities
Underlying
Options (#)
|
Exercise
or Base
Price of
Option
Awards
($/Sh)
|
Closing
Price on
Grant
Date
($/Sh)
|
Grant Date
Fair Value
of Stock and
Option
Awards ($)
(1)
|
|||||||||||||||||||||||||
|
Name
|
Grant
Date
|
Threshold
($)
|
Target
($)
|
Maximum
($)
|
|||||||||||||||||||||||||
|
Dolev Rafaeli
|
2/28/13
|
- | $ | 2,246,640 | - | 47,500 | 20.00 | 14.75 | 451,345 | ||||||||||||||||||||
|
Dennis McGrath
|
2/28/13
|
- | $ | 195,000 | - | 35,000 | 20.00 | 14.75 | 332,570 | ||||||||||||||||||||
|
(1)
|
Computed in accordance with FASB ASC Topic 718, formerly SFAS 123 (R).
|
Outstanding Equity Awards Value at Fiscal Year-End Table
The following table includes certain information with respect to the value of all unexercised options and unvested shares of restricted stock previously awarded to the executive officers named above at the fiscal year end, December 31, 2013.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE
|
Option Awards
|
Stock Awards
|
|||||||||||||||||||||||||||||||||||
|
Name
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
(2)
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
(2)
|
Equity
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
|
Option
Exercise
Price ($)
|
Option
Expiration
Date
|
Number of
Shares or
Units of
Stock That
Have Not
Vested (#)
|
Market
Value of
Shares or
Units of
Stock
That
Have Not
Vested
($)(1)
|
Equity
Incentive
Plan Awards:
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested (#)
|
Equity
Incentive Plan
Awards:
Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested ($) (1)
|
|||||||||||||||||||||||||||
|
Dolev Rafaeli
|
28,0000 | 112,000 | 0 | 20.00 |
3/18/2022
|
0 | 0 | N/A | N/A | |||||||||||||||||||||||||||
| 0 | 47,500 | 0 | 20.00 |
2/28/2023
|
0 | 0 | N/A | N/A | ||||||||||||||||||||||||||||
|
Dennis McGrath
|
8,750 | 0 | 0 | 6.24 |
6/15/19
|
0 | 0 | N/A | N/A | |||||||||||||||||||||||||||
| 0 | N/A | 0 | N/A | N/A | 0 | 0 | 33,333 | 431,662 | ||||||||||||||||||||||||||||
| 0 | N/A | 0 | N/A | N/A | 0 | 0 | 66,667 | 863,338 | ||||||||||||||||||||||||||||
| 10,600 | 0 | 0 | 20.00 |
12/13/21
|
0 | 0 | N/A | N/A | ||||||||||||||||||||||||||||
| 50,100 | 0 | 0 | 15.60 |
12/13/21
|
0 | 0 | N/A | N/A | ||||||||||||||||||||||||||||
| 18,000 | 72,000 | 0 | 20.00 |
3/18/22
|
0 | 0 | N/A | N/A | ||||||||||||||||||||||||||||
| 0 | 35,000 | 0 | 20.00 |
2/28/23
|
0 | 0 | N/A | N/A | ||||||||||||||||||||||||||||
|
(1)
|
The market value of unvested shares of restricted stock is based on $12.95 per share, which was the closing price of our stock on December 31, 2013.
|
|
(2)
|
All options grants were under the 2005 Equity Plan.
|
Mr. McGrath vests in the 100,000 shares of restricted stock granted on March 30, 2011 equally on each of the first three anniversaries of the Merger Date, viz. December 13, 2012; December 13, 2013; and December 13, 2014. Mr. McGrath vests in the 200,000 shares of restricted stock granted on the Merger Date equally on each of the first three anniversaries of the Merger Date. The outstanding stock options vest ratably on each of the five anniversaries of the grant date.
Option Exercises and Stock Vested Table
|
Option Awards
|
Stock Awards
|
|||||||||||||||
|
Number of
Shares Acquired
on Exercise (#)
|
Value
Realized on
Exercise ($)
|
Number of Shares
Acquired on
Vesting (#)
|
Value Realized
on Vesting ($)
(1)
|
|||||||||||||
|
Dennis M. McGrath
|
- | - | 100,000 | 1,225,000 | ||||||||||||
|
(1)
|
Value realized is determined by multiplying the market price of the common stock on the applicable vesting date by the number of shares that vested on that date.
|
Compensation Committee Interlocks and Insider Participation
No interlocking relationship exists between any member of our Board or Compensation Committee and any member of the board of directors or compensation committee of any other companies, nor has such interlocking relationship existed in the past.
Compensation Committee Report on Executive Compensation
The Compensation Committee has reviewed and discussed with management certain Compensation Discussion and Analysis provisions to be included herein. Based on the review and discussion referred to above, the Compensation Committee recommended to our Board of Directors that the Compensation Discussion and Analysis referred to above be included herein.
Compensation Committee
|
Yoav Ben-Dror
|
Stephen Connelly
|
Lewis Pell
|
Director Compensation
Directors who are also our employees receive no separate compensation for serving as directors or as members of committees of our Board of Directors. Directors who are not our employees are compensated under the Non-Employee Director Plan. Effective December 12, 2011, each outside director receives an annual cash retainer of $40,000, payable quarterly and the chairman of each committee receives an additional annual fee of $10,000 for audit, $5,000 for each of compensation and nominations. Dr. Ben-Dror receives a monthly payment of $30,000 for his services as the executive director for Radiancy Ltd. and Photo Therapeutics, Ltd. The table below sets forth our non-employee directors’ compensation through December 31, 2013.
DIRECTOR COMPENSATION TABLE
|
Name
|
Fees Earned ($)
|
Stock Awards
($) (1)
|
Total ($)
|
|||||||||
|
Lewis Pell
|
40,000 | 0 | 40,000 | |||||||||
|
Yoav Ben-Dror
|
405,000 | 0 | 405,000 | |||||||||
|
Nahum Melumad
|
50,000 | 0 | 50,000 | |||||||||
|
Katsumi Oneda
|
40,000 | 0 | 40,000 | |||||||||
|
James W. Sight
|
45,000 | 0 | 45,000 | |||||||||
|
Stephen P. Connelly
|
40,000 | 0 | 40,000 | |||||||||
|
(1)
|
The amounts shown for stock awards relate to shares granted under our Non-Employee Director Plan. These amounts are equal to the aggregate grant-date fair value with respect to the stock awards for financial statement purposes.
|
Limitation on Directors' Liabilities; Indemnification of Officers and Directors
Our Articles of Incorporation and bylaws designate the relative duties and responsibilities of our officers, establish procedures for actions by directors and stockholders and other items. Our Articles of Incorporation and bylaws also contain extensive indemnification provisions, which will permit us to indemnify our officers and directors to the maximum extent provided by Nevada law. Pursuant to our Articles of Incorporation and under Nevada law, our directors are not liable to us or our stockholders for monetary damages for breach of fiduciary duty, except for breaches which involve intentional misconduct, fraud or a knowing violation of law.
Directors' and Officers' Liability Insurance
We have obtained directors' and officers' liability insurance, which expires on December 13, 2014. We are required under our indemnification agreements to maintain such insurance for us and members of our Board of Directors. We also provided tail insurance for the directors of Radiancy.
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|
The information set forth in Item 5 of this Annual Report under the heading “Overview of Equity Compensation Plans” is hereby incorporated by reference.
The following table reflects, as of March 14, 2014, the beneficial common stock ownership of: (a) each of our directors, (b) each executive officer, (c) each person known by us to be a beneficial holder of five percent (5%) or more of our common stock, and (d) all of our executive officers and directors as a group. Unless otherwise provided in the accompanying footnotes, the information used in the table below was obtained from the referenced beneficial owner.
|
Name and Address Of Beneficial Owner (1)
|
Number of Shares
Beneficially Owned
|
Percentage of
Shares
Beneficially
Owned (1)
|
||||||
|
Lewis C. Pell (2)
|
1,775,319 | 9.4 | % | |||||
|
Yoav Ben-Dror (3)
|
1,380,921 | 7.3 | % | |||||
|
Dolev Rafaeli (4)
|
1,108,203 | 5.8 | % | |||||
|
Dennis M. McGrath (5)
|
294,267 | 1.5 | % | |||||
|
Nahum Melumad (6)
|
8,000 | * | ||||||
|
Katsumi Oneda (7)
|
1,325,164 | 7.01 | % | |||||
|
James W. Sight (8)
|
254,486 | 1.3 | % | |||||
|
Stephen P. Connelly (9)
|
19,943 | * | ||||||
|
Trevor Harris (10)
|
5,000 | * | ||||||
|
Shlomo Ben-Haim (11)
|
1,806,263 | 9.6 | % | |||||
|
LSV Asset Management (12)
|
996,969 | 5.3 | % | |||||
|
All directors and officers as a group (eight persons) (13)
|
6,171,571 | 32.2 | % | |||||
|
*
|
Less than 1%.
|
|
(1)
|
Beneficial ownership is determined in accordance with the rules of the Commission. Shares of common stock subject to delivery, or subject to options or warrants currently exercisable or exercisable, within 60 days of March 14, 2014, are deemed outstanding for computing the percentage ownership of the stockholder holding the options or warrants, but are not deemed outstanding for computing the percentage ownership of any other stockholder. Unless otherwise indicated in the footnotes to this table, we believe stockholders named in the table have sole voting and sole investment power with respect to the shares set forth opposite such stockholder’s name. Unless otherwise indicated, the listed officers, directors and stockholders can be reached at our principal offices. Percentage of ownership is based on 18,903,245 shares of common stock outstanding as of March 14, 2014.
|
|
(2)
|
Includes 1,175,319 shares of common stock and 600,000 shares held by trusts with respect to which Mr. Pell may be deemed to have beneficial ownership. Mr. Pell's address is 100 Lakeside Drive, Suite 100, Horsham, PA 19044.
|
|
(3)
|
Includes 1,380,921 shares of common stock beneficially owned, of which 1,255,843 shares are owned directly by Dr. Ben-Dror and 125,078 shares are owned by Gohan Investments Ltd. of which Dr. Ben-Dror is the 100% owner. Dr. Ben-Dror's address is 100 Lakeside Drive, Suite 100, Horsham, PA 19044.
|
|
(4)
|
Includes 541,703 shares of common, 501,000 shares held by trusts with respect to which Dr. Rafaeli may be deemed to have beneficial ownership and vested options to purchase 65,500 shares of common stock. Does not include unvested options to purchase up to 122,000 shares of common stock, which may vest more than 60 days after March 14, 2014.
|
|
(5)
|
Includes 46,136 shares of common stock, 100,000 additional shares of common stock subject to restriction agreements with us, warrants to purchase 35,688 shares of common stock and vested options to purchase 112,450 shares of common stock. Does not include options to purchase up to 82,000 shares of common stock, which may vest more than 60 days after March 14, 2014.
|
|
(6)
|
Includes 8,000 shares of common. Dr. Melumad's address was 100 Lakeside Drive, Suite 100, Horsham, PA 19044.
|
|
(7)
|
Includes 1,005,164 shares of common stock and 320,000 shares held by trusts with respect to which Mr. Oneda may be deemed to have beneficial ownership. Mr. Oneda’s address is 100 Lakeside Drive, Suite 100, Horsham, PA 19044.
|
|
(8)
|
Includes 196,208 shares of common stock and warrants to purchase 58,288 shares of common stock. Mr. Sight’s address is 100 Lakeside Drive, Suite 100, Horsham, PA 19044.
|
|
(9)
|
Includes 15,689 shares of common stock, 250 shares held by trusts with respect to which Mr. Connelly may be deemed to have beneficial ownership, warrants to purchase 3,422 shares of common stock and options to purchase up to 833 shares of common stock. Mr. Connelly’s address is 100 Lakeside Drive, Suite 100, Horsham, PA 19044.
|
|
(10)
|
Includes 5,000 shares of common stock. Mr. Harris’s address is 100 Lakeside Drive, Suite 100, Horsham, PA 19044.
|
|
(11)
|
Shlomo Ben-Haim is, or may be deemed to be, the beneficial owner of 1,806,263 shares of common stock. Of the 1,806,263 shares, 1,153,858 shares are owned by Eastnet Investment Limited and 402,250 shares are owned by Antinori, Ltd. Mr. Ben-Haim has voting and/or dispositive power over shares held by Eastnet Investment Limited and Antinori, Ltd. Mr. Ben-Haim's address is 8 Kensington Palace Gardens, London W84QP, United Kingdom. Eastnet Investment Limited's address is Nerine Chambers, PO Box 905, Road Town, Tortola, British Virgin Islands. Antinori Ltd.'s address is Alon Tavor 15, Industrial Zone, Caesarea, Israel.
|
|
(12)
|
LSV Asset Management is, or may be deemed to be, the beneficial owner of 996,969 shares of common stock. The foregoing information has been derived in part from a Schedule 13G filed on February 10, 2014. LSV Asset Management’s address is 155 N. Wacker Drive, Suite 4600, Chicago, IL 60606.
|
|
(13)
|
Includes 4,374,140 unrestricted shares of common stock, including 1,421,250 held by trusts, and 100,000 restricted shares of common stock warrants to purchase 97,398 shares of common stock and vested options to purchase 178,783 shares of common stock. Does not include options to purchase up to 204,000 shares of common stock, which may vest more than 60 days after March 14, 2014.
|
|
Certain Relationships and Related Transactions, Director Independence
|
Related Person Transactions
We have entered into an indemnification agreement with each of our directors pursuant to which we have agreed to indemnify each director against claims brought against them in their capacities as our directors. These indemnification agreements also require us to maintain directors’ and officers’ liability insurance for our directors.
We believe that all transactions with our affiliates have been entered into on terms no less favorable to us than could have been obtained from independent third parties. We intend that any transactions with officers, directors and 5% or greater stockholders will be on terms no less favorable to us than could be obtained from independent third parties and will be approved by a majority of our independent, disinterested directors and will comply with the Sarbanes-Oxley Act of 2002, as amended, and other securities laws and regulations.
Director Independence
As required under the NASDAQ Stock Market LLC, or NASDAQ, listing standards, a majority of the members of a listed company’s board of directors must qualify as “independent,” as affirmatively determined by the board of directors. Our board of directors consults with internal counsel to ensure that the board’s determinations are consistent with relevant securities and other laws and regulations regarding the definition of “independent,” including those set forth in pertinent NASDAQ listing standards, as in effect from time to time. Consistent with these considerations, after review of all relevant transactions or relationships between each director, or any of his or her family members, and our company, our senior management and our independent registered public accounting firm, the board of directors has affirmatively determined that all of our current directors are independent directors within the meaning of the applicable NASDAQ listing standards, except for Messrs. Rafaeli and McGrath, who are our Chief Executive Officer and Chief Financial Officer, respectively, who are not independent directors by virtueof their employment with our company.
|
Principal Accountant Fees and Services
|
We engaged Fahn Kanne & Co. Grant Thornton Israel (“Grant Thornton Israel”) as our independent auditors for 2013 and 2012, effective January 26, 2012. Prior to the appointment, Grant Thornton Israel had been the independent auditor for Radiancy Inc.
The following table shows the fees paid or accrued by us for the audit and other services provided by Grant Thornton Israel for 2013 and 2012:
|
2013
|
2012
|
|||||||
|
Audit Fees (1)
|
$ | 327,000 | $ | 346,000 | ||||
|
Audit-Related Fees (2)
|
18,000 | 18,000 | ||||||
|
Tax Fees (3)
|
126,000 | 150,000 | ||||||
|
All Other Fees (4)
|
116,000 | 221,000 | ||||||
|
Total
|
$ | 587,000 | $ | 735,000 | ||||
|
(1)
|
Consists of fees billed for the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form 10-Q and services that are normally provided by the auditors in connection with statutory and regulatory filings or engagements.
|
|
(2)
|
Consists of assurance and related services that are reasonably related to the performance of the audit and reviews of our financial statements and are not included in “audit fees” in this table, principally related to the 401(K) and due diligence services.
|
|
(3)
|
Consists of all tax related services.
|
|
(4)
|
Consists of all other products and services provided other than the services reported under audit fees, audit related fees and tax fees.
|
Engagement of the Independent Auditor. The Audit Committee is responsible for approving every engagement of Grant Thornton Israel to perform audit or non-audit services for us before Grant Thornton Israel is engaged to provide those services. Under applicable Commission rules, the Audit Committee is required to pre-approve the audit and non-audit services performed by the independent auditors in order to ensure that they do not impair the auditors’ independence. The Commission’s rules specify the types of non-audit services that an independent auditor may not provide to its audit client and establish the Audit Committee’s responsibility for administration of the engagement of the independent auditors.
Consistent with the Commission’s rules, the Audit Committee Charter requires that the Audit Committee review and pre-approve all audit services and permitted non-audit services provided by the independent auditors to us or any of our subsidiaries. The Audit Committee may delegate pre-approval authority to a member of the Audit Committee and if it does, the decisions of that member must be presented to the full Audit Committee at its next scheduled meeting.
The Audit Committee’s pre-approval policy provides as follows:
· First, once a year when the base audit engagement is reviewed and approved, management will identify all other services (including fee ranges) for which management knows it will engage Grant Thornton Israel for the next 12 months. Those services typically include quarterly reviews, specified tax matters, certifications to the lenders as required by financing documents, consultation on new accounting and disclosure standards and, in future years, reporting on management’s internal controls assessment.
· Second, if any new “unlisted” proposed engagement arises during the year, the engagement will require approval of the Audit Committee.
All fees to our independent accounting firms were approved by the Audit Committee.
Auditor Selection for Fiscal 2014 The Audit Committee has selected Grant Thornton Israel to serve as our independent auditors for the year ending December 31, 2014. The Committee’s selection will be submitted to our stockholders for ratification at our 2014 Annual Meeting of Stockholders.
PART IV
|
Exhibits and Financial Statement Schedules
|
|
(a)(1)
|
Financial Statements
|
Consolidated balance sheets of PhotoMedex, Inc. and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2013.
|
(a)(2)
|
Financial Statement Schedules
|
|
(a)(3)
|
Exhibits
|
The exhibits listed under subsections (b) of this Item 15 are hereby incorporated by reference.
All schedules have been omitted because they are not required, not applicable, or the information is otherwise set forth in the consolidated financial statements or notes thereto.
|
(b)
|
Exhibits
|
|
2.1
|
Amended and Restated Agreement and Plan of Merger, dated as of October 31, 2011, by and among Radiancy, Inc., PhotoMedex, Inc. and PHMD Merger Sub, Inc., including the Form of Warrant. (23)
|
|
|
2.2
|
Agreement and Plan of Merger by and among PhotoMedex, Inc., Gatorade Acquisition Corp. and LCA-Vision Inc., dated as of February 13, 2014 (34)
|
|
|
3.1
|
Amended and Restated Articles of Incorporation of PhotoMedex, Inc. a Nevada corporation, filed on December 12, 2011 with the Secretary of State for the State of Nevada. (23)
|
|
|
3.2
|
Bylaws of PhotoMedex, Inc. (a Nevada corporation), adopted December 28, 2010 (18)
|
|
|
4.1
|
Form of Warrant to Purchase Shares of Common Stock of PhotoMedex (19)
|
|
|
4.2
|
Term Loan and Security Agreement, dated as of March 19, 2010 between PhotoMedex, Inc. and Clutterbuck Funds LLC (26) (Exhibit 4.12 therein)
|
|
|
4.3
|
Term Note, dated March 19, 2010, between PhotoMedex, Inc. and Clutterbuck Funds, LLC (26) (Exhibit 4.13 therein)
|
|
|
4.4
|
Amendment No. 1 to Term Loan and Security Agreement, dated April 30, 2010 (27) (Exhibit 4.20 therein)
|
|
|
4.5
|
Amendment No. 2 to Term Loan and Security Agreement, dated March 28, 2011 (27) (Exhibit 4.21 therein)
|
|
|
Credit Agreement, dated December 27,2013, between Radiancy, Inc and JP Morgan Chase Bank, N.A. (35)
|
||
|
10.1
|
Lease Agreement dated May 29, 1996, between Surgical Laser Technologies, Inc. and Nappen & Associates (Montgomeryville, Pennsylvania) (2)
|
|
|
10.2
|
Lease Renewal Agreement, dated January 18, 2001, between Surgical Laser Technologies, Inc. and Nappen & Associates (2)
|
|
|
10.3
|
Lease Agreement, dated July 10, 2006, PhotoMedex, Inc. and Nappen & Associates (3)
|
|
|
10.4
|
Standard Industrial/Commercial Multi-Tenant Lease - Net, dated July 30, 2008 (additional facility at Carlsbad, California) (15)
|
|
|
10.5
|
Standard Industrial/Commercial Multi-Tenant Lease Net, dated March 17, 2005 (Carlsbad, California) (5)
|
|
|
10.6
|
License and Development Agreement, dated May 22, 2002, between Surgical Laser Technologies, Inc. and Reliant Technologies, Inc. (2)
|
|
|
10.7
|
Settlement Agreement and Release, dated November 11, 2008, by and among Allergan, Inc., Murray A. Johnstone, MD, PhotoMedex, Inc. and ProCyte Corporation. (15)
|
|
|
10.8
|
Master Asset Purchase Agreement, dated September 7, 2004, between PhotoMedex, Inc. and Stern Laser, srl (6)
|
|
|
10.9
|
License Agreement, dated March 31, 2006, and effective April 1, 2006, between the Mount Sinai School of Medicine and PhotoMedex, Inc. (7)
|
|
|
10.10
|
2005 Equity Compensation Plan, approved December 28, 2005 (8)
|
|
|
10.11
|
Amended and Restated 2000 Non-Employee Director Stock Option Plan (1)
|
|
|
10.12
|
Amended and Restated 2000 Stock Option Plan (1)
|
|
|
10.13
|
1996 Stock Option Plan, assumed from ProCyte (9)
|
|
|
10.16
|
Restricted Stock Purchase Agreement of Dennis M. McGrath, dated January 15, 2006 (5)
|
|
|
10.17
|
Consulting Agreement dated January 21, 1998 between the Company and R. Rox Anderson, M.D. (4)
|
|
|
10.18
|
Restricted Stock Purchase Agreement of Dennis M. McGrath, dated May 1, 2007 (10)
|
|
|
10.21
|
Amended and Restated 2000 Non-Employee Director Stock Option Plan, dated as of June 26, 2007 (24)
|
|
|
10.22
|
Amended and Restated 2005 Equity Compensation Plan, dated as of June 26, 2007, as amended on October 28, 2008 (14)
|
|
|
10.23
|
Form of Indemnification Agreement for directors and executive officers of PhotoMedex, Inc. (13)
|
|
|
10.24
|
Restricted Stock Purchase Agreement of Dennis M. McGrath, dated June 15, 2009 (16)
|
|
|
10.26
|
Co-Promotion Agreement, dated as of January 7, 2010, between PhotoMedex, Inc and Galderma Laboratories, L.P. (17)
|
|
|
10.27
|
Amended and Restated 2000 Non-Employee Director Stock Option Plan, dated as of August 3, 2010 (18)
|
|
|
10.28
|
Amended and Restated 2005 Equity Compensation Plan, dated as of August 3, 2010. (18)
|
|
|
10.29
|
Restricted Stock Agreement of Dennis M. McGrath, dated March 30, 2011 (18)
|
|
|
10.32
|
Amended and Restated Employment agreement, entered into by and between PhotoMedex, Inc. and Dennis McGrath on July 4, 2011. (19)
|
|
|
10.33
|
Amended and Restated Restricted Stock Agreement, entered into as of August 11, 2011, by and between PhotoMedex, Inc. and Dennis McGrath. (20)
|
|
10.34
|
Restricted Stock Agreement, entered into as of July 4, 2011, by and between PhotoMedex, Inc. and Dennis McGrath. (19)
|
|
|
10.35
|
Non-Qualified Stock Option Agreement, entered into as of July 4, 2011, by and between PhotoMedex, Inc. and Dennis McGrath. (19)
|
|
|
10.40
|
Amended and Restated Employment Agreement entered into by and between PhotoMedex, Inc. and Dolev Rafaeli on August 9, 2011. (21)
|
|
|
10.41
|
Distribution Agreement by and between Radiancy, Inc. and Ya-Man Ltd., dated October 17, 2008. (21)
|
|
|
10.42
|
Distribution Agreement Extension by and between Radiancy, Inc. and Ya-Man Ltd., dated August 12, 2010. (21)
|
|
|
10.43
|
First Amendment to the Nonqualified Stock Option Agreement, dated as of October 31, 2011, by and between PhotoMedex, Inc. and Dennis McGrath (22)
|
|
|
10.45
|
Lease Renewal Agreement, dated February 22, 2012, PhotoMedex, Inc. and FR National Life LLC (28)
|
|
|
10.46
|
Lease Agreement dated September 1, 2010, by and between 30 Ramland Road, LLC and Radiancy, Inc. (Orangeburg). (25)
|
|
|
10.47
|
Unprotected Tenancy Agreement dated September 9, 2008 by and between S.A.I. Yarak Buildings and Investments Ltd. and Radiancy (Israel) Ltd. (Hod Hasharon) (25)
|
|
|
10.48
|
Amendment to Unprotected Tenancy Lease, dated as of January 20, 2008, by and between S.A.I. Yarak Buildings and Investments Ltd. and Radiancy (Israel) Ltd. (25)
|
|
|
10.49
|
Exclusive License Agreement for Methods of Treating Diseased Tissue, dated April 1, 2012, by and between the Regents of the University of California and PhotoMedex, Inc. (25)
|
|
|
10.50
|
Non-Qualified Stock Option Agreement dated March 18, 2012 between PhotoMedex, Inc. and Dolev Rafaeli (25)
|
|
|
10.51
|
Non-Qualified Stock Option Agreement dated March 18, 2012 between PhotoMedex, Inc. and Dennis McGrath (25)
|
|
|
10.52
|
Warrant issued March 1, 2012 to Crystal Research Associates LLC. (29)
|
|
|
10.53
|
Lease Agreement dated August 24, 2012, by and between 30 Ramland Road, LLC and Radiancy, Inc. (Orangeburg). (30)
|
|
|
10.54
|
Non-Qualified Stock Option Agreement dated February 28, 2013 between PhotoMedex, Inc. and Dolev Rafaeli (31)
|
|
|
10.55
|
Non-Qualified Stock Option Agreement dated February 28, 2013 between PhotoMedex, Inc. and Dennis McGrath (31)
|
|
|
10.56
|
Quota Purchase and Sale Agreement dated May 7, 2013 by and Among Radiancy, Inc., Leo Klinger and Intervening Parties (32)
|
|
|
10.57
|
Lease Agreement dated June 3, 2013 by and between Maestro Properties Limited and Photo Therapeutics, Ltd. (UK) (32)
|
|
|
10.58
|
Lease Agreement dated September 23, 2013 by and between Liberty Property Limited Partnership and PhotoMedex, Inc. (33)
|
|
|
List of subsidiaries of the Company
|
||
|
Consent of Fahn Kanne & Co. Grant Thornton Israel
|
||
|
Rule 13a-14(a) Certificate of Chief Executive Officer
|
||
|
Rule 13a-14(a) Certificate of Chief Financial Officer
|
||
|
Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
||
|
101.INS*
|
XBRL Instance Document
|
|
|
101.SCH*
|
XBRL Taxonomy Schema
|
|
|
101.CAL*
|
XBRL Taxonomy Calculation Linkbase
|
|
|
101.DEF*
|
XBRL Taxonomy Definition Linkbase
|
|
|
101.LAB*
|
XBRL Taxonomy Label Linkbase
|
|
|
101.PRE*
|
XBRL Taxonomy Presentation Linkbase
|
|
*
|
Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended (the “Securities Act”), are deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise not subject to liability under those sections. This exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates this exhibit by reference.
|
|
(1)
|
Filed as part of our Registration Statement on Form S-4, on October 18, 2002, and as amended.
|
|
(2)
|
Filed as part of our Annual Report on Form 10-K for the year ended December 31, 2002.
|
|
(3)
|
Filed as part of our Annual Report on Form 10-K for the year ended December 31, 2006.
|
|
(4)
|
Filed as part of our Registration Statement on Form S-1/A, on August 5, 1999.
|
|
(5)
|
Filed as part of our Annual Report on Form 10-K for the year ended December 31, 2005.
|
|
(6)
|
Filed as part of our Current Report on Form 8-K, on September 13, 2004.
|
|
(7)
|
Filed as part of our Current Report on Form 8-K, on April 10, 2006.
|
|
(8)
|
Filed as part of our Definitive Proxy Statement on Schedule 14A, on November 15, 2005.
|
|
(9)
|
Filed as part of our Registration Statement on Form S-8, on April 13, 2005.
|
|
(10)
|
Filed as part of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.
|
|
(11)
|
Filed as part of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2007.
|
|
(12)
|
Filed as part of our Annual Report on Form 10-K for the year ended December 31, 2007.
|
|
(13)
|
Filed as part of our Current Report on Form 8-K on March 5, 2009.
|
|
(14)
|
Filed as part of our Definitive Proxy Statement on Schedule 14A on December 18, 2008.
|
|
(15)
|
Filed as part of our Annual Report on Form 10-K for the year ended December 31, 2008.
|
|
(16)
|
Filed as part of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2009.
|
|
(17)
|
Filed as part of our Current Report on Form 8-K on January 11, 2010.
|
|
(18)
|
Filed as part of our Annual Report on Form 10-K for the year ended December 31, 2010.
|
|
(19)
|
Filed as part of our Current Report on Form 8-K on July 8, 2011.
|
|
(20)
|
Filed as part of our Registration Statement on Form S-4, on August 12, 2011.
|
|
(21)
|
Filed as part of our Registration Statement on Form S-4/A, on October 5, 2011.
|
|
(22)
|
Filed as part of our Registration Statement on Form S-4/A, on November 2, 2011.
|
|
(23)
|
Filed as part of our Current Report on Form 8-K on December 16, 2011.
|
|
(24)
|
Filed as part of our Current Report on Form 8-K on July 2, 2007.
|
|
(25)
|
Filed as part of our Annual Report on Form 10-K for the year ended December 31, 2011.
|
|
(26)
|
Filed as part of our Current Report on Form 8-K on March 23, 2010.
|
|
(27)
|
Filed as part of our Annual Report on Form 10-K for the year ended December 31, 2010.
|
|
(28)
|
Filed as part of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012.
|
|
(29)
|
Filed as part of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012.
|
|
(30)
|
Filed as part of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2012.
|
|
(31)
|
Filed as part of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013.
|
|
(32)
|
Filed as part of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013.
|
|
(33)
|
Filed as part of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013.
|
|
(34)
|
Filed as part of LCA Vision, Inc.’s Current Report on Form 8-K on February 13, 2014..
|
|
(35)
|
Filed as part of this Form 10-K.
|
|
*
|
The certifications attached as Exhibit 32.1 accompany this Annual Report on Form 10-K pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
|
|
†
|
Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended (the “Securities Act”), are deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise not subject to liability under those sections. This exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates this exhibit by reference.
|
AVAILABLE INFORMATION
We are a reporting company and file annual, quarterly and special reports, proxy statements and other information with the Commission. You may inspect and copy these materials at the Public Reference Room maintained by the Commission at Room 100 F Street, N.W., Washington, D.C. 20549. Please call the Commission at 1-800-SEC-0330 for more information on the Public Reference Room. You can also find our Commission filings at the Commission's website at www.sec.gov. You may also inspect reports and other information concerning us at the offices of the Nasdaq Stock Market at 1735 K Street, N.W., Washington, D.C. 20006. We intend to furnish our stockholders with annual reports containing audited financial statements and such other periodic reports as we may determine to be appropriate or as may be required by law.
Our primary Internet address is www.photomedex.com (this website address is not intended to function as a hyperlink and the information contained on our website is not intended to be a part of this Report). Corporate information can be located by clicking on the “Investor Relations” link in the top-middle of the page, and then clicking on “SEC Filing” in the menu. We make our periodic Commission Reports (Forms 10-Q and Forms 10-K) and current reports (Form 8-K) available free of charge through our Web site as soon as reasonably practicable after they are filed electronically with the Commission. We may from time to time provide important disclosures to investors by posting them in the Investor Relations section of our Web site, as allowed by Commission’s rules. The information on the website listed above is not and should not be considered part of this Annual Report on Form 10-K and is intended to be an inactive textual reference only.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
PHOTOMEDEX, INC.
|
||
|
Date: March 17, 2014
|
By:/s/ Dr. Dolev Rafaeli
|
|
|
Dr. Dolev Rafaeli
|
||
|
Chief Executive Officer and Director
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
Signature
|
Capacity in Which Signed
|
Date
|
||
|
/s/ Lewis C. Pell
|
Chairman of the Board of Directors
|
March 17, 2014
|
||
|
Lewis C. Pell
|
||||
|
/s/ Dr. Yoav Ben-Dror
|
Vice Chairman of the Board of Directors
|
March 17, 2014
|
||
|
Dr. Yoav Ben-Dror
|
||||
|
/s/ Dr. Dolev Rafaeli
|
Chief Executive Officer and Director (Principal Executive Officer)
|
March 17, 2014
|
||
|
Dr. Dolev Rafaeli
|
||||
|
/s/ Dennis M. McGrath
|
President, Chief Financial Officer and Director (Principal Financial Officer)
|
March 17, 2014
|
||
|
Dennis M. McGrath
|
||||
|
/s/ Christina L. Allgeier
|
Chief Accounting Officer (Principal Accounting Officer)
|
March 17, 2014
|
||
|
Christina L. Allgeier
|
||||
|
/s/ James W. Sight
|
Director
|
March 17, 2014
|
||
|
James W. Sight
|
||||
|
/s/ Stephen P. Connelly
|
Director
|
March 17, 2014
|
||
|
Stephen P. Connelly
|
||||
|
/s/ Katsumi Oneda
|
Director
|
March 17, 2014
|
||
|
Katsumi Oneda
|
||||
|
/s/ Trevor Harris
|
Director
|
March 17, 2014
|
||
|
Trevor Harris
|
PHOTOMEDEX, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
|
Page
|
|
|
Report of Independent Registered Public Accounting Firm
|
F-2
|
|
Consolidated Balance Sheets, December 31, 2013 and 2012
|
F-3
|
|
Consolidated Statements of Comprehensive Income, Years ended December 31, 2013, 2012 and 2011
|
F-4
|
|
Consolidated Statements of Changes in Equity, Years ended December 31, 2013, 2012 and 2011
|
F-5
|
|
Consolidated Statements of Cash Flows, Years ended December 31, 2013, 2012 and 2011
|
F-6
|
|
Notes to Consolidated Financial Statements
|
F-7
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
Fahn Kanne & Co.
Head Office
|
|
Board of Directors and Shareholders
|
Levinstein Tower
|
| PhotoMedex, Inc. |
23 Menachem Begin Road
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Tel-Aviv 66184, ISRAEL
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P.O.B. 36172, 61361
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| T +972 3 7106666 | |
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F +972 3 7106660
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www.gtfk.co.il
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We have audited the accompanying consolidated balance sheets of PhotoMedex, Inc. and Subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PhotoMedex, Inc. and Subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2013, based on criteria established in the 1992 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 17, 2014 expressed an unqualified opinion.
/s/ Fahn Kanne & Co. Grant Thornton Israel
Tel-Aviv, Israel
March 17, 2014
PHOTOMEDEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
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December 31,
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2013
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2012
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ASSETS
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Current assets:
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Cash and cash equivalents
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$ | 45,388 | $ | 44,348 | ||||
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Short term bank deposit
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14,113 | 18,000 | ||||||
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Accounts receivable, net of allowance for doubtful accounts of $10,734 and $6,917, respectively
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27,218 | 19,064 | ||||||
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Inventories, net
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27,547 | 22,467 | ||||||
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Deferred tax asset
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13,041 | 19,441 | ||||||
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Prepaid expenses and other current assets
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12,597 | 12,853 | ||||||
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Total current assets
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139,904 | 136,173 | ||||||
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Property and equipment, net
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10,489 | 6,759 | ||||||
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Patents and licensed technologies, net
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10,832 | 12,673 | ||||||
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Other intangible assets, net
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9,701 | 10,854 | ||||||
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Goodwill, net
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24,930 | 24,500 | ||||||
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Deferred tax asset
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24,039 | 20,186 | ||||||
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Funds in respect of employee rights upon retirement and other assets
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1,034 | 745 | ||||||
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Total assets
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$ | 220,929 | $ | 211,890 | ||||
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current liabilities:
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Current portion of notes payable
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$ | 838 | $ | 609 | ||||
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Short term debt
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10,000 | 10 | ||||||
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Accounts payable
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14,785 | 10,025 | ||||||
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Accrued compensation and related expenses
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3,230 | 2,494 | ||||||
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Other accrued liabilities
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22,032 | 22,099 | ||||||
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Deferred revenues
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5,961 | 5,259 | ||||||
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Total current liabilities
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56,846 | 40,496 | ||||||
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Long-term liabilities:
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Notes payable, net of current maturities
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82 | - | ||||||
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Deferred revenues
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2,758 | 3,313 | ||||||
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Other liabilities
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61 | 166 | ||||||
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Liability for employee rights upon retirement
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821 | 588 | ||||||
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Total liabilities
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60,568 | 44,563 | ||||||
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Commitment and contingencies (Note 10)
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Stockholders' equity:
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Preferred Stock, $.01 par value, 5,000,000 shares authorized; 0 shares issued and outstanding at December 31, 2013 and 2012
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- | - | ||||||
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Common Stock, $.01 par value, 50,000,000 shares authorized; 18,903,245 and 21,043,947 shares issued and outstanding, respectively
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189 | 210 | ||||||
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Additional paid-in capital
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104,954 | 130,954 | ||||||
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Retained earnings
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53,679 | 35,302 | ||||||
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Accumulated other comprehensive income
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1,539 | 861 | ||||||
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Total stockholders' equity
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160,361 | 167,327 | ||||||
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Total liabilities and stockholders’ equity
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$ | 220,929 | $ | 211,890 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
PHOTOMEDEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except share and per share amounts)
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For the Year Ended December 31,
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2013
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2012
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2011
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Revenues
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$ | 224,664 | $ | 220,651 | $ | 132,082 | ||||||
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Cost of revenues
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45,035 | 46,642 | 26,296 | |||||||||
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Gross profit
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179,629 | 174,009 | 105,786 | |||||||||
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Operating expenses:
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Engineering and product development
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3,306 | 2,914 | 1,057 | |||||||||
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Selling and marketing
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127,528 | 116,487 | 62,185 | |||||||||
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General and administrative
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26,750 | 27,330 | 45,192 | |||||||||
| 157,584 | 146,731 | 108,434 | ||||||||||
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Operating profit (loss)
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22,045 | 27,278 | (2,648 | ) | ||||||||
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Other income (loss):
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Interest and other financing income (expense), net
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702 | (351 | ) | (68 | ) | |||||||
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Income (loss) before income tax (expense) benefit
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22,747 | 26,927 | (2,716 | ) | ||||||||
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Income tax (expense) benefit
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(4,370 | ) | (4,438 | ) | 2,022 | |||||||
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Net income (loss)
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$ | 18,377 | $ | 22,489 | $ | (694 | ) | |||||
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Net income (loss) per share (Note 1):
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Basic
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$ | 0.90 | $ | 1.10 | $ | ( 0.06 | ) | |||||
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Diluted
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$ | 0.89 | $ | 1.08 | $ | ( 0.06 | ) | |||||
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Shares used in computing net income (loss) per share:
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Basic
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20,454,970 | 20,355,520 | 11,602,049 | |||||||||
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Diluted
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20,657,240 | 20,764,354 | 11,602,049 | |||||||||
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Other comprehensive income:
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Foreign currency translation adjustments
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$ | 678 | $ | 859 | $ | 2 | ||||||
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Comprehensive income
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$ | 19,055 | $ | 23,348 | $ | (692 | ) | |||||
The accompanying notes are an integral part of these consolidated financial statements.
PHOTOMEDEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands, except share and per share amounts)
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Common Stock
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Additional Paid-In
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Treasury
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Retained
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Accumulated
Other
Comprehensive
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Shares
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Amount
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Capital
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stock
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Earnings
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Income
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Total
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BALANCE, DECEMBER 31, 2010
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10,256,364 | $ | 103 | $ | 15,290 | $ | - | $ | 13,507 | $ | - | $ | 28,900 | |||||||||||||||
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Stock-based compensation related to stock options and restricted stock
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- | - | 7,774 | - | - | 7,774 | ||||||||||||||||||||||
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Stock-based compensation - grant of Common stock
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2,045,571 | 20 | 13,843 | - | - | - | 13,863 | |||||||||||||||||||||
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Exercise of stock options
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2,783,303 | 28 | 382 | - | - | - | 410 | |||||||||||||||||||||
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Reverse merger acquisition
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3,736,490 | 37 | 60,683 | - | - | - | 60,720 | |||||||||||||||||||||
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Repurchase of Company stock (16,056 shares)
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- | - | - | (250 | ) | - | - | (250 | ) | |||||||||||||||||||
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Other comprehensive income
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- | - | - | - | - | 2 | 2 | |||||||||||||||||||||
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Net loss
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- | - | - | - | (694 | ) | - | (694 | ) | |||||||||||||||||||
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BALANCE, DECEMBER 31, 2011
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18,821,728 | 188 | 97,972 | (250 | ) | 12,813 | 2 | 110,725 | ||||||||||||||||||||
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Issuance of warrants to consultants for services
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- | - | 98 | - | - | - | 98 | |||||||||||||||||||||
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Stock-based compensation - grants of common stock
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30,000 | - | 405 | - | - | - | 405 | |||||||||||||||||||||
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Stock-based compensation related to stock options and restricted stock
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- | - | 5,709 | - | - | - | 5,709 | |||||||||||||||||||||
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Stock options issued to consultants for services
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- | - | 83 | - | - | - | 83 | |||||||||||||||||||||
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Issuance of common stock, net
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3,023,432 | 30 | 37,484 | - | - | - | 37,514 | |||||||||||||||||||||
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Repurchase and retirement of common stock
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(842,961 | ) | (9 | ) | (10,747 | ) | - | - | - | (10,756 | ) | |||||||||||||||||
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Exercise of stock options
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10,048 | - | 67 | - | - | - | 67 | |||||||||||||||||||||
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Warrants exercised
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17,756 | 1 | 133 | - | - | - | 134 | |||||||||||||||||||||
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Retirement of treasury stock (16,056 shares)
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(16,056 | ) | - | (250 | ) | 250 | - | - | - | |||||||||||||||||||
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Other comprehensive income
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- | - | - | - | - | 859 | 859 | |||||||||||||||||||||
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Net income
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- | - | - | - | 22,489 | - | 22,489 | |||||||||||||||||||||
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BALANCE, DECEMBER 31, 2012
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21,043,947 | 210 | 130,954 | - | 35,302 | 861 | 167,327 | |||||||||||||||||||||
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Stock-based compensation related to stock options and restricted stock
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- | - | 4,892 | - | - | - | 4,892 | |||||||||||||||||||||
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Stock options issued to consultants for services
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- | - | 93 | - | - | - | 93 | |||||||||||||||||||||
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Repurchase and retirement of common stock
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(2,144,452 | ) | (21 | ) | (31,008 | ) | - | - | - | (31,029 | ) | |||||||||||||||||
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Exercise of stock options
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3,750 | - | 23 | - | - | - | 23 | |||||||||||||||||||||
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Other comprehensive income
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- | - | - | - | - | 678 | 678 | |||||||||||||||||||||
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Net income
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- | - | - | - | 18,377 | - | 18,377 | |||||||||||||||||||||
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BALANCE, DECEMBER 31, 2013
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18,903,245 | $ | 189 | $ | 104,954 | $ | - | $ | 53,679 | $ | 1,539 | $ | 160,361 | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
PHOTOMEDEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share and per share amounts)
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For the Year Ended December 31,
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2013
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2012
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2011
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Cash Flows From Operating Activities:
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Net income (loss)
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$ | 18,377 | $ | 22,489 | $ | (694 | ) | |||||
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Adjustments to reconcile net income (loss) to net cash used in operating activities:
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Depreciation and amortization
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6,119 | 5,611 | 590 | |||||||||
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Provision for doubtful accounts
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5,958 | 4,629 | 2,595 | |||||||||
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Deferred income taxes
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2,589 | (2,330 | ) | (5,751 | ) | |||||||
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Stock-based compensation
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4,985 | 6,197 | 21,637 | |||||||||
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Changes in operating assets and liabilities:
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Accounts receivable
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(13,944 | ) | (11,254 | ) | (6,135 | ) | ||||||
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Inventories
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(4,967 | ) | (3,195 | ) | (993 | ) | ||||||
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Prepaid expenses and other assets
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843 | (8,583 | ) | (641 | ) | |||||||
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Accounts payable
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4,658 | 1,787 | (3,413 | ) | ||||||||
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Accrued compensation and related expenses
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733 | (1,316 | ) | 976 | ||||||||
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Other accrued liabilities (see Note 8)
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(444 | ) | 5,719 | 3,036 | ||||||||
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Other liabilities
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233 | 68 | 76 | |||||||||
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Deferred revenues
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130 | 5,243 | 2,176 | |||||||||
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Net cash provided by operating activities
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25,270 | 25,065 | 13,459 | |||||||||
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Cash Flows From Investing Activities:
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Purchases of property and equipment
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(943 | ) | (573 | ) | (358 | ) | ||||||
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Lasers placed into service
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(5,476 | ) | (3,221 | ) | 15 | |||||||
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Proceeds from (investments in) short-term deposit
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3,887 | (18,000 | ) | 14,500 | ||||||||
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Increase in funds – employees retirement rights
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(233 | ) | (69 | ) | (81 | ) | ||||||
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Acquisition of business, net of cash acquired
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84 | - | (18,729 | ) | ||||||||
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Net cash used in investing activities
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(2,681 | ) | (21,863 | ) | (4,653 | ) | ||||||
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Cash Flows From Financing Activities:
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Repurchase of common stock
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(31,029 | ) | (10,756 | ) | (250 | ) | ||||||
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Proceeds from issuance of common stock, net
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- | 37,514 | - | |||||||||
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Issuance of warrants
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- | 98 | - | |||||||||
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Proceeds from option exercises
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23 | 67 | 410 | |||||||||
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Proceeds from warrant exercises
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- | 134 | - | |||||||||
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Proceeds from issuance of debt
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10,000 | - | - | |||||||||
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Payments on notes payable
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(623 | ) | (465 | ) | - | |||||||
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Repayment of long-term debt
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(43 | ) | (2,000 | ) | - | |||||||
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Net cash (used in) provided by financing activities
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(21,672 | ) | 24,592 | 160 | ||||||||
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Effect of exchange rate changes on cash
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123 | 5 | 2 | |||||||||
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Net increase in cash and cash equivalents
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1,040 | 27,799 | 8,968 | |||||||||
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Cash and cash equivalents, beginning of year
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44,348 | 16,549 | 7,581 | |||||||||
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Cash and cash equivalents, end of year
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$ | 45,388 | $ | 44,348 | $ | 16,549 | ||||||
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Supplemental information:
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Cash paid for income taxes
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$ | 7,233 | $ | 12,976 | $ | 6,373 | ||||||
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Cash paid for interest
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$ | 13 | $ | 79 | $ | - | ||||||
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Fair value of assets, excluding cash, acquired in exchange for securities in a business combination
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$ | - | $ | - | $ | 69,592 | ||||||
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Fair value of liabilities assumed in exchange for securities in a business combination
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$ | - | $ | - | $ | 11,035 | ||||||
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Goodwill resulting from a business combination
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$ | - | $ | - | $ | 24,005 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
Note 1
The Company and Summary of Significant Accounting Policies:
The Company:
Background
PhotoMedex, Inc. (and its subsidiaries) (the “Company”) is a Global Skin Health company providing integrated disease management and aesthetic solutions to dermatologists, professional aestheticians and consumers. The Company provides proprietary products and services that address skin diseases and conditions including psoriasis, vitiligo, acne, actinic keratosis (a precursor to certain types of skin cancer) and photo damage.
On December 13, 2011, the Company closed the merger with Radiancy, Inc. Immediately following the reverse merger, the pre-reverse merger shareholders of PhotoMedex, Inc. (“Pre-merged PhotoMedex”) collectively owned approximately 20% of the Company’s outstanding common stock, and the former Radiancy, Inc. stockholders owned approximately 80% of the Company’s outstanding common stock.
The merger was accounted for as a reverse acquisition with Radiancy treated for accounting purposes as the acquirer. As such, the financial statements of Radiancy, Inc. were treated as the historical financial statements of the Company, with the results of Pre-merged PhotoMedex, Inc. being included from December 14, 2011 and thereafter. For periods prior to the closing of the reverse acquisition, therefore, our discussion below relates to the historical business and operations of Radiancy, Inc.
As a result of the acquisition, the Company implemented a revised business plan focused on three key components – skilled direct sales force to target Physician and Professional Segments; expertise in global consumer marketing; and a full product life cycle model representing the ability to develop and commercialize innovative products from concept through regulatory, physician acceptance, and ultimately marketed directly to the consumer as dictated by normal product-life-cycle evolution. The Company reorganized its business into three operating segments to better align its organization based upon the Company’s management structure, products and services offered, markets served and types of customers.
On July 1, 2013, PhotoMedex’ wholly-owned subsidiary, Radiancy, Inc., completed the acquisition of 100% of the shares of LK Technology Importaçăo E Exportaçăo LTDA (“LK”), a privately-held distributor in Brazil based in Sao Paulo, and has begun to market and sell its no!no!® products in Brazil in the third quarter through its acquisition of LK. (See Note 2).
Summary of Significant Accounting Policies:
Accounting Principles
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). Certain reclassifications from the prior year presentation have been made to conform to the current year presentation. These reclassifications did not have material impact on the Company’s equity, net assets, results of operations or cash flows.
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. The financial statements include the results from the entities defined as Pre-merged PhotoMedex from December 14, 2011 (the day following the closing date of the reverse acquisition) forward. There are, therefore, no corresponding activities up to and including December 13, 2011.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States (“US GAAP”) requires management to make estimates and assumptions that affect amounts reported of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates and be based on events different from those assumptions. As of December 31, 2013, the more significant estimates include (1) revenue recognition, including provision for sales return and valuation allowances of accounts receivable; (2) valuation allowance of deferred tax assets and uncertainty in tax positions; and (3) stock based compensation.
Functional Currency
The currency of the primary economic environment in which the operations of the Company and its subsidiaries are conducted is the US dollar ("$" or "dollars"), except for the operations of Photo Therapeutics, Ltd. which are conducted in Great Britain Pounds (GBP) and LK Technologies which are conducted in Brazilian Real (BRL). 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. Thus, the functional (and reporting currency) of the Company and its subsidiaries (other than Photo Therapeutics, Ltd. and LK Technologies) is 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, 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 the local currency, are translated from its 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. Deferred taxes are not provided on translation adjustments as the earnings of the subsidiaries are considered to be permanently reinvested.
Fair Value Measurements
The Company measures and discloses fair value in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 820, Fair Value Measurements and Disclosures (“ASC Topic 820”). ASC Topic 820 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions there exists a three-tier fair-value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
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•
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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.
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|
•
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Level 2 – pricing inputs are other than quoted prices in active markets that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.
|
|
•
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Level 3 – pricing inputs are unobservable for the non-financial asset or liability and only used when there is little, if any, market activity for the non-financial asset or liability at the measurement date. The inputs into the determination of fair value require significant management judgment or estimation. Fair value is determined using comparable market transactions and other valuation methodologies, adjusted as appropriate for liquidity, credit, market and/or other risk factors.
|
This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.
The fair value of cash and cash equivalents and short term bank deposits are based on its demand value, which is equal to its carrying value. The estimated fair values of notes payable and long-term debt which are based on borrowing rates that are available to the Company for loans with similar terms, collateral and maturity approximate the carrying values. The fair value of the amounts funded in insurance policies in respect of employee liability for employee rights upon retirement is usually identical or close to their carrying value. 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. The fair value of contingent consideration in connection with the acquisition of LK (see Note 2) is based on management estimate of the entity prices of remaining inventories of LK at acquisition date (level 3 measurement).
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.
Cash and Cash Equivalents
The Company invests its excess cash in highly liquid short-term investments. The Company considers short-term investments that are purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consisted of cash and money market accounts at December 31, 2013 and 2012.
Short-term Deposits
Short-term deposits are deposits with original maturities of more than three months but less than one year. Short-term deposits are presented at their costs including accrued interest.
Accounts Receivable
The majority of the Company’s accounts receivable are due from consumers, distributors (domestic and international), physicians and other entities in the medical field. Accounts receivable are most often due within 30 to 90 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company and available information about their credit risk, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they are considered uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. The Company does not recognize interest accruing on accounts receivable past due.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined to be purchased cost for raw materials and the production cost (materials, labor and indirect manufacturing cost, including sub-contracted work components) for work-in-process and finished goods. For the Company’s consumer and LHE products, cost is determined on the weighted-average method. For the pre-merged PhotoMedex’s products, cost is determined on the first-in, first-out method. Throughout the laser manufacturing process, the related production costs are recorded within inventory. Work-in-process is immaterial, given the typically short manufacturing cycle, and therefore is disclosed in conjunction with raw materials.
The Company's equipment for the treatment of skin disorders (e.g. the XTRAC for psoriasis or vitiligo) will either (i) be placed in a physician's office and remain the property of the Company (at which date such equipment is transferred to property and equipment) or (ii) be sold to distributors or physicians directly. The cost to build a laser, whether for sale or for placement, is accumulated in inventory.
Reserves for slow moving and obsolete inventories are provided based on historical experience and product demand. Management evaluates the adequacy of these reserves periodically based on forecasted sales and market trend.
Property, Equipment and Depreciation
Property and equipment are recorded at cost, net of accumulated depreciation. Excimer lasers-in-service are depreciated on a straight-line basis over the estimated useful life of five years. For other property and equipment, depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, primarily three to seven years for computer hardware and software, furniture and fixtures, and machinery and equipment. Leasehold improvements are amortized over the lesser of the useful lives or lease terms. Expenditures for major renewals and betterments to property and equipment are capitalized, while expenditures for maintenance and repairs are charged as an expense as incurred. Upon retirement or disposition, the applicable property amounts are deducted from the accounts and any gain or loss is recorded in the consolidated statements of comprehensive income. Useful lives are determined based upon an estimate of either physical or economic obsolescence or both.
Management evaluates the realizability of property and equipment based on estimates of undiscounted future cash flows over the remaining useful life of the asset. If the amount of such estimated undiscounted future cash flows is less than the net book value of the asset, the asset is written down to fair value. As of December 31, 2013, no such write-down was required (see Impairment of Long-Lived Assets below).
Patent Costs and Licensed Technologies
Costs incurred to obtain or defend patents and licensed technologies are capitalized and amortized over the shorter of the remaining estimated useful lives or eight to 12 years. Core and product technology was also recorded in connection with the reverse acquisition on December 13, 2011 and is being amortized on a straight-line basis over ten years for core technology and five years for product technology. (See Note 2, Reverse Acquisition and Note 5, Patent and Licensed Technologies).
Management evaluates the recoverability of intangible assets based on estimates of undiscounted future cash flows over the remaining useful life of the asset. If the amount of such estimated undiscounted future cash flows is less than the net book value of the asset, the asset is written down to fair value. As of December 31, 2013, no such write-down was required. (See Impairment of Long-Lived Assets and Intangibles).
Other Intangible Assets
Other intangible assets were recorded in connection with the reverse acquisition on December 13, 2011. The assets which were determined to have definite useful lives are being amortized on a straight-line basis over ten years. Such assets primarily include customer relationships and trademarks. (See Note 2, Reverse Acquisition and Note 6, Goodwill and Other Intangible Assets).
Management evaluates the recoverability of such other intangible assets based on estimates of undiscounted future cash flows over the remaining useful life of the asset. If the amount of such estimated undiscounted future cash flows is less than the net book value of the asset, the asset is written down to fair value. As of December 31, 2013 no such write-down was required. (See Impairment of Long-Lived Assets and Intangibles).
Accounting for the Impairment of Goodwill
The Company evaluates the carrying value of goodwill annually at the end of the calendar year and also between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit to which goodwill was allocated to below its carrying amount. Such circumstances could include, but are not limited to: (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. Goodwill impairment testing involves a two-step process. Step 1 compares the fair value of the Group’s reporting units to which goodwill was allocated to their carrying values. If the fair value of the reporting unit exceeds its carrying value, no further analysis is necessary. The reporting unit fair value is based upon consideration of various valuation methodologies, including guideline transaction multiples, multiples of current earnings, and projected future cash flows discounted at rates commensurate with the risk involved. If the carrying amount of the reporting unit exceeds its fair value, Step 2 must be completed to quantify the amount of impairment. Step 2 calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit, from the fair value of the reporting unit as determined in Step 1. The implied fair value of goodwill determined in this step is compared to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss, equal to the difference, is recognized. As of December 31, 2013, no impairment of goodwill has been recorded.
Accrued Warranty Costs
The Company offers a standard warranty on product sales generally for a one to two-year period. In the case of domestic sales of XTRAC lasers, however, the Company has offered longer warranty periods, ranging from three to four years, in order to meet competition or meet customer demands. The Company provides for the expected cost of estimated 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 years ended December 31, 2013 and 2012 is summarized as follows:
|
December 31,
|
||||||||
|
2013
|
2012
|
|||||||
|
Accrual at beginning of year
|
$ | 1,440 | $ | 1,661 | ||||
|
Additions charged to warranty expense
|
1,206 | 1,497 | ||||||
|
Expiring warranties
|
(410 | ) | (442 | ) | ||||
|
Claims satisfied
|
(1,085 | ) | (1,276 | ) | ||||
|
Total
|
1,151 | 1,440 | ||||||
|
Less: current portion
|
(1,094 | ) | (1,274 | ) | ||||
|
Long term accrued warranty
|
$ | 57 | $ | 166 | ||||
For extended warranty on the consumer products, see Revenue Recognition below.
Liability for Employee Rights Upon Retirement
Israeli labor law generally requires payment of severance pay upon dismissal of an employee or upon termination of employment in certain other circumstances. The Company has recorded a severance pay liability for the amount that would be paid if all its Israeli employees were dismissed at the balance sheet date, on an undiscounted basis, in accordance with Israeli labor law. This liability is computed based upon the number of years of service multiplied by the latest monthly salary, since the employees are entitled to one month's salary for each year of employment, or a portion thereof. The amount of accrued severance pay as above represents the Company's severance pay liability in accordance with the labor agreement in force and based on salary components, which in the opinion of Management, create entitlement to severance pay.
The liability is partly funded by insurance policies, as the Company makes monthly deposits for such policies. The amounts funded are included under Funds in respect of employee rights upon retirement and other assets. The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn upon the fulfillment of the obligation pursuant to Israeli severance pay laws or labor agreements. The value of the deposited funds is based on the cash surrender value of these policies, and includes immaterial profits.
Severance pay expenses amounted to approximately $201, $179 and $185 for the years ended December 31, 2013, 2012 and 2011, respectively.
Revenue Recognition
The Company recognizes revenues from the product sales when the following four criteria have been met: (i) the product has been delivered and the Company has no significant remaining obligations; (ii) persuasive evidence of an arrangement exists; (iii) the price to the buyer is fixed or determinable; and (iv) collection is reasonably assured. Revenues from product sales are recorded net of provisions for estimated chargebacks, rebates, expected returns and cash discounts.
The Company ships most of its products FOB shipping point, although from time to time certain customers, for example governmental customers, will insist upon FOB destination. 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.
For revenue arrangements with multiple deliverables within a single, contractually binding arrangements (usually sales of products with separately priced extended warranty), each element of the contract is accounted for as a separate unit of accounting when it provides the customer value on a stand-alone basis and there is objective evidence of the fair value of the related unit.
With respect to sales arrangements under which the buyer has a right to return the related product, revenue is recognized only if all the following conditions are met: the price is fixed or determinable at the date of sale; the buyer has paid, or is obligated to pay and the obligation is not contingent on resale of the product; the buyer's obligation would not be changed in the event of theft or physical destruction or damage of the product; the buyer has economic substance; the Company does not have significant obligations for future performance to directly bring about resale of the product by the buyer; and the amount of future returns can be reasonably estimated.
The Company provides a provision for product returns based on the experience with historical sales returns, in accordance with ASC Topic 605-15 with respect to sales of product when a right of return exists. Reported revenues are shown net of the returns provision. Such allowance for sales returns is included in Other Accrued Liabilities. (See Note 8).
Deferred revenue includes amounts received with respect to extended warranty maintenance, repairs and other billable services and amounts not yet recognized as revenues. Revenues with respect to such activities are deferred and recognized on a straight-line basis over the duration of the warranty period, the service period or when service is provided, as applicable to each service.
The Company has two distribution channels for its phototherapy treatment equipment. The Company either (i) sells its lasers through a distributor or directly to a physician or (ii) places its lasers in a physician’s office (at no charge to the physician) and generally charges the physician a fee for an agreed upon number of treatments. In some cases, the Company and the customer stipulate to a quarterly or other periodic target of procedures to be performed, and accordingly revenue is recognized ratably over the period.
When the Company places a laser in a physician’s office, it generally recognizes service revenue based on the number of patient treatments performed, or purchased under a periodic commitment, by the physician. Amounts collected with respect to treatments to be performed through laser-access codes that are sold to physicians free of a periodic commitment, but not yet used, are deferred and recognized as a liability until the physician performs the treatment. Unused treatments remain an obligation of the Company because the treatments can only be performed on Company-owned equipment. Once the treatments are performed, this obligation has been satisfied.
The Company defers substantially all revenue from sales of treatment codes ordered by and performed to its customers within the last two weeks of the period in determining the amount of treatments performed by its physician-customers. Management believes this approach closely approximates the actual amount of unused treatments that existed at the end of a period.
Shipping and Handling Costs
Shipping and handling fees billed to customers are reflected as revenues while the related shipping and handling costs are included in selling and marketing expense. To date, shipping and handling costs have not been material.
Product Development Costs
Costs of research, new product development and product redesign are charged to expense as incurred.
Advertising Costs
Advertising costs are charged to expenses as incurred.
Advertising expenses amounted to approximately $71,992, $60,651 and $32,303 for the years ended December 31, 2013, 2012 and 2011, respectively.
Derivatives
The group 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 designed to hedge the cash flows 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 and included in financing income (expenses), net.
At December 31, 2013, the balance of such derivative instruments amounted to approximately $255 in assets and approximately $699 were recognized as financing income in the Statement of Comprehensive Income during the year ended that date. At December 31, 2012, the balance of such derivative instruments amounted to approximately $402 in assets and approximately $289 were recognized as financing income in the Statement of Comprehensive Income during the year ended that date.
The nominal amounts of foreign currency derivatives as of December 31, 2013 consist of forward transactions for the exchange of $6,725 into NIS and $8,400 as of December 31, 2012.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences reverse. Any resulting net deferred tax assets are evaluated for recoverability and, accordingly, a valuation allowance is provided when it is more likely than not that all or some portion of the deferred tax asset will not be realized.
The Company may incur an additional tax liability in the event of an intercompany dividend distribution, although it is the Company’s policy not to cause a distribution of dividends which would generate an additional tax liability to the Company in the foreseeable future. Upon the distribution of dividends from the tax-exempt income of an "Approved Enterprise" of an Israeli subsidiary (see Note 12), the amount distributed will be subject to the tax rate that would have been applicable had the Israeli subsidiary not been exempted from payment thereof. The Israeli subsidiary intends on permanently reinvesting the amounts of tax-exempt income and it does not intend on causing a distribution of such income as cash dividends. Therefore, no deferred income taxes have been provided in respect of such tax-exempt income. Taxes, which would apply in the event of disposal of investments in subsidiaries, have not been taken into account in computing the deferred taxes, as it is the Company's policy to hold these investments, not to dispose of them.
The Company accounts for uncertainty tax positions in accordance with an amendment to ASC Topic 740-10, Income Taxes (Accounting for Uncertainty in Income Taxes), which clarified the accounting for uncertainty in tax positions. This amendment provides that the tax effects from an uncertain tax position can be recognized in the financial statements only if the position is "more-likely-than-not" to be sustained were it to be challenged by a taxing authority. The assessment of the tax position is based solely on the technical merits of the position, without regard the likelihood that the tax position may be challenged. If an uncertain tax position meets the "more-likely-than-not" threshold, the largest amount of tax benefit that is more than 50% likely to be recognized upon ultimate settlement with the taxing authority is recorded.
In the year ended December 31, 2013, the Company determined that the liability for unrecognized tax benefits could suitably be extinguished by application of net operating loss carryforwards and carrybacks, with any residual impact arising as a liability in 2013 that has been duly provided for.
Concentration of credit risks
Financial instruments which subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, derivative (assets), accounts receivable and short-term bank deposits. The carrying amounts of these instruments approximate fair value due to their short-term nature. The Company deposits cash and cash equivalents and short term deposits in major financial institutions in the US, UK, Brazil and in Israel. The Company performs periodic evaluations of the relative credit standing of these institutions. The Company is of the opinion that the credit risk in respect of these balances is immaterial. In addition, the Company performs an ongoing credit evaluation and establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of customers (see also Accounts receivable above).
Most of the Company’s sales are generated in North America and Asia Pacific, to a large number of customers. Management periodically evaluates the collectability of the trade receivables to determine the amounts that are doubtful of collection and determine a proper allowance for doubtful accounts. Accordingly, the Company’s trade receivables do not represent a substantial concentration of credit risk.
Contingencies
The Company and its subsidiaries are involved in certain legal proceedings that arise from time to time in the ordinary course of its business. Except for income tax contingencies, the Company records accruals for contingencies to the extent that the management concludes that the occurrence is probable and that the related amounts of loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred.
Earnings (Loss) Per Share
The Company computes earnings (net loss) per share in accordance with ASC Topic. 260, Earnings per share. Basic earnings per share are computed by dividing net income by the weighted-average number of common shares outstanding during the period, net of the weighted average number of treasury shares. Diluted earnings 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. Potential common shares are excluded from the computation for a period in which a net loss is reported or if their effect is anti-dilutive. The Company’s potential common shares consist of stock options, warrants and restricted stock awards issued under the Company’s stock incentive plans and their potential dilutive effect is considered using the treasury method.
Due to the reverse merger on December 13, 2011, the earnings per share for the period before the acquisition date presented in these financial statements were computed based on Radiancy’s historical weighted-average number of shares outstanding, multiplied by the exchange ratio that was established in the reverse merger. Therefore, unless otherwise noted, all share and per-share amounts for prior period to the acquisition date presented have been retroactively adjusted to give effect to the exchange ratio.
Basic and diluted earnings per common share were calculated using the following weighted average shares outstanding for the years ended December 31, 2013, 2012 and 2011:
|
December 31,
|
||||||||||||
|
2013
|
2012
|
2011
|
||||||||||
|
Weighted average number of common and common equivalent shares outstanding:
|
||||||||||||
|
Basic number of common shares outstanding
|
20,454,970 | 20,355,520 | 11,602,049 | |||||||||
|
Dilutive effect of stock options and warrants
|
202,270 | 408,834 | - | |||||||||
|
Diluted number of common and common stock equivalent shares outstanding
|
20,657,240 | 20,764,354 | 11,602,049 | |||||||||
Diluted earnings (loss) per share for each of the years ended December 31, 2013, 2012 and 2011 exclude the impact of common stock options, warrants and unvested restricted stock totaling 2,172,745, 1,920,442 and 1,791,788 shares, respectively, as the effect of their inclusion would be anti-dilutive.
Impairment of Long-Lived Assets and Intangibles
Long-lived assets, such as property and equipment, and definite-lived intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the fair value of the asset. If the carrying amount of an asset exceeds the fair value, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. As of December 31, 2013, no such impairment exists. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as discontinued operations are presented separately in the appropriate asset and liability sections of the balance sheet.
Share-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC Topic 718, Compensation – Stock Compensation. Under the fair value recognition provision, of this statement, share-based compensation cost is measured at the grant date based on the fair value of the award that is ultimately expected to vest and is recognized as operating expense over the applicable vesting period of the stock award using the graded vesting method.
Treasury Stock and Repurchase of Common Stock
Shares held by the Company are presented as a reduction of equity, at their cost to the Company as treasury stock.
Adoption of New Accounting Standards
Effective January 1, 2013, the Company adopted Accounting Standard Update No. 2013-02, Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU Topic 220") This ASU requires entities to provide information about significant amounts reclassified out of accumulated other comprehensive income. The standard became effective, prospectively, for interim and annual periods beginning after December 15, 2012. The adoption of the standard did not impact the Company's consolidated results of operations and financial condition.
Effective January 1, 2013, the Company adopted Accounting Standard Update No. 2011-11, Balance Sheet – Disclosure about Offsetting Assets and Liabilities ("ASU 2011-11"). ASU 2011-11 enhances disclosures about financial instruments and derivative instruments that are either offset in accordance with the Accounting Standards Codification or are subject to an enforceable master netting arrangement or similar agreement. The amended guidance became effective, in a retrospective manner to all comparative periods presented, for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of the standard did not have a material impact on the Company's consolidated results of operations and financial condition.
Recently Issued Accounting Standards
In July 2013 the FASB has issued Accounting Standard Update 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force) ("ASU 2013-11").
The amendments in ASU 2013-11 state that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows: To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be presented net of deferred tax assets.
ASU 2013-11 applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. For public companies the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted.
Management believes that the adoption of the amendments is not expected to have material impact on the Company's consolidated results of operations and financial condition.
In March 2013, the FASB issued Accounting Standards Update 2013-5, Foreign Currency Matters (Topic 830) Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity ("ASU 2013-5").
ASU 2013-5 clarifies that, when a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets that is a business (other than a sale of in-substance real estate or conveyance of oil and gas mineral rights) within a foreign entity, the parent is required to apply the guidance in Subtopic 830-30 to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. ASU 2013-5 also clarifies that if the business combination achieved in stages relates to a previously held equity method investment (step-acquisition) that is a foreign entity, the amount of accumulated other comprehensive income that is reclassified and included in the calculation of gain or loss shall include any foreign currency translation adjustment related to that previously held investment.
For public companies, the amendments in this Update will be effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. The amendments should be applied prospectively to derecognition events occurring after the effective date. Prior periods should not be adjusted. Early adoption is permitted. If an entity elects to early adopt the amendments, it should apply them as of the beginning of the entity’s fiscal year of adoption. Management believes that the adoption of the standard is not expected to have a material impact on the Company's consolidated results of operations and financial condition.
Note 2
Acquisition:
On July 1, 2013, PhotoMedex’ wholly-owned subsidiary, Radiancy, Inc., completed the acquisition of 100% of the shares of LK Technology Importaçăo E Exportaçăo LTDA (“LK”), a privately-held distributor in Brazil.
LK brings to PhotoMedex all required licenses, authorizations and permits to immediately begin its consumer business operating locally. LK was founded in 2003 and is based in Sao Paulo. LK has been operating for several years selling Radiancy’s professional line of products in Brazil. The local manager of LK will remain in his position.
The total consideration was $181, consisting of $100 consideration and $81 (a contingent consideration component) liability for an estimated amount to be due for the profit to be earned on the remaining inventory at acquisition date. Such contingent amount is expected to be paid during the year 2014. Of the $100 consideration, $41 was a cash down payment and the balance of $59 is to be paid in 2014.
The fair value of the assets acquired and liabilities assumed were based on management estimates. Based on the initial purchase price allocation, the following table summarizes the fair value amounts of the assets acquired and liabilities assumed at the date of the acquisition:
|
Cash and cash equivalents
|
$ | 125 | ||
|
Accounts receivable
|
1 | |||
|
Inventories
|
20 | |||
|
Prepaid expenses and other current assets
|
2 | |||
|
Total assets acquired at fair value
|
148 | |||
|
Accounts payable
|
(75 | ) | ||
|
Accrued compensation and related expenses
|
(2 | ) | ||
|
Other accrued liabilities
|
(11 | ) | ||
|
Total liabilities assumed
|
(88 | ) | ||
|
Net assets acquired
|
$ | 60 |
The purchase price exceeded the fair value of the net assets acquired by $121, which was recorded as goodwill.
The consolidated results of operations do not include any revenues or expenses related to the LK business on or prior to July 1, 2013, the consummation date of the acquisition. The amounts of revenue and earnings of LK since the acquisition date through December 31, 2013 included in the consolidated statement of comprehensive income were immaterial. Assuming the acquisition of LK had occurred on January 1, 2012, the impact on the Company’s results for the years ended December 31, 2013 and 2012 would have been immaterial. However this determination does not purport to be indicative of the results of operations which would have actually resulted had the acquisition occurred on January 1, 2012, nor to be indicative of future results of operations.
Reverse Acquisition:
On December 13, 2011, PhotoMedex closed the merger acquisition with Radiancy, Inc. in a transaction that was accounted for as a reverse acquisition, with Radiancy treated as the accounting acquirer. Radiancy was considered the accounting acquirer even though PhotoMedex was the issuer of common stock in the transaction, such that upon completion of the merger, the Company had 18,820,852 shares of common stock issued and outstanding, with the Pre-merged PhotoMedex, Inc. stockholders collectively owning approximately 20%, and the former Radiancy, Inc. stockholders owning approximately 80%, of the outstanding common stock of the Company.
The consideration transferred was $82,562, and included $1,842 of assumed debt, for the Pre-merged PhotoMedex assets. This amount was determined based on the amount of equity interest (shares, options and warrants) that Radiancy would have had to issue to PhotoMedex shareholders in order to provide, as agreed upon in the merger document, a 75%/25% ownership ratio on a fully converted basis. Consistent with this formula all warrants and options were treated as equivalent, share for share, with outstanding common stock. The fair value of the consideration effectively transferred by Radiancy was based on the market price of Pre-merged PhotoMedex shares which was $15.60 per-share (closing price) on December 13, 2011, the day on which the reverse acquisition became effective. This consideration transferred also included $20 million in cash, which Pre-merged PhotoMedex, used to liquidate its convertible debt, prior to the acquisition. The $82,562 of consideration transferred was adjusted down during the measurement period of the reverse acquisition from the previously reported period by $1,353 to due to a change in valuation on unvested restricted stock of Pre Merged PhotoMedex as of December 13, 2011.
The consolidated results of operations did not include any revenues or expenses related to the pre-merged PhotoMedex business on or prior to December 13, 2011, the consummation date of the reverse acquisition. The Company’s unaudited pro-forma results for the years ended December 31, 2011 summarize the combined results of the Radiancy and PhotoMedex in the following table, assuming the reverse acquisition had occurred on January 1, 2011 and after giving effect to the reverse acquisition adjustments, including amortization of the tangible and intangible assets that were acquired in the transaction:
|
Year Ended
December 31, 2011
|
||||
|
(unaudited)
|
||||
|
Net revenues
|
$ | 162,341 | ||
|
Net income (loss)
|
(13,077 | ) | ||
|
Net income (loss) per share:
|
||||
|
Basic
|
$ | (0.91 | ) | |
|
Diluted
|
$ | (0.91 | ) | |
|
Shares used in calculating net income (loss) per share:
|
||||
|
Basic
|
14,445,184 | |||
|
Diluted
|
14,445,184 | |||
These unaudited pro-forma information have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which would have actually resulted had the reverse acquisition occurred on January 1, 2011, nor to be indicative of future results of operations.
Note 3
Inventories:
|
December 31,
|
||||||||
|
2013
|
2012
|
|||||||
|
Raw materials and work-in-process
|
$ | 12,631 | $ | 9,012 | ||||
|
Finished goods
|
14,916 | 13,455 | ||||||
|
Total inventories
|
$ | 27,547 | $ | 22,467 | ||||
Work-in-process is immaterial given the typically short manufacturing cycle, and therefore is disclosed in conjunction with raw materials.
Note 4
Property and Equipment:
|
December 31,
|
||||||||
|
2013
|
2012
|
|||||||
|
Lasers-in-service
|
$ | 12,599 | $ | 7,301 | ||||
|
Equipment, computer hardware and software
|
4,730 | 4,015 | ||||||
|
Furniture and fixtures
|
705 | 617 | ||||||
|
Leasehold improvements
|
534 | 396 | ||||||
| 18,568 | 12,329 | |||||||
|
Accumulated depreciation and amortization
|
(8,079 | ) | (5,570 | ) | ||||
|
Total property and equipment, net
|
$ | 10,489 | $ | 6,759 | ||||
Related depreciation and amortization expense was $2,875 in 2013, $2,367 in 2012 and $356 in 2011.
Note 5
Patents and Licensed Technologies, net:
|
December 31,
|
||||||||
|
2013
|
2012
|
|||||||
|
Gross Amount beginning of period
|
$ | 15,411 | $ | 15,124 | ||||
|
Additions
|
171 | 181 | ||||||
|
Translation differences
|
66 | 106 | ||||||
|
Gross Amount end of period
|
15,648 | 15,411 | ||||||
|
Accumulated amortization
|
(4,816 | ) | (2,738 | ) | ||||
|
Net Book Value
|
$ | 10,832 | $ | 12,673 | ||||
Related amortization expense was $2,043, $2,049 and $184 for the years ended December 31, 2013, 2012 and 2011, respectively. An amount of $13,500, included in Patents represents product and core technologies recorded as part of the purchase price allocation done in connection with the reverse acquisition of the Pre-merged PhotoMedex.
Estimated amortization expense for amortizable patents and licensed technologies assets for the next five years is as follows:
|
2014
|
$ | 2,052 | ||
|
2015
|
2,045 | |||
|
2016
|
2,040 | |||
|
2017
|
905 | |||
|
2018
|
905 | |||
|
Thereafter
|
2,885 | |||
|
Total
|
$ | 10,832 |
Note 6
Goodwill and Other Intangible Assets:
As part of the purchase price allocation for the reverse acquisition, the Company recorded goodwill in the amount of $24,005 and definite-lived intangibles in the amount of $12,000. Goodwill reflects the value or premium of the acquisition price in excess of the fair values assigned to specific tangible and intangible assets. Goodwill has an indefinite useful life and therefore is not amortized as an expense, but is reviewed annually for impairment of its fair value to the Company. The purchase price intrinsically recognizes the benefits of the broadened depth of the management team and the addition of a sizeable direct sales force creating greater access to the physician community with branded products and technologies. Furthermore, the purchase price paid by Radiancy, Inc, a private company includes, among other things, other benefits such as the intrinsic value of being a Nasdaq-listed issuer post merger and now having access to capital markets and stockholder liquidity.
|
Balance at January 1, 2012
|
$ | 24,500 | ||
|
Additions to goodwill
|
121 | |||
|
Translation differences
|
309 | |||
|
Balance at December 31, 2013
|
$ | 24,930 | ||
The Company has no accumulated impairment losses as of December 31, 2013.
The goodwill was allocated among the reportable segments as of December 31, 2013 in accordance with the provisions of ASC Topic 350-20 Intangibles-Goodwill and consisted of the following:
|
December 31, 2013
|
||||
|
Consumer segment
|
$ | 20,850 | ||
|
Physician Recurring segment
|
4,080 | |||
|
Total goodwill
|
$ | 24,930 | ||
Set forth below is a detailed listing of other definite-lived intangible assets:
|
December 31, 2013
|
December 31, 2012
|
|||||||||||||||||||||||
|
Trademarks
|
Customer
Relationships
|
Total
|
Trademarks
|
Customer
Relationships
|
Total
|
|||||||||||||||||||
|
Gross Amount beginning of period
|
$ | 5,744 | $ | 6,372 | $ | 12,116 | $ | 5,700 | $ | 6,300 | $ | 12,000 | ||||||||||||
|
Translation differences
|
28 | 45 | 73 | 44 | 72 | 116 | ||||||||||||||||||
|
Gross Amount end of period
|
5,772 | 6,417 | 12,189 | 5,744 | 6,372 | 12,116 | ||||||||||||||||||
|
Accumulated amortization
|
(1,178 | ) | (1,310 | ) | (2,488 | ) | (598 | ) | (664 | ) | (1,262 | ) | ||||||||||||
|
Net Book Value
|
$ | 4,594 | $ | 5,107 | $ | 9,701 | $ | 5,146 | $ | 5,708 | $ | 10,854 | ||||||||||||
Related amortization expense was $1,200, $1,212 and $50 for the years ended December 31, 2013, 2012 and 2011. Customer Relationships embody the value to the Company of relationships that Pre-merged PhotoMedex had formed with its customers. Tradename includes the names and various other trademarks associated with Pre-merged PhotoMedex products (e.g. “XTRAC”, “Neova” “Omnilux” and “Lumiere”).
Estimated amortization expense for the above amortizable intangible assets for the next five years is as follows:
|
2014
|
$ | 1,200 | ||
|
2015
|
1,200 | |||
|
2016
|
1,200 | |||
|
2017
|
1,200 | |||
|
2018
|
1,200 | |||
|
Thereafter
|
3,701 | |||
|
Total
|
$ | 9,701 |
Note 7
Accrued Compensation and related expenses:
|
December 31,
|
||||||||
|
2013
|
2012
|
|||||||
|
Accrued payroll and related taxes
|
$ | 707 | $ | 1,010 | ||||
|
Accrued vacation
|
290 | 262 | ||||||
|
Accrued commissions and bonuses
|
2,233 | 1,222 | ||||||
|
Total accrued compensation and related expense
|
$ | 3,230 | $ | 2,494 | ||||
Note 8
Other Accrued Liabilities:
|
December 31,
|
||||||||
|
2013
|
2012
|
|||||||
|
Accrued warranty, current, see Note 1
|
$ | 1,094 | $ | 1,274 | ||||
|
Accrued taxes, including liability for unrecognized tax benefit, see Note 12
|
1,023 | 4,304 | ||||||
|
Accrued sales return (1)
|
16,046 | 11,901 | ||||||
|
Other accrued liabilities
|
3,869 | 4,620 | ||||||
|
Total other accrued liabilities
|
$ | 22,032 | $ | 22,099 | ||||
|
(1)
|
The activity in the sales returns liability account was as follows:
|
|
December 31,
|
||||||||
|
2013
|
2012
|
|||||||
|
Balance at beginning of year
|
$ | 11,901 | $ | 6,143 | ||||
|
Additions that reduce net sales
|
47,916 | 43,284 | ||||||
|
Actual returns
|
(43,771 | ) | (37,526 | ) | ||||
|
Balance at end of year
|
$ | 16,046 | $ | 11,901 | ||||
Note 9
Short-term Debt:
Term-Note Credit Facility
In December 2013, the Company, through its subsidiary, Radiancy, Inc., entered into a term-note facility with JP Morgan Chase (“Chase”). The facility has maximum principal amount of $15 million and is for a term of one year. As of December 31, 2013, the Company had total borrowings of $10,000 under this facility. The stated interest rate for any draw under the credit facility was set as the greater of (i) prime rate, (ii) federal funds effective rate plus .5% or (iii) LIBOR plus 2.5%. Each draw has a repayment period of one year with principal due at maturity, although any draw may be paid early with penalty. On February 3, 2014, the Company repaid the entire balance of $10,000.
Note 10
Commitments and Contingencies:
Leases
The Company has entered into various non-cancelable operating lease agreements for real property and one minor operating lease for personal property. These arrangements expire at various dates through 2016. Rent expense was $1,002, $908 and $458 for the years ended December 31, 2013, 2012 and 2011, respectively. The future annual minimum payments under these leases are as follows:
|
Year Ending December 31,
|
||||
|
2014
|
$ | 535 | ||
|
2015
|
336 | |||
|
2016
|
56 | |||
|
Thereafter
|
- | |||
|
Total
|
$ | 927 | ||
Litigation
During the year ended December 31, 2013, Radiancy, Inc., a wholly-owned subsidiary of PhotoMedex, commenced legal action against Viatek Consumer Products Group, Inc., over Viatek’s Pearl and Samba hair removal products which Radiancy believes infringe the intellectual property covering its no!no! hair removal devices. The first suit, which was filed in the United States Federal Court, Southern District of New York, includes claims against Viatek for patent infringement, trademark and trade dress infringement, and false and misleading advertising. A second suit against Viatek was filed in Canada, where the Pearl is offered on that country’s The Shopping Channel, alleging trademark and trade dress infringement, and false and misleading advertising. Viatek’s response contains a variety of counterclaims and affirmative defenses against both Radiancy and its parent company PhotoMedex, including, among other counts, claims regarding the invalidity of Radiancy’s patents and antitrust allegations regarding Radiancy’s conduct.
As of March 17, 2014, the case has proceeded into the discovery phase of the litigation. Radiancy, and PhotoMedex, have moved to dismiss PhotoMedex from the case, and to dismiss the counterclaims and affirmative defenses asserted by Viatek. Radiancy has also moved for sanctions against Viatek for failure to provide meaningful and timely responses to Radiancy’s discovery requests. No decision has yet been rendered on these motions. At this time, the amount of any loss, or range of loss, cannot be reasonably estimated as the case is still in the early stages of discovery to determine the validity of any claim or claims made by Viatek. Therefore, the Company has not recorded any reserve or contingent liability related to this particular legal matter. However, in the future, as the case progresses, the Company may be required to record a contingent liability or reserve for this matter.
On December 20, 2013, PhotoMedex, Inc. was served with a putative class action lawsuit filed in the United States District Court for the Eastern District of Pennsylvania against the Company and its two top executives, Dolev Rafaeli, Chief Executive Officer, and Dennis M. McGrath, President and Chief Financial Officer. The suit, filed by Mr. Guy Ratz, a former employee of Radiancy (Israel) Ltd., a wholly-owned subsidiary of the Company, alleges various violations of the Federal securities laws between November 7, 2012 and November 14, 2013, including that the Company and its officers made false and misleading statements or failed to disclose material facts concerning the Company’s business. Two other shareholders filed suit through other firms; the Asbestos Workers Local 14 Pension Fund was appointed the lead plaintiff in this case. The complaint seeks certification of the putative class as well as an unspecified amount of monetary damages, pre-and post-judgment interest and attorneys’ fees, expert witness fees and other costs. The Company and its officers intend to vigorously defend themselves against this lawsuit. At this time, the amount of any loss, or range of loss, cannot be reasonably estimated as the cases have only been initiated and no discovery has been conducted to determine the validity of any claim or claims made by plaintiffs. Therefore, the Company has not recorded any reserve or contingent liability related to these particular legal matters. However, in the future, as the cases progress, the Company may be required to record a contingent liability or reserve for these matters.
Four putative class-action lawsuits have been filed in connection with PhotoMedex’s proposed acquisition of LCA-Vision, Inc. Two of those suits have been filed in the Court of Chancery of the State of Delaware and two have been filed in the Court of Common Pleas of Hamilton County, Ohio. All cases assert claims against LCA-Vision, Inc., its chief executive officer and directors, PhotoMedex, and Gatorade Acquisition Corp., a wholly owned subsidiary of PhotoMedex. The complaints allege that the proposed acquisition undervalues LCA and deprives LCA’s shareholders of the opportunity to participate in LCA’s long-term financial prospects, that the “go shop” provisions of the Merger Agreement are intended to prevent LCA from soliciting or receiving competing offers, that LCA’s Board has breached its fiduciary duties and failed to maximize that company’s stockholder value, and that LCA, PhotoMedex, and Gatorade have aided and abetted the LCA defendants’ alleged breaches of duty. The complaints seek injunctive relief, unspecified damages, and other relief. As of March 17, 2014, defendants have not responded to the complaints in any of the actions. Defendants intend to vigorously defend themselves in the lawsuits. At this time, the amount of any loss, or range of loss, cannot be reasonably estimated as the cases have only been initiated and no discovery has been conducted to determine the validity of any claim or claims made by plaintiffs. Therefore, the Company has not recorded any reserve or contingent liability related to these particular legal matters. However, in the future, as the cases progress, the Company may be required to record a contingent liability or reserve for these matters.
The Company and certain of the Company’s subsidiaries are involved in certain other legal actions and claims, including product liability, consumer, commercial, tax and governmental matters, which arise from time to time in the ordinary course of its business. Management believes, based on discussions with legal counsel, that these other litigation matters and claims will likely be resolved without a material effect on the Company’s consolidated financial position, results of operations or liquidity. However, litigation is inherently unpredictable, and excessive verdicts can result from litigation. Although the Company believes that it has substantial defenses in these matters, the Company may, in the future, incur judgments or enter into settlements of claims that could have a material adverse effect on our results of operations in a particular period. As of December 31, 2013, management believes that there are not any contingencies that might cause a significant loss or that the occurrence is considered to be probable.
Employment Agreements
The Company has severance agreements with certain key executives and employees that create certain liabilities in the event of their termination of employment by the company without cause, or following a change in control of the Company. The aggregate commitment under these executive severance agreements, should all covered executives and employees be terminated other than for cause, was approximately $1,427 as of December 31, 2013, based on 2013 salary levels. Should all covered executives and certain key employees be terminated following a change in control of the Company, the aggregate commitment under these executive severance agreements at December 31, 2013 was approximately $1,174, based on 2013 salary levels.
Note 11
Stockholders’ Equity:
Preferred Stock
The Company has authorized preferred stock consisting of 5,000,000 shares with a $.01 par value, which shall be designated as blank check preferred. The Board of Directors may authorize the issuance from time to time of one or more classes of preferred stock with one or more series within any class thereof, with such voting powers, full or limited, or without voting powers and with such designations, preferences and relative, participating, optional or special rights and qualifications, limitations or restrictions thereon as shall be set forth in the resolution or resolutions adopted by the Board of Directors providing for the issuance of such preferred shares. At December 31, 2013 and 2012, no shares of preferred stock were outstanding.
Common Stock
On August 18, 2012, the Board of Directors approved a stock repurchase program up to a maximum to $25 million. In August 2013, the Board of Directors has authorized an additional $30 million share re-purchase program of its common shares in the open market over the next twelve months, at such times and prices as determined appropriate by the Company's management in collaboration with the Board of Directors. To date, the Company has repurchased 2,987,413 shares at an average price of $13.98 per share for a total of $41,757.
On December 12, 2011, the stockholders voted to increase the number of authorized shares of common stock from 35,000,000 to 50,000,000 shares.
On December 13, 2011, in conjunction with the reverse acquisition, the Company issued 15,084,370 shares of common stock to the shareholders of Radiancy, Inc. and also, 380,000 shares of restricted stock to two executives of per-merged PhotoMedex. These restricted shares vest over a three-year period.
Common Stock Options
Pre-Reverse Merger
In 1999, Radiancy established a stock option plan (the "Plan") whereby 6,033,748 shares of the Company's common stock were reserved for issuance to eligible employees, directors and consultants. Stock options granted under the Plan generally vested ratably over a three-year period and expired 10 years from the date of the grant.
As of the closing of the reverse acquisition, the Plan was discontinued and all outstanding option grants, not exercised, under the Plan were cancelled.
Post-Reverse Merger
Following the closing of the reverse acquisition, the previous Non-Employee Director Stock Option Plan of PhotoMedex (the acquired entity) was adopted by the group. This plan has authorized 120,000 shares; of which 7,000 shares had been issued or were reserved for issuance as awards of shares of common stock, and 17,077 shares were reserved for outstanding stock options. The directors, who were elected to our Board in connection with the reverse merger, each received a one-time stock award of 5,000 shares of the Company’s common stock in January 2012.
In addition, following the closing of the reverse acquisition, the previous 2005 Equity Compensation Plan (“2005 Equity Plan”) of Pre-merged PhotoMedex (the acquired entity) was also adopted for use by the group. The 2005 Equity Plan has authorized 3,000,000 shares, of which 753,095 shares had been issued or were reserved for issuance as awards of shares of common stock, and 1,115,601 shares were reserved for outstanding options.
A summary of option transactions for all of the Company’s stock options during the years ended December 31, 2013, 2012 and 2011:
|
Number of Stock
Options
|
Weighted
Average
Exercise Price
|
|||||||
|
Outstanding at December 31, 2010
|
1,950,936 | $ | 0.69 | |||||
|
Granted
|
1,476,279 | 0.04 | ||||||
|
Exercised
|
(2,782,435 | ) | 0.15 | |||||
|
Assumed in reverse merger
|
180,718 | 19.54 | ||||||
|
Expired/cancelled
|
(644,780 | ) | 1.32 | |||||
|
Outstanding at December 31, 2011
|
180,718 | 19.54 | ||||||
|
Granted
|
739,000 | 15.87 | ||||||
|
Exercised
|
(10,048 | ) | 6.67 | |||||
|
Expired/cancelled
|
(11,129 | ) | 20.25 | |||||
|
Outstanding at December 31, 2012
|
898,541 | 16.65 | ||||||
|
Granted
|
259,625 | 16.59 | ||||||
|
Exercised
|
(3,750 | ) | 6.24 | |||||
|
Expired/cancelled
|
(21,738 | ) | 31.36 | |||||
|
Outstanding at December 31, 2013
|
1,132,678 | $ | 16.51 | |||||
|
Exercisable at December 31, 2013
|
320,053 | $ | 17.35 | |||||
The outstanding and exercisable options at December 31, 2013, have a range of exercise prices and associated weighted remaining contractual life and weighted average exercise price, as follows:
|
Options Range
of Exercise
Prices
|
Outstanding
Number of
Shares
|
Weighted Average
Remaining
Contractual Life
(years)
|
Weighted
Average
Exercise Price
|
Exercisable
Number of
Shares
|
Exercisable
Weighted Avg.
Exercise Price
|
|||||||||||||||||
| $ | 0 - $15.00 | 691,831 | 8.33 | $ | 13.92 | 145,706 | $ | 12.45 | ||||||||||||||
| $ | 15.01 - $30.00 | 427,900 | 8.32 | $ | 19.02 | 161,400 | $ | 17.41 | ||||||||||||||
| $ | 30.01 - $45.00 | 2,169 | 4.02 | $ | 39.41 | 2,169 | $ | 39.41 | ||||||||||||||
| $ | 45.01 - $60.00 | 3,563 | 2.97 | $ | 47.07 | 3,563 | $ | 47.07 | ||||||||||||||
| $ | 60.01 - up | 7,215 | 1.03 | $ | 93.69 | 7,215 | $ | 93.69 | ||||||||||||||
|
Total
|
1,132,678 | 8.25 | $ | 16.51 | 320,053 | $ | 17.35 | |||||||||||||||
The outstanding options will expire, as follows:
|
Year Ending
|
Number of Shares
|
Weighted
Average
Exercise Price
|
Exercise Price
|
|||||||||
|
2014
|
2,499 | $ | 102.48 | $ | 102.48 | |||||||
|
2015
|
2,499 | $ | 102.90 | $ | 102.90 | |||||||
|
2016
|
2,634 | $ | 69.48 | $ | 48.72 - $93.66 | |||||||
|
2017
|
3,146 | $ | 46.85 | $ | 46.62 - $47.88 | |||||||
|
2018 and later
|
1,121,900 | $ | 15.91 | $ | 5.70 - $20.00 | |||||||
| 1,132,678 | $ | 16.51 | $ | 5.70 - $102.90 | ||||||||
As the share price as of December 31, 2013 was $12.95, the aggregate intrinsic value for options outstanding and exercisable was immaterial.
The Company uses the Black-Scholes option-pricing model to estimate fair value of grants of stock options with the following weighted average assumptions:
|
Year Ended December 31,
|
||||||||||||
|
2013
|
2012
|
2011
|
||||||||||
|
Risk-free interest rate
|
1.3 | % | 1.2 | % | N/A | |||||||
|
Volatility
|
85.25 | % | 85.53 | % | N/A | |||||||
|
Expected dividend yield
|
0 | % | 0 | % | N/A | |||||||
|
Expected life
|
5.5 years
|
5.5 years
|
N/A | |||||||||
|
Estimated forfeiture rate
|
0 | % | 0 | % | N/A | |||||||
Prior to the reverse acquisition, Radiancy calculated the expected volatility based on the historic volatility of comparable public companies which operate in the same industry sector. Currently, the Company calculates expected volatility for a share-based grant based on historic daily stock price observations of its common stock. For estimating the expected term of share-based grants made in the years ended December 31, 2013 and 2012, the Company has adopted the simplified method. The Company has used historical data to estimate expected employee behaviors related to option exercises and forfeitures and included these expected forfeitures as a part of the estimate of expense as of the grant date.
With respect to grants of options, the risk-free rate of interest is based on the U.S. zero-coupon US Government bond rates appropriate for the expected term of the grant or award.
On February 28, 2013, the Company granted an aggregate of 177,125 options to purchase common stock to a number of employees and consultants with a strike price of $15, which was higher than the quoted market value of our stock at the date of grants. The options vest over five years and expire ten years from the date of grant. Also on February 28, 2013, the Company granted an aggregate of 82,500 non-qualified options to purchase common stock to two executive employees with a strike price of $20, which was set to match the exercise price of the warrants issued in the reverse merger and was higher than the quoted market value of our stock at the date of grant. The aggregate fair value of the options granted was $2,590. The options vest over five years and expire ten years from the date of grant.
On January 26, 2012, the Company issued 30,000 shares of common stock to the six non-employee directors with an aggregate fair value of $405.
On March 18, 2012, the Company granted an aggregate of 509,000 options to purchase common stock to a number of employees and consultants with a strike price of $14, which was higher than the quoted market value of our stock at the date of grants. The options vest over five years and expire ten years from the date of grant. Also on March 18, 2012, the Company granted an aggregate of 230,000 non-qualified options to purchase common stock to two executive employees with a strike price of $20, which was set to match the exercise price of the warrants issued in the reverse merger and was higher than the quoted market value of our stock at the date of grant. The aggregate fair value of the options granted was $6,652. The options vest over five years and expire ten years from the date of grant.
On December 13, 2011, as part of the reverse merger, the Company issued 380,000 shares of restricted common stock to two executives of pre-merged PhotoMedex. These 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 three-year period. The Company determined the fair value of the awards to be the fair value of the Company’s common stock on the date of issuance less the value paid for the award, accordingly the fair value of this grant was $5,928.
As part of the reverse acquisition, the Company assumed 164,000 unvested restricted stock out of 200,000 shares of restricted stock awards that Pre-merged PhotoMedex were issued on March 30, 2011 to two of its senior executives. Based on the terms of the award between Pre-merged PhotoMedex and the grantees, the vesting of 36,000 of the restricted stock awards were accelerated as of December 13, 2011, the date of the reverse merger (the number of shares that could be vested without causing excise taxes under Sec. 4999 of the Internal Revenue Code to be imposed on the executive or the loss in any material respect of a deduction under Section 162(m) of the Internal Revenue Code).
This portion was accounted for as part of the consideration transferred, which was based on the amount of equity interest (shares and warrants) that Radiancy would have had to issue to PhotoMedex equity holders in order to provide the ownership ratio determined for the reverse acquisition.
The remaining 164,000 unvested restricted stock that were assumed by the company were accounted for at fair value as of the reverse acquisition date. Accordingly, the fair value of the awards will be recorded as compensation costs in the post-merger periods - at 3 equal annual installments over a 3-year period, on each anniversary of the closing of the merger, so long as the executive continues to be employed by the Company on each such date.
On June 30, 2011, the Board of Directors of Radiancy approved for its’ Chief Executive Officer (i) a stock award of 2,045,571 shares of the Company's common stock and (ii) a cash bonus as a "gross-ups" for compensation of tax payments (tax obligations, withholdings and other tax-related liabilities in connection with the stock award and cash award). The Company recorded stock-based compensation expense of $27.1 million (including the cash bonus in an amount of $12.3 million) in respect to this grant, for the year ended December 31, 2011.
In addition, on June 30, 2011, prior to the reverse acquisition, the Board of Directors of Radiancy approved a grant to certain of its directors, executives and employees of 732,292 stock options at an exercise price of $0.01, to purchase shares of the Company's common stock (each option is exercisable to 2.011 shares of common stock). The fair value estimation of the award was $13.62 per option. The contractual term of each option is 10 years from the date of grant. The vesting periods of the options are as follows:
|
•
|
66,667 options vested upon the effective date of grant.
|
|
•
|
49,470 options will vest on June 30, 2012
|
|
•
|
616,155 options vest as: (i) 33% of the options on June 30, 2012; and (ii) as to the remaining options, 8 1/3% of the options on each of the end of the following eight consecutive quarters.
|
Upon consummation of the reverse merger, the Board of Directors accelerated the vesting periods so all outstanding options became fully vested and were available to exercise into shares of common stock. Options that were not exercised on that date were forfeited. Due to this accelerated vesting, 2,740,414 options were exercised into common shares.
Out of the total options exercised into shares of common stock during 2011, the Company shall have the right to repurchase 66,912 shares of common stock (the remaining balance as of December 31, 2013) at a price equal to the par value of such shares ($0.005 per share) in the event of either the resignation or the termination for cause according to the employment agreement of the employees with the Company or its subsidiary. The repurchase right will be subject to the same vesting periods as the option grants themselves. The Company accounted for the replacement of the options, with similar vesting terms, as a modification of an award and determined that the fair value of the replaced award equals the new award and therefore no incremental costs should be recorded. As a result, the stock based compensation of $50 will continue to be expensed over the original vesting period.
Total compensation expense was as $4,985, $6,197 and $34,001 for the years ended December 31, 2013, 2012 and 2011.
At December 31, 2013, there was $8,569 of total unrecognized compensation cost related to non-vested stock awards that is expected to be recognized over a weighted-average period of 2.75 years.
Common Stock Warrants
Following the closing of the reverse merger, the Company had warrants outstanding, a majority of which were issued in conjunction with the reverse merger on December 13, 2011. As a result of the reverse merger, Pre-merged PhotoMedex shareholders were issued warrants at a ratio of 0.305836 per each outstanding share held or a total of 1,026,435 warrants. The warrants have the following principal terms: (i) a warrant exercise price of $20 per share of common stock, (ii) an exercise period of three years, and (iii) the right of the Company to notify the holders of the warrants of an earlier expiration of the warrants, at any time following such time as the Company’s common stock will have had a closing trading price in excess of $30 per share for a period of 20 consecutive trading days, provided that such earlier expiration date shall not be earlier than that date which is 20 trading days following the delivery of such notification by the Company.
A summary of warrant transactions for the years ended December 31, 2013, 2012 and 2011 is as follows:
|
Number of Warrants
|
Weighted
Average
Exercise Price
|
|||||||
|
Outstanding at January 1, 2011
|
- | $ | - | |||||
|
Issued
|
- | - | ||||||
|
Assumed in reverse merger
|
1,067,240 | 19.98 | ||||||
|
Exercised
|
- | - | ||||||
|
Expired/cancelled
|
- | - | ||||||
|
Outstanding at December 31, 2011
|
1,067,240 | 19.98 | ||||||
|
Issued
|
25,000 | 20.00 | ||||||
|
Exercised
|
(17,756 | ) | 7.50 | |||||
|
Expired/cancelled
|
(11,216 | ) | 47.04 | |||||
|
Outstanding at December 31, 2012
|
1,063,268 | 19.91 | ||||||
|
Issued
|
- | - | ||||||
|
Exercised
|
- | - | ||||||
|
Expired/cancelled
|
(4,589 | ) | 18.48 | |||||
|
Outstanding at December 31, 2013
|
1,058,679 | $ | 19.91 | |||||
At December 31, 2013, all outstanding warrants were exercisable. As the share price as of December 31, 2013 was $12.95, the aggregate intrinsic value for warrants outstanding and exercisable was immaterial.
If not previously exercised, the outstanding warrants will expire as follows:
|
Year Ending December 31,
|
Number of Warrants
|
Weighted
Average
Exercise Price
|
||||||
|
2014
|
1,026,429 | $ | 20.00 | |||||
|
2015
|
32,250 | 17.19 | ||||||
| 1,058,679 | $ | 19.91 | ||||||
As all of the warrants were fully vested at the date of the consummation of the reverse merger, the fair value of the warrants at that date was included as part of the calculation of the consideration transferred, as the consideration was determined based on the equity interests Radiancy would have had to issue to the stockholders of Pre-merged PhotoMedex to provide them the same equity interests in the combined company.
Note 12
Income Taxes:
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.
A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which the related temporary difference becomes deductible. The benefit of tax positions taken or expected to be taken in the Company's income tax returns are recognized in the consolidated financial statements if such positions are more likely than not of being sustained.
For the years ended December 31, 2013, 2012, and 2011, the following table summarizes the components of income before income taxes and the provision for income taxes:
|
Year Ended December 31,
|
||||||||||||
|
2013
|
2012
|
2011
|
||||||||||
|
Income (loss) before income tax:
|
||||||||||||
|
U.S.
|
$ | 7,698 | $ | 3,152 | $ | ( 16,309 | ) | |||||
|
Israel
|
14,279 | 20,414 | 13,980 | |||||||||
|
Other Foreign
|
768 | 3,365 | - | |||||||||
|
Income before income taxes
|
$ | 22,745 | $ | 26,931 | $ | ( 2,329 | ) | |||||
|
Income tax expense (benefit):
|
||||||||||||
|
United States - Federal tax:
|
||||||||||||
|
Current
|
$ | ( 1,253 | ) | $ | 2,752 | $ | 246 | |||||
|
Deferred
|
1,795 | (1,572 | ) | (5,495 | ) | |||||||
|
United States - State tax:
|
||||||||||||
|
Current
|
180 | 315 | - | |||||||||
|
Deferred:
|
850 | (2,074 | ) | (243 | ) | |||||||
|
Israel:
|
||||||||||||
|
Current
|
2,781 | 4,034 | 3,487 | |||||||||
|
Deferred
|
(237 | ) | (50 | ) | (17 | ) | ||||||
|
Other foreign:
|
||||||||||||
|
Current
|
54 | 1371 | - | |||||||||
|
Deferred:
|
200 | (338 | ) | - | ||||||||
|
Income tax expense (benefit)
|
$ | 4,370 | $ | 4,438 | $ | (2,022 | ) | |||||
For the years ended December 31, 2013, 2012 and 2011, the following table reconciles the federal statutory income tax rate to the effective income tax rate:
|
Year Ended December 31,
|
||||||||||||
|
2013
|
2012
|
2011
|
||||||||||
|
Federal Tax rate
|
35 | % | 35 | % | 35 | % | ||||||
|
Federal tax expense (benefit) at 35%
|
$ | 7,961 | $ | 9,426 | $ | ( 815 | ) | |||||
|
State and local income tax
|
958 | 286 | (320 | ) | ||||||||
|
Foreign rate differential
|
(2,656 | ) | (4,213 | ) | (3,654 | ) | ||||||
|
Increase in taxes from permanent differences in stock-based compensation
|
433 | 637 | 2,674 | |||||||||
|
US taxation of foreign earnings – Subpart F
|
367 | 403 | - | |||||||||
|
Increase (decrease) in uncertain tax positions
|
269 | (2,325 | ) | - | ||||||||
|
Return to provision and other adjustments
|
(1,964 | ) | - | - | ||||||||
|
Impact of tax rate change on deferred taxes
|
(942 | ) | - | - | ||||||||
|
Foreign tax credits
|
(341 | ) | - | - | ||||||||
|
Change in valuation allowance
|
116 | - | - | |||||||||
|
Other
|
169 | 224 | 93 | |||||||||
|
Income tax expense (benefit)
|
$ | 4,370 | $ | 4,438 | $ | ( 2,022 | ) | |||||
As of December 31, 2013, the Company had approximately $48 million of Federal net operating loss carryforwards in the United States. Approximately $18.4 million of the loss carryforward has been recognized in the deferred tax account without a valuation allowance. Such recognized carryforward has sufficient expected income and sufficient Section 382 limitation to be used in future years. The balance of the loss carryforward has been placed under a valuation allowance.
After conversion to U.S. dollars, Photo Therapeutics Limited had approximately $11 million of net operating loss carryforwards. Additionally, an NOL of $0.3 million was recorded by the Company’s Brazilian subsidiary.
As of December 31, 2013, the Company’s gross deferred tax asset pertaining to State net operating loss carryforwards approximated $1.971 million and expire generally through 2017 to 2033, depending on the particular State’s rules. A large portion of the State loss carryforwards have been placed under a valuation allowance, approximating $1.548 million.
In addition, the Company has approximately $0.1 million of AMT credits. The Company is currently expected to utilize foreign tax credits on a current basis. None of the Federal research tax credit carryforwards from Pre-merged PhotoMedex are deemed utilizable due to the constraints of Section 382.
The balance of the deferred tax asset at December 31, 2013 has a valuation allowance of $11,910, which offsets the gross valuation of Federal and State NOL carryforwards.
The following table summarizes the components of deferred income tax assets and liabilities:
|
December 31,
|
||||||||
|
2013
|
2012
|
|||||||
|
Loss carryforwards
|
$ | 21,092 | $ | 20,122 | ||||
|
AMT credits
|
112 | 1,495 | ||||||
|
Foreign tax credits
|
- | 446 | ||||||
|
Accrued employment expenses
|
1,256 | 718 | ||||||
|
Amortization and write-offs
|
8,883 | 10,557 | ||||||
|
Capitalized R&D costs
|
2,933 | 3,670 | ||||||
|
Deferred revenues
|
84 | 301 | ||||||
|
Depreciation
|
4,360 | 5,537 | ||||||
|
Doubtful accounts
|
3,499 | 2,121 | ||||||
|
Inventory reserves
|
822 | - | ||||||
|
Other accruals and reserves
|
228 | 617 | ||||||
|
Return allowances
|
5,660 | 4,118 | ||||||
| Translation adjustments | 61 | - | ||||||
|
Gross deferred tax asset
|
48,990 | 49,702 | ||||||
|
Less: valuation allowance
|
(11,910 | ) | (10,075 | ) | ||||
|
Net deferred tax asset
|
$ | 37,080 | $ | 39,627 | ||||
|
Among current assets
|
$ | 13,041 | $ | 19,441 | ||||
|
Among other non-current assets
|
24,039 | 20,186 | ||||||
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 2010 through 2013 and is also generally subject to various State income tax examinations for calendar years 2005 through 2013. 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 2010 through 2013.
The Israeli subsidiary is entitled to reduced tax rates regarding income that is subject to tax pursuant to the "approved enterprise" until end of year 2012 and "preferred enterprise" from year 2013. Other income is subject to the regular corporate income tax rate.
Change in Israel rates. Effective for tax periods beginning 1 January 2014, the standard corporate income tax rate was increased from 25% to 26.5% and preferred income tax rate (for preferred enterprise located in an area which is not development zone A) was increased to 16%.
Income derived from the approved enterprise was tax-exempt for the first two years. In the succeeding five to eight years (depending on the classification of the Company as a foreign-invested company) the income was taxed at a reduced rate. In the event of cash dividends from income which was tax-exempt as above, the Israeli subsidiary would have to pay 15% tax in respect of the amount distributed. The Israeli subsidiary intends to reinvest the amount of such tax-exempt income and not to distribute it as dividends.
The entitlement to the above benefits is contingent upon fulfillment of the conditions stipulated by the law, the regulations published thereunder (and the letters of approval for the specific investments in the approved enterprise) in the preferred enterprise. Management of the Israeli subsidiary believes that as of December 31, 2013 the subsidiary was in compliance with the above-mentioned conditions.
Change in U.K. rates. In addition, effective for tax periods beginning on April 1, 2013, the United Kingdom tax rate was reduced from 24% to 23%. Further enacted decreases in the tax rate to 21% and 20% will take effect on April 1, 2014 and 2015 respectively. These changes in rate will affect the tax provision with regard to the tax attributes of Photo Therapeutics Limited, the United Kingdom subsidiary.
Unrecognized Tax Benefits. The Company is subject to income taxation in the U.S., Israel, the U.K., and Brazil. Unrecognized tax benefits reflect the difference between positions taken or expected to be taken on income tax returns and the amounts recognized in the financial statements. Resolution of the related tax positions through negotiations with the relevant tax authorities or through litigation could take years to complete. It is difficult predict the timing of resolution for tax positions since such timing is not entirely within the control of the Company. It is reasonably possible that the total amount of unrecognized tax benefits could both increase and decrease in the next 12 months, with no material impact on earnings.
The Company and its subsidiaries file income tax returns in the United States, Israel and the United Kingdom.
In 2012, Management conducted an analysis of the facts and law surrounding the then existing income tax uncertainties, and found that such liability as may have arisen was of a much lesser magnitude and is able to be extinguished by loss carryforwards and carrybacks,
Reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
Balance at January 1, 2011
|
$ | 2,700 | ||
|
Additions / Settlements during 2011
|
- | |||
|
Balance December 31, 2011
|
2,700 | |||
|
Additions/ Settlements due 2012
|
(2,325 | ) | ||
|
Balance at December 31, 2012
|
375 | |||
|
Additions / Settlements due 2013
|
269 | |||
|
Balance at December 31, 2013
|
$ | 644 | ||
Note 13
Significant Customer Concentration:
No customer was more than 10% of total company revenues for the years ended December 31, 2013 and 2012. There was one customer, Ya-Man, that was 20% of total company revenues for the year ended December 31, 2011.
Note 14
Business Segment and Geographic Data:
Effective December 13, 2011, the Company reorganized its business into three operating segments to better align its organization based upon the Company’s management structure, products and services offered, markets served and types of customers, as follows: The Consumer segment derives its revenues from the design, development, manufacturing and selling of long-term hair reduction and acne consumer products. The Physician Recurring segment derives its revenues from the XTRAC procedures performed by dermatologists, the sales of skincare products, the sales of surgical disposables and accessories to hospitals and surgery centers and on the repair, maintenance and replacement parts on our various products. The Professional segment generates revenues from the sale of equipment, such as lasers, medical and esthetic light and heat based products and LED products. Management reviews financial information presented on an operating segment basis for the purposes of making certain operating decisions and assessing financial performance.
Unallocated operating expenses include costs that are not specific to a particular segment but are general to the group; included are expenses incurred for administrative and accounting staff, general liability and other insurance, professional fees and other similar corporate expenses. Unallocated assets include cash and cash equivalents, prepaid expenses and deposits.
The following tables reflect results of operations from our business segments for the periods indicated below:
|
Year ended December 31, 2013
|
||||||||||||||||
|
CONSUMER
|
PHYSICIAN
RECURRING
|
PROFESSIONAL
|
TOTAL
|
|||||||||||||
|
Revenues
|
$ | 188,259 | $ | 28,548 | $ | 7,857 | $ | 224,664 | ||||||||
|
Costs of revenues
|
26,794 | 13,022 | 5,219 | 45,035 | ||||||||||||
|
Gross profit
|
161,465 | 15,526 | 2,638 | 179,629 | ||||||||||||
|
Gross profit %
|
85.8 | % | 54.4 | % | 33.6 | % | 80.0 | % | ||||||||
|
Allocated operating expenses:
|
||||||||||||||||
|
Engineering and product development
|
1,100 | 1,371 | 835 | 3,306 | ||||||||||||
|
Selling and marketing expenses
|
112,898 | 12,681 | 1,949 | 127,528 | ||||||||||||
|
Unallocated operating expenses
|
- | - | - | 26,750 | ||||||||||||
| 113,998 | 14,052 | 2,784 | 157,584 | |||||||||||||
|
Income (loss) from operations
|
47,467 | 1,474 | (146 | ) | 22,045 | |||||||||||
|
Interest and other financing income (expense), net
|
- | - | - | 702 | ||||||||||||
|
Net income (loss) before taxes
|
$ | 47,467 | $ | 1,474 | $ | ( 146 | ) | $ | 22,747 | |||||||
|
Year ended December 31, 2012
|
||||||||||||||||
|
CONSUMER
|
PHYSICIAN
RECURRING
|
PROFESSIONAL
|
TOTAL
|
|||||||||||||
|
Revenues
|
$ | 188,425 | $ | 21,284 | $ | 10,942 | $ | 220,651 | ||||||||
|
Costs of revenues
|
28,965 | 11,512 | 6,165 | 46,642 | ||||||||||||
|
Gross profit
|
159,460 | 9,772 | 4,777 | 174,009 | ||||||||||||
|
Gross profit %
|
84.6 | % | 45.9 | % | 43.7 | % | 78.9 | % | ||||||||
|
Allocated operating expenses:
|
||||||||||||||||
|
Engineering and product development
|
876 | 1,201 | 837 | 2,914 | ||||||||||||
|
Selling and marketing expenses
|
102,736 | 10,203 | 3,548 | 116,487 | ||||||||||||
|
Unallocated operating expenses
|
- | - | - | 27,330 | ||||||||||||
| 103,612 | 11,404 | 4,385 | 146,731 | |||||||||||||
|
Income (loss) from operations
|
55,848 | (1,632 | ) | 392 | 27,278 | |||||||||||
|
Interest and other financing income (expense), net
|
- | - | - | (351 | ) | |||||||||||
|
Net income (loss) before taxes
|
$ | 55,848 | $ | ( 1,632 | ) | $ | 392 | $ | 26,927 | |||||||
|
Year ended December 31, 2011
|
||||||||||||||||
|
CONSUMER
|
PHYSICIAN
RECURRING
|
PROFESSIONAL
|
TOTAL
|
|||||||||||||
|
Revenues
|
$ | 125,581 | $ | 829 | $ | 5,672 | $ | 132,082 | ||||||||
|
Costs of revenues
|
23,309 | 456 | 2,531 | 26,296 | ||||||||||||
|
Gross profit
|
102,272 | 373 | 3,141 | 105,786 | ||||||||||||
|
Gross profit %
|
81.4 | % | 45.0 | % | 55.4 | % | 80.1 | % | ||||||||
|
Allocated operating expenses:
|
||||||||||||||||
|
Engineering and product development
|
837 | 27 | 193 | 1,057 | ||||||||||||
|
Selling and marketing expenses
|
59,424 | 319 | 2,442 | 62,185 | ||||||||||||
|
Unallocated operating expenses
|
- | - | - | 45,192 | ||||||||||||
| 60,261 | 346 | 2,635 | 108,434 | |||||||||||||
|
Income (loss) from operations
|
42,011 | 27 | 506 | (2,648 | ) | |||||||||||
|
Interest and other financing income (expense), net
|
- | - | - | (68 | ) | |||||||||||
|
Net income (loss) before taxes
|
$ | 42,011 | $ | 27 | $ | 506 | $ | (2,716 | ) | |||||||
For the years ended December 31, 2013, 2012 and 2011, net revenues by geographic area were as follows:
|
Year Ended December 31,
|
||||||||||||
|
2013
|
2012
|
2011
|
||||||||||
|
North America 1
|
$ | 174,850 | $ | 163,973 | $ | 91,821 | ||||||
|
Asia Pacific 2
|
19,081 | 28,031 | 28,213 | |||||||||
|
Europe (including Israel)
|
27,849 | 25,521 | 9,994 | |||||||||
|
South America
|
2,884 | 3,126 | 2,054 | |||||||||
| $ | 224,664 | $ | 220,651 | $ | 132,082 | |||||||
|
1 United States
|
$ | 112,635 | $ | 135,950 | $ | 75,341 | ||||||
|
1 Canada
|
$ | 62,215 | $ | 28,023 | $ | 16,480 | ||||||
|
2 Japan
|
$ | 11,556 | $ | 21,134 | $ | 25,924 | ||||||
For the years ended December 31, 2013, 2012 and 2011, long-lived assets by geographic area were as follows:
|
Year Ended December 31,
|
||||||||||||
|
2013
|
2012
|
2011
|
||||||||||
|
North America
|
$ | 9,119 | $ | 5,772 | $ | 4,496 | ||||||
|
Asia Pacific
|
- | - | - | |||||||||
|
Europe (including Israel)
|
1,370 | 987 | 828 | |||||||||
|
South America
|
- | - | - | |||||||||
| $ | 10,489 | $ | 6,759 | $ | 5,324 | |||||||
Note 15
Quarterly Financial Data (Unaudited):
|
For the Quarter Ended
|
||||||||||||||||
|
2013
|
Mar. 31
|
Jun. 30
|
Sep. 30
|
Dec. 31
|
||||||||||||
|
Revenues
|
$ | 57,216 | $ | 58,065 | $ | 45,893 | $ | 63,490 | ||||||||
|
Gross profit
|
45,350 | 46,675 | 36,827 | 50,777 | ||||||||||||
|
Net income
|
7,212 | 7,094 | 886 | 3,185 | ||||||||||||
|
Net income per share:
|
||||||||||||||||
|
Basic
|
$ | 0.35 | $ | 0.34 | $ | 0.04 | $ | 0.16 | ||||||||
|
Diluted
|
$ | 0.34 | $ | 0.34 | $ | 0.04 | $ | 0.16 | ||||||||
|
Shares used in computing net income per share:
|
||||||||||||||||
|
Basic
|
20,678,023 | 20,573,048 | 19,982,967 | 19,400,341 | ||||||||||||
|
Diluted
|
21,147,583 | 21,033,349 | 20,441,262 | 19,602,611 | ||||||||||||
|
2012
|
Mar. 31
|
Jun. 30
|
Sep. 30
|
Dec. 31
|
||||||||||||
|
Revenues
|
$ | 50,273 | $ | 58,906 | $ | 56,681 | $ | 54,791 | ||||||||
|
Gross profit
|
39,039 | 46,551 | 45,400 | 43,019 | ||||||||||||
|
Net income
|
4,857 | 4,213 | 7,525 | 5,894 | ||||||||||||
|
Net income per share:
|
||||||||||||||||
|
Basic
|
$ | 0.26 | $ | 0.20 | $ | 0.35 | $ | 0.28 | ||||||||
|
Diluted
|
$ | 0.26 | $ | 0.20 | $ | 0.35 | $ | 0.27 | ||||||||
|
Shares used in computing net income per share:
|
||||||||||||||||
|
Basic
|
18,339,977 | 20,547,244 | 21,205,675 | 20,947,985 | ||||||||||||
|
Diluted
|
18,876,163 | 21,034,814 | 21,752,845 | 21,356,819 | ||||||||||||
|
2011
|
Mar. 31
|
Jun. 30
|
Sep. 30
|
Dec. 31
|
||||||||||||
|
Revenues
|
$ | 34,741 | $ | 33,847 | $ | 34,745 | $ | 28,749 | ||||||||
|
Gross profit
|
28,519 | 28,157 | 26,603 | 22,507 | ||||||||||||
|
Net income (loss)
|
8,085 | (10,045 | ) | 4,249 | (2,983 | ) | ||||||||||
|
Net income (loss) per share:
|
||||||||||||||||
|
Basic
|
$ | 0.79 | $ | (0.98 | ) | $ | 0.34 | $ | (0.22 | ) | ||||||
|
Diluted
|
$ | 0.68 | $ | (0.98 | ) | $ | 0.32 | $ | (0.22 | ) | ||||||
|
Shares used in computing net income (loss) per share:
|
||||||||||||||||
|
Basic
|
10,256,364 | 10,256,364 | 12,341,723 | 13,509,866 | ||||||||||||
|
Diluted
|
11,819,587 | 10,256,364 | 13,182,818 | 13,509,866 | ||||||||||||
Note 16
Valuation and Qualifying Accounts:
|
Additions Charged to
|
||||||||||||||||||||
|
Description
|
Balance at
Beginning
of Period
|
Cost and
Expenses
|
Other
Accounts (1)
|
Deductions (2)
|
Balance at End
of Period
|
|||||||||||||||
|
For The Year Ended December 31, 2013:
|
||||||||||||||||||||
|
Reserve for Doubtful Accounts
|
$ | 6,917 | $ | 5,958 | $ | - | $ | (2,141 | ) | $ | 10,734 | |||||||||
|
Reserve for Sales Returns
|
$ | 11,901 | $ | 47,914 | $ | - | $ | ( 43,770 | ) | $ | 16,045 | |||||||||
|
For The Year Ended December 31, 2012:
|
||||||||||||||||||||
|
Reserve for Doubtful Accounts
|
$ | 3,196 | $ | 4,629 | $ | - | $ | ( 908 | ) | $ | 6,917 | |||||||||
|
Reserve for Sales Returns
|
$ | 6,143 | $ | 43,284 | $ | - | $ | ( 37,526 | ) | $ | 11,901 | |||||||||
|
For The Year Ended December 31, 2011:
|
||||||||||||||||||||
|
Reserve for Doubtful Accounts
|
$ | 1,824 | $ | 2,595 | $ | 70 | $ | (1,293 | ) | $ | 3,196 | |||||||||
|
Reserve for Sales Returns
|
$ | 3,406 | $ | 26,610 | $ | - | $ | ( 23,873 | ) | $ | 6,143 | |||||||||
|
(1)
|
Represents additions due to the reverse merger on December 13, 2011.
|
|
(2)
|
Represents write-offs of specific accounts receivable and actual returns.
|
Note 17
Subsequent Events:
On February 13, 2014, the Company, LCA-Vision Inc. (NasdaqGS: LCAV), a Delaware corporation (“LCA”), and Gatorade Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of the Company (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) under which the Company has agreed to acquire LCA. Pursuant to the Merger Agreement, and subject to the satisfaction or waiver of the conditions therein, Merger Sub will be merged with and into LCA (the “Merger”), with LCA surviving as a wholly-owned subsidiary of the Company.
At the effective time of the merger, each outstanding share of LCA common stock (other than dissenting shares, treasury shares, any shares owned by the Company and its subsidiaries, and shares owned by a subsidiary of LCA) will be cancelled, and the shareholders will receive $5.37 in cash, without interest. Immediately prior to the effective time of the Merger, each outstanding option to acquire common stock granted under any LCA equity incentive plan, whether vested or exercisable, that is outstanding will be cancelled and converted into the right to receive an amount in cash, without interest, equal to the product of (i) the excess, if any, of $5.37 over the per share exercise price of the option multiplied by (ii) the total number of shares of common stock subject to the option. Also immediately prior to the effective time of the Merger, each outstanding share of restricted stock unit award or other right to receive common stock granted under any LCA equity incentive plan, whether vested or exercisable, will be cancelled and converted into the right to receive $5.37 per share in cash, without interest. The $5.37 per ownership interest price represents a premium of 34% over the closing price of LCA common stock on February 12, 2014, or an approximate purchase price of $106.4 million for all LCA stock and equity instruments described above.
The Company intends to fund this transaction through a new $85 million senior secured credit facility including a $10 million revolving credit facility and a $75 million four-year term loan, as well as through existing cash balances. However, the Merger is not conditioned upon the Company receiving such financing.
The Merger Agreement contains customary representations, warranties and covenants by both the Company and LCA. The parties’ obligations to complete the Merger are contingent upon customary closing conditions, including the approval of the Merger and the adoption of the Merger Agreement by the holders of a majority of the outstanding shares of LCA common stock, and the expiration or termination of the applicable Hart-Scott-Rodino Antitrust Improvements Act waiting period. The boards of directors of both the Comapny and LCA have voted unanimously in favor of the transaction, which is expected to close in the second quarter of 2014.
The Merger Agreement also contains a 30-day “go-shop” period, which runs from the date of the Merger Agreement through March 15, 2014 (the “Go-Shop Period”). During this period, LCA may initiate or solicit alternative proposals from third parties for the sale of LCA (“Alternative Proposals”). However, starting on March 16, 2014, LCA will become subject to customary “window-shop” restrictions on its ability to solicit and act with regard to Alternative Proposals, although LCA may continue to engage in negotiations with third parties that submitted Alternative Proposals during the Go-Shop Period or respond to an unsolicited Alternative Proposal under certain circumstances.
The Merger Agreement includes defined termination rights for both the Company and LCA. Under certain specified circumstances, LCA is entitled to terminate the Merger Agreement to accept an Alternative Proposal. The Merger Agreement includes a termination fee of approximately $3.2 million, plus up to $1 million in expenses, payable under certain specified circumstances, including if LCA terminates the Merger Agreement in order to enter into a definitive agreement with an alternative buyer, if the Company terminates the Merger Agreement for LCA’s board of directors' failure to reaffirm its recommendation of the transaction with the Company, or as a result of LCA’s uncured breach of representations, warranties and covenants in the Merger Agreement.
F-35