UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X]           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 20102012
OR
 [  ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission file number: 0-11635
 
PHOTOMEDEX, INC.
(Exact name of registrant as specified in its charter)
 
Nevada
(State or other jurisdiction
of incorporation or organization)
 
59-2058100
(I.R.S.  Employer
Identification No.)
 

147 Keystone Drive, Montgomeryville, Pennsylvania 18936
(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:

 
 
Title of each class
NoneCommon Stock
 
Name of each exchange
on which registered
NoneNasdaq Global
Select Market, TASE
 

Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.01 par value per share
(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 [ ] 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 [ ] 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 [__]

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.  [X]

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

Yes[    ]Yes [X] No [__]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 Large accelerated filer [__]Accelerated filer [__][X] 
    
 Non-accelerated filer [__]Smaller reporting company [X][  ] 

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

Yes [ ] No [X]

The number of shares outstanding of our common stock as of June 30, 2010,29, 2012, was 2,772,63721,881,182 shares. The aggregate market value of the common stock held by non-affiliates (2,162,841(12,324,609 shares), based on the closing market price ($5.21)12.15) of the common stock as of June 30, 201029, 2012 was $11,268,402.$149,743,999.

As of March 30, 2011,15, 2013, the number of shares outstanding of our common stock was 3,069,749.21,043,947. The closing market price of our common stock as of March 15, 2013 was $16.17.




 
 

 


 
Table of Contents
 
    
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Part I    
 
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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 "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:
forecasts of future business performance, consumer trends and macro-economic conditions;
descriptions of market and/or competitive conditions;
descriptions of plans or objectives of management for future operations, products or services;
our estimates regarding the sufficiency of our cash resources, expenses, capital requirements and needs for additional financing and our ability to obtain additional financing
our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;
our ability to obtain and maintain regulatory approvals of our products;
anticipated results of existing or future litigation; and
descriptions or assumptions underlying or related to any of the above items.
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 or the date of the document incorporated by reference into this Annual Report o 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
 
Our Company
 
We arePhotoMedex, Inc., re-incorporated in Nevada December 30, 2010, originally formed in Delaware in 1980, is a Global Skin Health Solutions™global skin health company that providesproviding integrated disease management and aesthetic solutions through innovative laser systems, light-based devicesto dermatologists, professional aestheticians and science-based skincare products. Through our relationships with dermatologistsconsumers. We provide proprietary products and plastic surgeons, our productsservices that address multiple skin diseases and skin conditions including psoriasis, vitiligo, acne and sunphoto damage. Our experience in addressing these diseases and conditions in the physician market has allowed usprovides the platform to expand our products and services to provide skin health solutions to certain non-physician markets.spa markets, as well as traditional retail, online and infomercial outlets for home-use products.
 
Our History
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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 and skin rejuvenation. We also offer a professional product line for acne clearance, skin tightening, psoriasis care and hair removal sold to physician clinics and spas.
 
We were organized in 1987 and through 1999 were principally a research and development companyOn December 13, 2011, or the Merger Date, we closed the merger with insignificant end-user revenue. In January 2000, the FDA issued a 510(k) clearance for the XTRAC laser system, an important milestone in our history. The XTRAC was a breakthrough technology designed to treat psoriasis using targeted narrow band UVB light. Despite receiving FDA clearance, our ability to commercialize the XTRAC was limited dueRadiancy, Inc, formerly private company. As of December 13, 2011, after giving effect to the lackreverse acquisition and the issuance of insurance reimbursement available forPhotoMedex, Inc. common stock to the treatment, a key driver inshareholders of Radiancy, Inc., we had 18,820,852 shares of common stock issued and outstanding, with the acceptance by dermatologistsPre-merged PhotoMedex, Inc. shareholders collectively owning approximately 20% and their psoriasis patients. We undertook a prolonged effort to establish insurance reimbursement, an effort that would ultimately take until 2007 for the Blue Cross Blue Shield Association to include the XTRAC in its National Reference Policy and until 2008 for allformer Radiancy, Inc. stockholders owning approximately 80%, of the Blue Crossoutstanding 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 Blue Shield Plans“Pre-merged Radiancy” mean PhotoMedex, Inc. and virtually all other major plansRadiancy, Inc., respectively, prior to issue policies covering the system.Merger Date.
 
From our organization through early 2009, we augmented our business through a series of acquisitions which expanded our product suite to include skincare and LED (Light Emitting Diode) product lines. While these acquisitions, along with the development and growth of the XTRAC business, have significantly increased our revenues over this time, the limited integration of the sales and marketing teams which were previously product-focused, coupled with an emphasis on short-term goals over long-term strategy, has resulted in a history of losses.
Our Key Strategies
 
Our technologies, products and research efforts are directed to addressing a worldwide aesthetic industry valued at $34 billion annually. We concentrateprovide 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 and skin rejuvenation. 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 2012, we began to benefit from the impact of these marketing methodologies and expertise on our strategic efforts primarily in the physician market both domesticallyXTRAC® Excimer Laser and internationally. Supporting those efforts we have initiated a renewed commitmentNEOVA® topical skin care lines while continuing to innovation, whereby we lookrealize organic and geographic growth of additional brands.
Skilled Direct Sales Force to maximize the application ofTarget Physician and Professional Segments
The merger has allowed us to blend our technologies and utilize the significant scientific resources available to us in each of

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our product areas. And, finally we look to leverage our experience and substantial product advancements in the physician market into non-physician based markets, or alternate channels, that may benefit from those technological advancements.
Establishment of a Leaner, Highly Trained Sales Force
In the U.S. we market and sell our products through a direct sales organization capable of addressing each product area with specific expertise. Our focus on enhanced training of our sales organization has increased our ability to drive sales and to support our customer base with a leaner and more cost-effective sales force since the strategy change in 2009.
Our growing sales force consists today of 32 direct sales representatives led by an experienced sales management team of eight professionals and supported by a marketing organization consisting of seven employees.
Expanded International Capabilities
In the third quarter of 2009, we realigned our international operations and selling approach, and the once limited capabilities of the international organization have been enhanced through two initiatives.
First, we have entered into an expanded management relationship with GlobalMed with respect to our laser and light-based devices. GlobalMed is an international distribution and management company focused on creating increased market opportunity through the engagement and management of local in-country distributors and providing assistance in expediting regulatory approvals. Historically, GlobalMed managed our distribution relationships in the Pacific Rim for the XTRAC and VTRAC product lines, which represented a majority of our total international device sales. As a result of its success in managing our Pacific Rim distribution relationships, we have now expanded its responsibilities to include all of our laser- and light-based devices in substantially all markets outside of the U.S. GlobalMed’s efforts are supported by our internal organization and by GlobalMed employees in major regions of the world.
Second, we have undertaken significant efforts to expand the international reach of our skincare business in both the physician and consumer channels. We have reformulated our clinical skincare products by eliminating certain preservatives and other ingredientsunique expertise in order to comply with international regulations. Our skincare product packagingstrengthen revenue lines, enable cross-selling and drive development opportunities for future growth. Pre-merged PhotoMedex has long been redesignedactive in physician sales, having developed a portfolio of medical devises and topical formulations that are provided under various financial arrangements primarily to meet international regulations,dermatologists and 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, 48-person, physician-targeted sales force that is currently selling into 3,000 U.S. locations. Since the December 2011 reverse merger, we have registeredare 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, in certain foreign jurisdictions. Our sales approach incorporates procedure-specific protocols for in-office treatments coupled with outpatient product kits designed for patients to continue to use the products at home. The protocols utilize our skincare products and Omnilux professional and hand-held LED light systems in a regimen designed to addresswhich provide skin rejuvenation, acne clearance, skin brightening, eye treatment, hair removal and recoveryother services for dermatologists and photoaging repair. In these unique protocols, our copper peptide complexes, DNA repair enzymes and LED technology provide patientsmed 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 optimized treatment outcomes.Pre-merged PhotoMedex’s domestic U.S. sales infrastructure can expand the use of the LHE® products in multiple sales channels.
 
Development of Alternate Channels
Certain of our technologies have applications outside our historical physician based sales channel, and we look to continue to expand our sales into these market opportunities.
Our sales capabilities relating to non-physician channels are comprised of an internal sales organization of three professionals and an external organization of channel-specific partners who encompass the knowledge and expertise required of their unique markets. Through these sales capabilities we have the ability to address such alternate channels as the consumer skincare market through on-line, television and retail channels as well as the indoor tanning and spa markets through major distribution partners.
Renewed Commitment to InnovationExpertise in Global Consumer Marketing
 
We believe that our innovative products have been crucial to our ability to succeed in the extremely competitive skin health market. Under the guidance of our Scientific Advisory Board, future indications for oura 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 being explored as well as potential combinations of our products withsold at roughly 5,000 retail outlets across 55 countries, through infomercials and print, radio other dermatological treatments. We have recently launched, or are workingtelevision advertising worldwide, online, on innovative uses for our technologies that we believe will allow us to leverage the success of our current products in the marketplace.home shopping channels and at stores and kiosks.
 

 
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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 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
XTRAC Velocity.    PriorUltimately, due to June 2009,the sales channel and product line synergies between the Radiancy and Pre-merged PhotoMedex businesses, we offeredbelieve that the XTRAC Ultra as our only solution forcombination of these two businesses will enable a revenue and earnings growth potential that neither firm would be 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 treatmentevolving needs of psoriasis. The XTRAC Ultra is most appropriate for use on patients with mildcustomers. 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 moderate psoriasis. We did not have a practical solution which physicians could use to treat patients with severe psoriasis. Over $1 billion is spent annuallycommercialize such products in the U.S. based on devicehaving submitted safety and drug treatments intended for severe psoriasis, many of which have systemic side effects or FDA warning labels. To deliver a safeefficacy information to the FDA. See Government Regulations – Regulations Relating to Products and more cost-effective treatment for severe psoriasis, we launched the XTRAC Velocity, an innovation of the XTRAC Ultra. The XTRAC Velocity is three times faster and more powerful than the XTRAC Ultra, making it ideal for practices having a greater mix of severe patients or having a significantly larger volume of psoriasis patients overall. With the innovation of the XTRAC Ultra into the XTRAC Velocity, we now have a psoriasis solution for physician practices of all sizes and patient demographics.Manufacturing discussion below.
 
In addition, beginningFull Product Life Cycle Model
Since 2004, we have introduced a portfolio of professional-grade consumer products for hair removal, acne treatment, skin rejuvenation and facial skin tightening. These products - marketed globally under the no!no!® brand - are built upon the same technology platforms that are used in early 2010, Dr. John Y. M. Koo,medical devices for physicians and aestheticians. We have been able to bring the Directorclinical solutions used by physicians and med spas to the consumer home-use market by successfully miniaturizing equipment into handheld 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 dermatologists 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 Psoriasis Treatment Centernew 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 Universityneed 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 California San Francisco Medical Center, initiated a clinical study to demonstrate the effectivenessProduct Innovation’s 2011 “Product of the XTRAC Velocity in combination with the drug Clobex from Galderma for patients with severe psoriasis. Dr. Koo has published numerous articles and book chaptersYear” award in the field of psoriasis. The goal of this study is to achieve better patient results in fewer treatments than either the drug or the XTRAC Velocity can achieve as a stand-alone treatment. If successful, the end result will be greater efficacy and convenience for the patient, which we believe will result in an increase in the use and applicability of the XTRAC Velocity in severe psoriasis.
New Skincare ingredients and combinations.      In September 2010 we launched a new line of Neova skincare products that uniquely combine two key ingredient areas: DNA repair enzymes and copper peptides. These products are designed to activate self-healing, boost essential skin cell function and maximize results for sustained skin health.
DNA Repair.    UV-induced stresses to the skin can cause damage to skin cells and their DNA. The first natural line of defense against the damaging effects of the sun is melanin, which reflects or absorbs UV light and prevents damaging UV rays from striking the DNA in the cell nucleus. When UV light does strike DNA, the interaction produces a chemical in the DNA bases, which alters the genetic code. Such alterations can interrupt or destroy the cellular repair process. The consequences of unrepaired DNA damage for skin cells can be severe and include discolorations, wrinkles and other signs of photodamage.At Home Beauty Treatment category.
 
Our DNA Repair topical products, which include DNA Nourishing LotionGlobal Growth Strategies
The global market for aesthetic devices and DNA Total Repair, use innovative technologyprocedures continues to address DNA damageexpand, driven by activatingan individual desire to improve one’s appearance; a higher disposable income being spent on aesthetic treatments; an aging population in the skin’s natural recovery process after damage has occurred but before the secondary result, such as erythema or skin cancer, appears. Modern sunscreen products frequently combine UV filters with one orindustrialized world that desires a more antioxidants, which provideyouthful look; a degree of secondary photoprotection against oxygen radicals. Our DNA Repair products activate the DNA repair process using a liposome system specifically engineeredyounger generation seeking preventive solutions for the transferenceinevitable aging process; technological advances making products available to a consumer market that were previously only possible at the physician level; an increasing number of DNA repair enzymes into epidermal cellsconditions, 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 enhance DNA repaira greater number of UV-irradiated skin.individuals.
 
Our DNA Repair products help skin continuously repair its appearance in three advanced ways. First, the products heighten the skin’s natural repair process, which, over time, results in a reduction in the visible signs of aging, including fine lines, wrinkles and discolorations. Second, the products help skin continuously repair the appearance of past damage caused by UV exposure before it becomes permanent. Finally, the products, which contain a blend of an anti-inflammatory and a powerful antioxidant, block the activation of the two enzymes, elastase and matrix metalloproteinase, which degrade collagen and elastin and destroy the skin’s supporting structure, leading to wrinkle formation.
Omnilux Home Use Devices.    Consumers have long sought products that would help them look their best conveniently and affordably. Since the prices of professional procedures performed in a salon, spa or medical office can be high, and traveling to these establishments for treatment typically entails an additional commitment of time for the consumer, products developed for home-use often best meet these needs. The Omnilux New-U for treating peri-orbital wrinkles was cleared by the FDA for over-the-counter sale directly to the consumer on March 3, 2008. The Omnilux Clear-U for treating acne was cleared by the FDA for over-the-counter sale directly to the consumer on January 16, 2009. We are continuing to advance the technology by reducing the size of the products even further and thereby reducing their manufacturing costs. Such advancements should provide greater access to the technology to the consumer.

 
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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
Expand into additional geographic markets. We intend to continue implementing a global multichannel sales and marketing strategy. We have sold over 4 million no!no!® units to consumers, the majority of these over the past three years. Growth has been largely driven by North America (with a population of 314 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 2011, we launched the no!no!® brands in the UK and experienced significant growth in the UK during 2012. In addition, in 2012, we launched the no!no!® brands in South Korea. We intend to continue to expand our presence in additional geographies during 2013.
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 we recently 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. Fully 3,000 multi-tiered retail doors in the Japanese market, more than 800 doors in Argentina, the UK market's success in expanding from major department stores like Selfridges, Harrods, John Lewis and Boots stores to Argos' 600 additional doors in 2012 third quarter and the expansion of our kiosk presence in Canada from about 60 stores to just over 80 stores in 2012. 
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.
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!® brands or from our NEOVA® and XTRAC® technologies—using the same marketing foundation.
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.
Leverage technology development in the physician and professional segments to drive new products for the consumer channel. We believe that our consumer line is in the early stages of market penetration. We hold 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
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.
°
In 2012 we launched a direct to consumer 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.
°
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.
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.
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.
Professional Segment
Use pre-merged PhotoMedex’s 48-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.
Our Products
 
OurWe emphasize the development of physician-endorsed skin care products have applications in two general areas: management of skin diseases and conditions, and skincare.based on science. Once cleared by the FDA for use, 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, address both the management of skin diseases and conditions and skincare areas.
Our Ability to Treat Skin Diseases and Conditions
Our XTRAC System
In January 2000, we obtained FDA 510(k) clearance to market our XTRAC excimer laser system for the treatment of psoriasis, a chronic, autoimmune disease that appears on the skin. Indications for the XTRAC were later expanded to include the treatment of vitiligo, a medical condition that causes the skin to lose color; atopic dermatitis (eczema), an inflammation of the skin; and leukoderma, an acquired condition with localized loss of pigmentation of the skin that may occur after any number of inflammatory skin conditions, including burns and scars.
According to the National Psoriasis Foundation, psoriasis afflicts as many as 7.5 million Americans and 125 million people worldwide. While the exact cause of psoriasis is unknown, the immune system and genetics play major roles in the development of this disease. Most researchers agree that the immune system is mistakenly triggered, which causes the acceleration of skin cell growth. Normal skin cells mature and fall off the body in 28 to 30 days. In a patient with psoriasis, skin cells take only three to four days to mature and instead of falling off, build up on the surface of the skin, forming psoriatic lesions.
Our XTRAC system applies a concentrated dose of UVB radiation directly to the diseased skin at a high intensity, which temporarily stops this excess cell buildup and allows the diseased skin to return to a more normal state during a term of remission. Remission length varies from several months to in excess of one year. Our XTRAC system utilizes a 308-nm light wavelength, which studies have shownare expected to be an optimal wavelength to treat psoriasis effectively.
More than one-quarter of people with psoriasis have cases thatsignificant growth drivers for us. Our primary technology and product platforms are considered moderate to severe. We offer two versions of our XTRAC system: the XTRAC Ultra, which has been established as one of the most clinically effective therapies for treating patients with mild to moderate psoriasis, and the XTRAC Velocity, launched in June 2009, which is three times faster than the XTRAC Ultra and enables physicians to safely treat severe psoriasis patients conveniently and effectively without the significant side effects of other more expensive modalities.
Vitiligo, which affects up to 2% of the world population, develops when cells called melanocytes die or are destroyed by the body’s immune system. As the cells die, an area of skin or hair turns white because the cells no longer make pigment. The XTRAC treatment of vitiligo, delivered in much the same way as when treating psoriasis but requiring more treatments, re-ignites the melanocytes causing pigment to return to the skin. We do not yet know how long the positive effects of our treatment for vitiligo will last on an individual, but based on anecdotal data we believe the re-pigmentation may last for several years. Vitiligo is genetically inherited and is thought to be triggered by certain unknown environmental factors. There is presently no known cure for vitiligo.
Our VTRAC System
Our VTRAC system is a lamp-based product line that is sold principally outside of the U.S. and is used to treat the same diseases and conditions as the XTRAC laser. This product offering provides an effective, non-laser option to compete against lower-priced UVB lamp-based international competitors.
Our Omnilux Products
We market a family of products under the brand name Omnilux that produce certain therapeutic wavelengths of light through LEDs. Our Omnilux technology is based on narrowband LEDs and the range of products include the Omnilux Blue (blue light), Omnilux Revive (red light), Omnilux Plus (infrared light) and Omnilux PDT (red light-marketed only outside the U.S.). The professional products consist of a base unit upon which an interchangeable LED head is attached. Each detachable treatment head delivers pure, optimized,

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narrowband light via a matrix of LEDs carefully positioned to deliver a measured dosage of light to the treatment area. In addition, we have developed two hand-held home-use devices, the Omnilux New-U for the treatment of peri-orbital wrinkles (skin rejuvenation) and the Omnilux Clear-U for the treatment of acne.
Our Omnilux products provide treatments for acne and actinic keratosis and also offer skin health solutions addressing skin rejuvenation, anti-aging, post-procedure care and wound healing. The Omnilux therapy stimulates the body’s own cellular mechanisms through a process known as photobiomodulation. The therapy produces nearly no heat, is non-invasive and non-ablative and causes no damage to sub-dermal tissue. We may promote the Omnilux for treatment of acne in markets outside the U.S.described below.
 
Acne is the most common skin disorder in the U.S., affecting as many as 50 million Americans. The bacteria within acne produce chemicals, that when stimulated by the blue light of the Omnilux blue, neutralize the bacteria. With the bacteria eliminated, the inflammation of acne subsides. Red light is also used in the treatment of acne due to its anti-inflammatory properties. The handheld Omnilux Clear-U device allows the user to switch between red light and blue light in the same device.
Actinic keratosis is considered the earliest stage in the development of certain skin cancers. The treatment for actinic keratosis lesions ranks as one of the most frequent reasons that people consult a dermatologist. Owing to more stringent regulatory requirements in the U.S., the Omnilux is used more prevalently abroad for the treatment of actinic keratosis.
Our Skin Health Solutions—Neova Therapy and Omnilux Products
Skin Rejuvenation and Anti-Aging
The highly competitive clinical skincare market has been dominated by anti-aging products. They continue to lead the skincare market with over $30 billion in estimated global sales. Over the last seven years, the skincare market has witnessed an increasing convergence of the personal care and pharmaceutical industries, which has led to the emergence of new hybrid markets where actives and ingredients have been leveraged from pharmaceuticals into science-based aesthetic products. Our Neova Therapy product line consists of anti-aging and skin rejuvenation products that we specifically developed in response to the demand from physician customers for a comprehensive approach to medically directed skincare. The Neova Therapy line of copper peptide complex products includes moisturizers and serums that are complemented by cleansers, toners and masks for an integrated approach to skincare. We also market a line of facial peel products. We have added products containing DNA repair enzymes to our line of Neova products. DNA repair enzymes are designed to help cellular components of skin recover from past damage. They may also help restore thymine dimers, which are pieces of DNA that have been broken by UV exposure. We have recently added products which combine the strengths of DNA repair enzymes with copper peptides. Our Omnilux Revive and Omnilux Plus products deliver wavelengths of light in the red and infrared spectrums which have been proven to stimulate cellular mechanisms responsible for tissue repair and regeneration. The Omnilux products are used both as stand-alone treatment as well as in conjunction with our Neova line of products.
Post-Procedure Care and Wound Healing
The global market size for advanced/active wound care products is estimated to be $4.9 billion and growing at a 10% annual rate. Within our Neova line, our Complex Cu3 topical products provide a comprehensive approach to post-procedure care and allow us to differentiate our line of skincare products on the basis of our proprietary copper and manganese peptide technologies. Studies have indicated that the skin heals more rapidly with the use of copper peptide compounds than with a placebo treatment. Our Complex Cu3 Post Laser Lotion, Intensive Repair Crème, Cleanser and Hydrating Gel products containing copper peptide compounds are used to treat patients following chemical peels, microdermabrasion and laser treatments. Our Omnilux professional and handheld units also provide wound healing results. Trials have clearly displayed that 633 nm light not only enhances DNA synthesis, but also augments cellular tissue regeneration pathways, including collagen deposition. Light at 830nm is known to stimulate tissue, remodel cell lines and influence remodeling and restructuring of collagen. Study groups have shown that near-infrared light (830nm, Omnilux plus) combined with red light (633nm, Omnilux revive) accelerates the wound healing response and therefore offers an effective treatment for the healing of compromised tissue. The Omnilux handheld New-U combines both wavelengths in a single device.

 
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Sun ProtectionWe evaluate four principal criteria in determining where to allocate product development resources:
 
Ti-Silc
demonstrable clinical efficacy and safety;
intellectual property protection;
cost of goods; and
market opportunity.
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 Z-Silc area 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:
Our Thermicon® technology and no!no!® product line;
Professional equipment built upon our Light and Heat Energy (LHE®) technology which is also incorporated into some of our consumer devices;
Our XTRAC® technology to treat psoriasis and vitiligo;
Our topical NEOVA® formulations to combat UV-induced damage causing premature skin aging; and
Light-emitting diode (LED) technology used in our Omnilux™ and Lumière™ Light Therapy systems as well as in some of our consumer devices.
Beyond these, we provide the Iamin® line of advanced sun protectionhair care products, which are recommended by dermatologistsformulated with a clinically tested Triamino Copper Complex™ in order to promote conditions for hair growth. These products are targeted to the hair transplant and plastic surgeonsrestoration 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 assistaddress 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 the prevention of sun exposurebody areas that can leadbe 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.
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.
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.
High 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.
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! Hair Removal Classic™ to the no!no! Hair Removal 8800™ to the no!no! Hair for Men™ to the no!no! Plus™ and more—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 numberchange in growth trajectory, we will likely possess new, enhanced technologies that are synergistic with our platform.
The no!no!® line of problems including age spots, hyperpigmentation, premature agingproducts 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 melanoma.topical products.
LIGHT AND HEAT ENERGY (LHE®)
 
Our Surgical Productsproprietary 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.

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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.
Non-invasive, non-abrasive treatments;
No down time;
Clinically proven results;
Safety and efficacy for all skin types;
Especially suited for Skin Types V-VI; and
Easy to use
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.

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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 narrow 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 narrow-band UVB, which studies suggest can clear psoriasis faster and produce longer remissions than broad-band UVB. In comparison to broad-band UVB, narrow-band UVB may also require fewer treatments per week to produce the desired effect.
We market two excimer laser brands: the XTRAC Ultra and the XTRAC Velocity. The Velocity is a faster machine, allowing clinicians to treat a greater surface area in a shorter period of time. It is designed primarily for severe cases 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. The National Psoriasis Foundation recommends 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.
Topical therapies:
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.
Phototherapy:
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: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.
Ongoing Clinical Trial
The XTRAC® Excimer Lasers are particularly beneficial to 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, and has been shown to achieve results in as little as two weeks. Vectical Ointment is a topical treatment for mild-to-moderate plaque psoriasis. The trial is led by Dr. John Koo and Dr. Tina Bhutani 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 11 of an anticipated 30 patients to be enrolled in the XTRAC combination trial were reported in March 2011. Of these, 10 patients completed six weeks of treatment, and six completed 12 weeks. Approximately 83% of patients who completed all 12 weeks achieved better than PASI-75. These results were presented by Dr. Koo during the 20th Annual Meeting of the Photomedicine Society.
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.
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.

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The DNA repair enzymes contained in the NEOVA formulation have several objectives:
Continuously repair and enhance skin’s natural processes;
Protect from UV immunosuppression;
Restore barrier function;
Promote collagen regeneration and skin elasticity; and
Assist in correcting and improving cell metabolism.
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 25 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.
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.

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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 marketmarkets in which our XTRAC system competes iswe participate are highly competitive. Certain of our competitors are larger than us and have substantially more resources. However, the new combined company, due to the recent merger, positions us 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), Palomar Medical Technologies Inc. (PMTI-NASDAQ) and Solta Medical, Inc. (SLTM-NASDAQ), 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 other productsno!no!®, they then become tasked with the challenge of building the marketing for that product. We invested roughly $61 million in 2012 in marketing and advertising. Furthermore, our comprehensive intellectual property position may serve as a deterrent to companies.

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We may also compete with pharmaceutical compounds and methodologies used to treat psoriasis, vitiligo, atopic dermatitis and leukoderma, includingan array of skin conditions addressed by our professional products. Such alternative treatments may be in the form of topical treatments,products, systemic medications, and other phototherapies. We believe thatphototherapies from both large pharmaceutical and smaller laser companies. Currently, our XTRAC system favorably compete withis believed to be a competitive therapy to alternative treatments in the treatment of psoriasis and vitiligo primarily on the basis of its recognized clinical effectiveness, as well as on the basis of itseffect, cost-effectiveness and reimbursability. We have concentrated our marketingreimbursement. Potential competition for us in this category could come from Biogen Idec Inc. (BIIB-NASDAQ), Centocor, Inc. (a Johnson & Johnson company) and efforts on psoriasis and vitiligo. General market acceptance of our XTRAC system treatment for atopic dermatitis and leukoderma will be dependent on our ability to establish, with the medical and patient communities, the efficacy of our XTRAC system as a preferred treatment modality that is likewise cost-effective and reimbursable.
We also face direct competition from other companies, including large pharmaceutical companies and small laser companies,Abbott Laboratories (ABT-NYSE), which are engaged in the research, developmentR&D and commercialization of treatments for psoriasis, atopic dermatitis, vitiligo and leukoderma.in these areas. In some cases, thosethese companies have already received FDA approval for products 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.
Various other companies are now marketing light-based phototherapy treatment products. Other devices include pulse-dye lasers, lamp-based systems, intense pulsed systems and standard UVB systems using fiber-optic delivery systems. We expect that other devices may enter the market in the future. All of these technologies will continue to evolve with time and we cannot say how much these technologies will impact us. Non-laser systems are typically reimbursed at substantially lower rates.

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Competition in the wound care, skin health and hair care markets is intense. Our competitors include well-established pharmaceutical, cosmetic and healthcare companies such as Obagi, La Roche Posay, Pavonia, Decleor, Murad and Allergan. These competitors have substantially more financial and other resources, larger research and development staffs and more experience and capabilities in researching, developing and testing products in clinical trials, in obtaining FDA and other regulatory approvals and in manufacturing, supply chain control, marketing and distribution than we do. A number of smaller companies are also developing or marketing competitive products. Our competitors may succeed in developing and commercializing products or obtaining patent protection or other regulatory approvals for products more rapidly than we can. In addition, competitive products may be manufactured and marketed more successfully than our potential products. Such developments could render our existing or potential products less competitive or obsolete and could have a material adverse effect on our business, financial condition and results of operations.
 
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. Many of these companies are substantially larger and have substantially greater resources than we do.
Our LED products also face substantial competition. We compete based on quality of design, manufacturing and clinical research. In addition, we have a broad intellectual property position which may deter reputable companies with LED products from entering the market.
 
Manufacturing
 
We manufacture our excimer laser products and our excimer lamp product at our 8,00011,300 sq. ft. facility in Carlsbad, California; we have also leased another facility of approximately 6,000 sq. ft. that is nearby.California. We manufacture our excimer lamp product and 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 the International Organization for Standardization that represents the requirements for a comprehensive management system for the design and manufacture of medical devices. We believe that our present manufacturing capacity at these facilities is sufficient to meet foreseeable demand for our products. We substantially outsource the manufacturing of our Skin Care products to OEM contract manufacturers.
 
WeFor 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 instruments are manufactured in accordance with FDA Quality System Requirements 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 professionalLED product offerings areequipment 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 more thansufficiently 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.supplier for the purpose of offsetting this single-supplier approach.
 

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Research and Development
 
As of March 30, 2011,18, 2013, our research and development team, including engineers, included 13consisted of 11 employees. We conduct research and development activities at three of our facilities.facilities located in Montgomeryville, Pennsylvania, Carlsbad, California and Hod Hasharon, Israel. Our research and development expenditures were approximately $1.3$2.9 million in 2010,2012, $1.1 million in 20092011 and $1.1$0.8 million in 2008.2010.
 

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Our research and development activities are focused on:
 
the utilization of existing technologies to develop additional consumer and professional applications and products;
  
the application of our XTRAC system to the treatment of inflammatory skin disorders;
 
  
the development of complementary devices to further improve the phototherapy treatments performed with our XTRAC and other light-based systems;
 
  
the development of new skin health and hair care products; and
 
  the development of additional products and applications, whether in phototherapy or surgery, by working closely with our scientific advisory board,Scientific Advisory Board, medical centers, universities and other companies worldwide.
 
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 business segmentproduct 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, 2010,2012, we had 42 domestic and foreign136 issued patents which serve to help protect the technology of our businesses in phototherapy, skin health and hair care and surgical products and services. As of December 31, 2010, we had 2934 patent applications pending inapplications. In the U.S. and abroad. We have let patents and patent applications for markets not offering significant market potential lapse.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 federally227 trademarks, either registered 35or being registered, in markets around the world that we intend to maintain in support of our products. These include 45 trademarks issued in the U.S. as(including 33 for Pre-merged PhotoMedex) and 182 trademarks issued in the rest of December 31, 2010. In addition, as of December 31, 2010, we had 121 trademark registrationsthe world (including 138 for our products in foreign jurisdictions. Trademarks for products that are not commercially important may be allowed to lapse.Pre-merged PhotoMedex).
 

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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 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 FDA 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, surgical lasers and other products currently under development by us. Product development and approval within this regulatory framework takes a number of years and involves the expenditure of substantial resources.
 

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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 (510(k)) (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, post-market surveillance, patient registries and FDA guidelines. Some Class III devices are 510(k)-exempt. 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 PlusPlus™ Excimer Laser System. In October 2004, the FDA granted clearance for the XTRAC UltraUltra™ (AL 8000) Excimer Laser System and, in March 2008, we received 510(k) clearance for the XTRAC VelocityVelocity™ (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 preamendmentspre-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.
 

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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.
 

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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 ISO 13485/EN46001 certification for our XTRAC laser system, VTRACVTRAC™ lamp system, Omnilux LED system and our diode laser system. This certification authorizes us to affix a CE mark, which is a mandatory conformity mark for products placed on the market in the European Economic Area, to these products as 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 FDA Act and the regulations promulgated there and under and 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 three devices (e.g. wound care dressings) subject to 510(k) clearance, seven products (e.g. sunscreen products) that contain drugs approved for use in over-the-counter products, and one prescription drug. 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.
 

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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

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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, wherewhen 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.
 

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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

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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,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,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.
 

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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

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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.
 

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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.
 

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As of December 31, 2010,2012, the national rates were as follows:
 
  
96920 – designated for: the total area less than 250 square centimeters. CMS assigned a 20102013 national payment of approximately $176.80$158.55 per treatment;
 
  
96921 – designated for: the total area 250 to 500 square centimeters. CMS assigned a 20102013 national payment of approximately $177.49$174.54 per treatment; and
 
  96922 – designated for: the total area over 500 square centimeters. CMS assigned a 20102013 national payment of approximately $254.36$241.90 per treatment.
 
The national rates are adjusted by overhead factors applicable to each state.
 
In addition to Medicare and Medicaid, consistent domestic private healthcare reimbursement is critical for significant growth in XTRAC system procedures. There were more than 151,000 procedures in 2010, 152,000 XTRAC procedures in 2009, 140,000 XTRAC procedures in 2008, 113,000 XTRAC procedures in 2007, 89,000 XTRAC procedures in 2006, 60,000 XTRAC procedures in 2005 and more than 50,000 XTRAC procedures in 2004 with the majority being covered by third-party reimbursement. There is presently substantial coverage for mild to moderate psoriatic lesions that cover to less than 5% of the body surface area. We are now focused on securing coverage for severe psoriatic lesions. In fact, Independence Blue Cross and Blue Shield have already approved the XTRAC for treatment up to 20% body surface area.
Recently, we have witnessed an increase in the payment of claims by insurers for the treatment of vitiligo. Among the 25 carriers we know to be reimbursing for excimer treatment of vitiligo are Aetna, United Healthcare, Blue Cross Blue Shield of California and of Texas. We are currently attempting to gather information necessary to determine the percentage of payors who have a favorable coverage policy for vitiligo.
Employees
 
As of March 30, 2011,18, 2013, we had 144177 full-time employees, which consisted of threetwo executive officers, 1118 senior managers, 6071 sales and marketing staff, 3541 people engaged in manufacturing of lasers, 10operations, 11 customer-field service personnel, 811 engaged in research and development, including seven6 engineers, and 1723 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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Item 1A.    Risk Factors
 
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.
 
Risks RelatedRisk Factors Relating to Ourthe Company’s Business
 
We have a history of losses, entertain the possibility of future lossesEconomic downturns and cannot assure you that we will become or remain profitable.
Historically, we have incurred significant losses and have had negative cash flows from our dermatological operations. To date, we have dedicated most of our financial resources to selling, general and administrative expenses. As of December 31, 2010, our accumulated deficit was approximately $124,564,000.

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Our future revenues and success depend significantly upon acceptance and adoption of our excimer laser systems for the treatment principally of psoriasis. Our XTRAC system for the treatment of this condition generates revenues, but those revenues have been insufficient under our consignment model to generate consistent, positive cash flows from our operationsdisruption in the domestic XTRAC business segment. Our future revenues and success depend on revenue growth from our revamped sales strategies in our dermatological business. Our ability to market our products and services successfully under our revamped strategies and the expected benefits to be obtained from our products may be adversely affected by a number of factors, such as unforeseen costs and expenses, technological changes, economic downturns, competitive factors or other events beyond our control.
There can be no assurance that we will be able to maintain adequate liquidity to allow us to continue to operate our business or prevent the possible impairment of our assets. We cannot assure you that we will market any products successfully, operate profitably in the future, or that we will not require significant additional financing in order to accomplish our business plan. Any failure to achieve and maintain profitability would continue to have an adverse effect on our stockholders’ equity and working capital and could result in a decline in our stock price or cause us to cease operations.
Recent adverse developments with respect to our industry and the global macro-economy generally have adversely affected our business and our liquidity, the effect of which has resulted in our need to obtain additional financing.
Beginning in 2008, the national and global economic downturn has resulted in a decline in overall consumer spending, a decline in access to credit and increased liquidity risks, all of which have impacted, and could continue to impact our business, financial condition and results of operations for the foreseeable future. Given our significant operating losses, negative cash flows and financial position at July 31, 2009, we required significant additional funds in order to continue to fund our operations.
In October 2009, we launched a private placement in which we received proceeds in that offering amounted to approximately $2.85 million. On March 19, 2010, we entered into a Term Loan and Security Agreement (the “Clutterbuck Agreement”) and a related secured term note with Clutterbuck Funds LLC (“Clutterbuck Funds”). Clutterbuck Funds LLC is a registered investment advisor based in Cleveland, Ohio. We received net proceeds of $2,373,000 in the transaction. The secured term note has a principal amount of $2.5 million (the “Term Note”), which accrues interest at a rate of 12% per annum. The Term Note requires us to make monthly payments of interest only. The principal matures in 18 months and may be prepaid without penalty at any time. The note is secured by XTRAC lasers that we have consigned to physician customers and that are not otherwise pledged to CIT Healthcare LLC and Life Sciences Capital LLC pursuant to our outstanding term notes with such lenders. In May 2010, we raised net proceeds of approximately $2.0 million through the issuance of 534,000 shares in an underwritten public offering headed by Ladenburg Thalmann. Finally, on March 28, 2011, Clutterbuck Funds agreed to extend the maturity date of its loan of to us, of which the principal of $2.5 million was to be paid at maturity. Previously, the loan matured on September 19, 2011; it will now mature on December 1, 2012. Starting in August 2011, we will begin monthly installments of principal.
These proceeds and cash flows from operations are expected to ensure our liquidity through the first quarter of 2012.
To maintain and expand our business, we may need additional financing and such financing may not be available on favorable terms, if at all.
We have historically financed our activities through working capital provided from operations, the private placement of equity and debt securities and from lines of credit. We believe that our cash balance and other existing financial resources, and revenues from sales, distribution, licensing and manufacturing relationships, should be sufficient to meet our operating and capital requirements through the first quarter of 2012.
However, our operating plan or debt repayment obligations may change and we may need additional funds sooner than anticipated to meet our operational needs and repayment obligations or to answer our capital requirements for expansion, including in the event that:

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operating losses continue because anticipated demand for our skincare products, including our Photo Therapeutics, or PTL, products, does not meet our expectations under our new sales strategies;
we fail to maintain existing, or develop new, customers or sales affiliates and alternate channels for the marketing and distribution of our skincare and PTL products;
we need to maintain or accelerate favorable, but costlier, growth of our revenues;
changes in our research and development plans necessitate unexpected, large expenditures;
the investor that holds the Convertible Notes does not convert the notes, thereby obliging us to have funds to satisfy the notes upon maturity on February 27, 2014;
costs to defend existing and unknown future litigation exceed our current planned resources; or
Debt financing for increased capital expenditures cannot be obtained.
If we need funds and cannot raise them on acceptable terms, we may not be able to:
execute our growth plan for our XTRAC system, Neova skincare products and Omnilux and Lumiere  PTL products;
expand our manufacturing facilities, if necessary, based on increased demand for the XTRAC system or new skincare or PTL products which may be introduced;
meet our debt obligations, including the obligation to repay all amounts outstanding under our Convertible Notes at maturity on February 27, 2014;
take advantage of future opportunities, including synergistic, accretive acquisitions;
respond to customers, competitors or violators of our proprietary and contractual rights; or
remain in operation.
We must secure the consent of the holder of the Convertible Notes to incur debt financing. This investor is not obligated to give consent and could prohibit us from issuing debt to raise capital. To raise additional equity financing, we must first offer our terms to this holder, called elsewhere the investor and, if this holder declines, or fails to accept, such terms, then we have 30 days in which to pursue subscriptions and another 30 days in which to consummate the subscriptions. Such delay may inhibit our ability to raise additional equity financing in a timely matter or at all.
Our laser treatments of psoriasis, vitiligo, atopic dermatitis and leukoderma, our skincare products and our PTL products and any of our future products or services may fail to gain market acceptance, whichmarkets could adversely affect our competitive position.
No independent studies with regard to the feasibility of our proposed business plan, including integration of the PTL products into our corporate operations or the reorganization of our sales strategies and sales force, have been conducted by third parties with respect to our present and future business prospects and capital requirements. We have generated limited commercial distribution for our XTRAC system and other products. It is still not established that the PTL devices targeted for the consumer market will be widely accepted in that market. We may be unsuccessful in continuing our 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. In addition, our infrastructure to enable such expansion, though stronger than in the past, is still limited.
Even if adequate financing is available and our products are ready for market, we cannot assure you that our products and services will find sufficient acceptance in the marketplace under our new sales strategies.

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We also face 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 our ability to increase our base of users and ensure they engage in optimal usage of our 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 is hindered.
While we have engaged in clinical studies for our psoriasis treatment and, based on these studies, we have gained U.S. Food and Drug Administration, or 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.
We have designed the XTRAC system so that a properly trained medical technician in a physician’s office may, under the physician’s supervision, safely and effectively administer treatments to a patient. In fact, the CMS lowered labor rates applied to the revenue value units applicable to the laser dermatological CPT codes are achieved through delegation to medical technicians. Nevertheless, 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 we 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 we are not successful, we 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.
We therefore cannot assure you that the marketplace will be receptive to our excimer laser technology or skincare products over competing products, services and therapies or that a cure will not be found for the underlying diseases we are focused on treating. Failure of our products to achieve market acceptance could have a material adverse effect on our business,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.

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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 ourthe Company’s products are highlyintensely 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 ourthe 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, Solta and Palomar. 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.
 
Competition in the wound care, skin health and hair care markets is intense. OurOther competitors include well-established pharmaceutical, cosmetic and healthcare companies such as Allergan, Inc., Obagi Medical Products, Inc., and Estee Lauder Inc. These competitors have substantially more financial and other resources, larger research and development staffs, and more experience and capabilities in researching, developing and testing products in clinical trials, in obtaining FDA and other regulatory approvals, and in manufacturing, supply chain control, marketing and distribution than we do.

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These companies may enjoy significant competitive advantages over us, including:
 
   
broad product offerings, which address the needs of physicians and hospitals in a wide range of procedures;
 
  
greater experience in, and resources for, launching, marketing, distributing and selling products, including strong sales forces and established distribution networks;
 
  
existing relationships with physicians and hospitals;
 
  
more extensive intellectual property portfolios and resources for patent protection;
 
  
greater financial and other resources for product research and development;
 
  
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;
 
  
significantly greater name recognition and more recognizable trademarks; and
 
  established relationships with healthcare providers and payors.
 
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.
 
Our successBecause a substantial portion of the Company’s revenue is dependent on intellectual property rights held by usgenerated from its consumer business, if it fails to accurately forecast consumer demand and ourtrends 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 be adversely affected by direct competition if we are unabledecline or our reputation may suffer. The success of our consumer product business depends to protecta 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 rights both domesticallyeconomic indicators may cause consumer spending to decline further, which could hurt its sales and internationally.profitability.
 
Our successThe 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 depend,be widely accepted in part,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 ourinvestment and therefore compromise the Company’s ability to maintainincrease its base of users and defendensure 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 patents. However,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 cannot guarantee thatmay 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 patents covering certain of our technologies and processes will not be contested, found to be invalid or unenforceable or would not be circumventable. Moreover, as our patents expire, competitors may utilize the technology found in such patents to commercialize their own products. While we seek to offset the losses relating to important expiring patents by securing additional patents on commercially desirable improvements, there can be no assurance that we will be successful in securing such additional patents, or that such additional patents will adequately offset the effectrole of the expiring patents. Further, pending patent applications areXTRAC system as a first-line or second-line therapy for treating psoriasis; or patients simply may not enforceable.elect to undergo psoriasis treatment using the XTRAC system.
 
We will rely on certain of our PTL patents to protect the home-use market for two of our PTL hand-held devices. If the patents prove unenforceable or circumventable, we may not attain growth and may lose market share from these PTL products.
Trade secrets and other proprietary information which are not protected by patents are also critical to our business. We attempt to protect our trade secrets by, among other steps, entering into confidentiality agreements with third parties, employees and consultants. However, such other steps may be ineffective and these agreements can be breached and, if they are and even if we are able to prove the breach or that our technology has been misappropriated under applicable state law, there may not be an adequate remedy available to us. In addition, costly and time-consuming litigation may be necessary to enforce and determine the scope of our proprietary rights; even should we prevail in such litigation, the party over which we prevail may have insufficient resources available to satisfy a judgment.
Furthermore, our skincare business seeks to establish customer loyalty, in part, by means of our 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 our trademarks. In either eventuality, our 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 our own. Without the protection afforded by our patent, trade secret and

 
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proprietary information rights, weBeginning 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 face direct competition from others commercializingor 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 using our technology, which mayover 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 ourthe Company’s business, financial condition and our prospects.results of operations.
 
From an international perspective, intellectual property law outsideThe success of the U.S. is uncertain to us. The laws of some countries may not protect our intellectual property rights to the same extent as laws in the U.S. The intellectual property rights we enjoy in one country or jurisdiction may be rejected inCompany’s XTRAC system and other countries or jurisdictions, or, if recognized there, the rights may be significantly diluted. It may be necessary or useful for us to participate in proceedings to determine the validity of our foreign intellectual property rights, or those of our competitors, which could result in substantial cost and divert our resources, efforts and attention from other aspects of our business.
In addition, we may be subject in the ordinary course of our business to legal proceedings and claims relating to the intellectual property or derivative rights of others. Defending against intellectual property infringement claims, both domestically and internationally, could be time-consuming and expensive and, if we are not successful, could cause substantial expenses and disrupt our business. If we are unable to defend our intellectual property rights internationally, we may face increased competition outside the U.S., which could materially and adversely affect our future business, prospects, operating results and financial results and financial condition.
Our successtreatment products depends on third-party reimbursement of patients’ costs, for our XTRAC system, which could result in potentially reduced prices or reduced demand.demand and, in relevant part, adversely affect the Company’s revenues and business operations.
 
OurThe 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.
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 ourthe Company’s products, even if ourits products are safer or more effective than the alternatives.
 
Although we havethe 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 ourthe Company’s pricing structure and revenue model before authorizing reimbursement.
 

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As of December 31, 2010, we estimate,2012, 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, we arethe 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. WeThe 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.
 
We intendThe 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 wethe 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 we do,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

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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, wethe Company may have difficulty replacing the lost revenue, which would negatively affect ourits results and operations.
 
Excluding niche marketing efforts, the Skin CareCompany’s skincare business segment 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 ourthe Company’s sales. We findThe 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 ourthe Company’s internet sales policy, but this policy can be difficult to enforce.
 
In our Physician International business segment (as well as in our Surgical Products business segment), we dependits  international businesses, the Company depends for a material portion of ourits 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 ourthe Company’s master distributor over most of the international arena for devices.devices (excluding our no!no!® line of products). If we losethe Company loses GlobalMed or one of these sub-distributors, ourthe Company’s sales of phototherapy and surgical lasers are likely to suffer in the short term, which could have a negative effect on ourits revenues and profitability.
 
OurThe Company’s PTL hand-held products can be sold over the counter, to the consumer market through mass retailers, Suchand such retailers may not give us long-term purchase commitments. Loss of such a retailer could adversely impact revenues from the consumer market.market related to such products. Additionally, OEMoriginal equipment manufacturer (“OEM”) arrangements or license arrangements will carry reduced profits.
 

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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 its 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:
sell products that compete with its products in breach of their non-competition agreements with the Company;
violate laws or regulations;
fail to adequately promote its products; or
fail to provide proper service to its retailers or end-users.
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 distributor of our no!no!® brand of products accounts for a significant part of its business, adverse conditions or risks relating to Japan could harm its business.
Approximately 9% of the Company’s revenues related to the sale of its no!no!® brand products for the year ended December 31, 2012 was generated by sales in Japan. The Company relies on a key independent distributor for these sales, and the Company has no assurance that this distributor will continue to purchase its products at the same levels as in prior years, will purchase its new products or that such relationship will continue on favorable terms, if at all. The potential loss of this distributor may result in lower sales and profits. If the Company is unable to recoup these sales, it may have an adverse material negative effect on its future operating results. Factors that could impact the Company’s results in the market include:
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;
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;
significant weakening of the Japanese yen;
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
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 ourthe Company’s business exposes us to certain business risks that could limit the effectiveness of ourthe Company’s growth strategy and cause our results of operations to suffer.
 
Continued expansion into international markets is an element of ourthe Company’s growth strategy. Introducing and marketing ourthe 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. We faceThe Company faces a number of risks associated with expanding ourthe Company’s business internationally that could negatively impact ourthe Company’s results of operations, including:
 
  
management, communication and integration problems resulting from cultural differences and geographic dispersion;
 
  
compliance with foreign laws, including laws regarding importation and registration of products;
 
  
compliance with foreign regulatory requirements and the ability of GlobalMed to establish additional regulatory clearances necessary to expand distribution of ourthe Company’s products in countries outside of the United States;
 
  
competition from companies with international operations, including large international competitors and entrenched local companies;
 
  
difficulties in protecting intellectual property rights in international jurisdictions;
 
  
political and economic instability in some international markets;

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sufficiency of qualified labor pools in various international markets;
 
  
currency fluctuations and exchange rates; and
 
  potentially adverse tax consequences or an inability to realize tax benefits.
 
WeThe Company may not succeed in ourits efforts to expand ourits international presence as a result of the factors described above or other factors that may have an adverse impact on ourthe Company’s overall financial condition and results of operations. In addition, we havethe Company has a relationship with GlobalMed, whereby it provides usthe Company with certain non-U.S. regulatory support. To the extent that we discontinue ourthe Company discontinues its relationship with GlobalMed, or if GlobalMed is otherwise unable to provide usthe Company with the resources and assistance that we need, wethe 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.
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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 we failthe Company fails to integrate, build and manage ourits sales and marketing force or to market and distribute ourits products effectively, wethe Company may experience diminished revenues and profits.
 
There are significant risks involved in integrating, building and managing ourthe Company’s sales and marketing force and marketing ourits products, including ourthe Company’s ability:
 
  
to hire, as needed, a sufficient number of qualified sales and marketing personnel with the aptitude, skills and understanding to market ourits XTRAC system, ourits skincare products, ourits Omnilux products and ourits surgical products effectively;
 
  
to adequately train ourits sales and marketing force in the use and benefits of all ourits products and services, thereby making them more effective promoters;
 
  
to manage ourits sales and marketing force and ourits ancillary channels (e.g.(e.g., telesales) such that variable and semi-fixed expenses grow at a lesser rate than ourits 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
 
  to cope with employee turnover among the sales force in the skin health business, in which there is substantial competition for talented sales representatives.
 
To increase acceptance and utilization of ourits XTRAC system, wethe Company may have to expand ourits sales and marketing programs in the U.S. While wethe Company may be able to draw on currently available personnel within ourits organization to meet this need, wethe Company also expectexpects that weit will have to increase the number of representatives devoted to the sales and marketing programs and to broaden, through such representatives, the talents we haveit has at ourits disposal. In some cases, wethe Company may look outside ourits organization for assistance in marketing ourits products.
 
In similar fashion, wethe Company cannot predict how successful weit may be in marketing ourits skincare and Omnilux products in the U.S., nor can wethe Company predict the success of any new skincare or Omnilux products that weit may introduce. Despite an increased focus on developing alternate channels for many of ourthe Company’s skincare and Omnilux products, wethe Company may find that channels that are attractive to usthe Company are unavailable because they already carry competitive products. No assurance can be given that wethe Company will be successful in marketing and selling ourits skin health and hair care products or ourits Omnilux products.
 
WeThe Company may be unsuccessful in accessing the home-use consumer market with ourits PTL products or with ourits skincare products. Distribution through the consumer market will be principally through mass-retail chains in the near term, but will also include e-commerce and electronic media. While we expectthe 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. The mass retailer wethe Company collaborated with for the New-U hand-held device proved not equal to the task, and ourthe Company’s licensee for the Clear-U technology has opted to discontinue its development activity under the license. If we arethe Company is unable to secure distribution partners or obtain favorable pricing or long-term commitments, ourthe Company’s efforts in the home-use consumer market may be unsuccessful.
 
WeThe Company may encounter difficulties in quality testing and the manufacturing ourof its products in commercial quantities, which could adversely impact the rate at which we grow.the Company grows.
 
WeThere 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 ourits non-cosmetic line of products because we haveit has limited experience manufacturing oursuch products in significant commercial quantities and because wequantities. As a result, the Company will, in order to increase ourits manufacturing output significantly, have to attract and retain qualified employees for such assembly and testing operations.
 

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Some of the components necessary for the assembly of ourthe Company’s non-cosmetic products, including ourits PTL products, are currently provided to usthe 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. OurThe Company’s dependence on a limited number of third-party suppliers and the challenges wethe 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 ourthe Company’s inability to meet demand for our its

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products, which could harm ourits ability to generate revenues, lead to customer dissatisfaction and damage ourits reputation. Furthermore, if we arethe Company is required to change the manufacturer of a key component of ourits products, wethe 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.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 ourthe Company’s ability to manufacture ourits products in a timely manner or within budget. We faceThe Company faces the risk that there will be supply chain problems if the volumes do not match to the margins, as ourcertain of the Company’s consumer market products are intended to be high-volume, lower-margined products.
 
Although we believethe Company believes that ourits current manufacturing facilities are adequate to support ourits commercial manufacturing activities for the foreseeable future, wethe Company may be required to expand or restructure ourits manufacturing facilities to increase capacity substantially. If we areIn addition, if the Company is unable to provide customers with high-quality products in a timely manner, wethe Company may not be able to achieve market acceptance for ourits XTRAC system or achieve market acceptance and growth for ourits skincare products. OurThe Company’s inability to manufacture or commercialize ourits devices successfully could have a material adverse effect on ourits revenue.
 
WeIf 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 and damage its reputation.
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 difficulty managing our growth.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.

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In addition, if private carriers continue to approve favorable reimbursement policies for psoriasis and ourthe Company’s marketing programs are successful in increasing utilization of theits XTRAC system, we expectthe Company expects to experience growth in the number of ourits employees and customers and the scope of ourits operations.
Such growth may place a strain on ourthe Company’s management and operations. OurThe Company’s ability to manage this growth will depend upon, among other factors, ourits ability to broaden ourits management team; ourits ability to attract, hire, train, motivate and retain skilled employees; and the ability of ourits officers and key employees to continue to implement and improve ourits operational, financial and other systems, to manage multiple, concurrent customer relationships and different products and to respond to increasing compliance requirements. OurThe Company’s future success is heavily dependent upon achieving such growth and acceptance of ourits products. If we cannotAny failure to effectively manage thisfuture growth it could have a material adverse effect on ourthe Company’s business, results of operations and wefinancial 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 become profitable.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.
 
We areIf 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 ourthe Company’s XTRAC system requires specific component parts obtained from ourthe Company’s suppliers. Production of ourthe Company’s surgical laser systems requires some component parts that may become harder to procure as the design of a system ages. Similarly, ourthe Company’s skincare products may require compounds that can be efficiently produced only by a limited number of suppliers. Our PTL business segmentThe Company has one primary supplier of LEDs for its PTL business and relies on contract manufacturers. While we believethe Company believes that weit could find alternate suppliers, in the event that ourits suppliers fail to meet ourits needs, a change in suppliers or any significant delay in ourthe Company’s ability to have access to such resources could have a material adverse effect on ourits 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.
 
Our
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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 ourits products could make ourits treatment system obsolete.
 
The medical device industry is subject to rapid and substantial technological development and product innovations. To be successful, wethe Company must respond to new developments in technology, new applications of existing technology and new treatment methods. WeThe Company may also encounter greater pressure for innovation in order to satisfy a demand for novelty in the consumer market. OurThe Company’s financial condition and operating results could be adversely affected if we failthe 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 ourthe Company’s XTRAC system for these diseases and would require usthe Company to focus on other uses of ourits technology, which would have a material adverse effect on ourits business and prospects.
 

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As we developthe Company develops new products or improve ourimproves its existing products, wethe 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 we havethe Company has against ourits 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 ourthe Company’s inventory.
 
Our productsThe Company’s marketing campaigns and advertising may be found defectiveattacked 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:
create greater awareness of its products and brand name;
determine the appropriate creative message and media mix for future expenditures; and
effectively manage advertising costs, including creative and media costs, to maintain acceptable costs in relation to sales levels and operating margins.
The Company’s no!no!® Hair products line of infomercials and advertising 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.

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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 ourcertain of its products, and product and other damages imposed on usthe Company may exceed ourits insurance coverage, or wethe Company may be subject to claims that are not covered by insurance.
 
The Company offers consumers who purchase its no!no!® products directly from the Company an unconditional full 60-days money-back guarantee. Retailers and home shopping channels are also permitted to return the no!no!® 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 ourthe 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 ourcertain of the Company’s products and procedures may also expose usthe Company to product liability, FDA regulatory and/or legal actions, or other claims. Certain indications for use for ourthe 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, wethe Company may be involved in costly litigation. In addition, the fact that we trainthe Company trains technicians whom we doit does not supervise in the use of ourits XTRAC system during patient treatment may expose usthe Company to third-party claims if those doing the training are accused of providing inadequate training. WeThe Company presently maintainmaintains liability insurance with coverage limits of at least $5,000,000 per occurrence. However,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. We thusTherefore, 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 we arethe 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 ourthe Company’s business, financial condition and results of operations.
 
We dependThe Company’s costs could substantially increase if it experiences a significant number of warranty claims.
The Company provides 12-month product warranties against technical defects of its no!no!® line of hair removal 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.

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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. 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 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:
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;
cause the Company to change its business operations to avoid perceived risks associated with such litigation; and
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.
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 ourits business strategy and could be harmed by the loss of their services.
 
We believeThe Company believes that ourits growth and future success will depend in large part upon the skills of ourits key management, technical and scientific personnel. Certain of the Company’s management and technical team.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, ourthe Company’s success depends in part upon the continued service and performance of our named executive officers:
Dennis M. McGrath, President and Chief Executive Officer;
Michael R. Stewart, Executive Vice President and Chief Operating Officer; and
Christina L. Allgeier, Vice President and Chief Financial Officer.
We haveDr. Dolev Rafaeli and Dennis M. McGrath. The Company has fixed-term employment agreements with Mr. McGrathDr. Rafaeli and Mr. Stewart and an at-will employment agreement with Ms. Allgeier;McGrath; however, there are no assurances that the services of these individuals will be available to usthe Company for any specified period of time. The loss of the services of one or moreboth of these officers could adversely affect ourthe Company’s ability to develop and introduce ourits new products.
 
The competition for qualified personnel in the laser and skincare industries is intense, and we cannot assure you that we will be able to retain our existing key personnel or to attract additional qualified personnel. In addition, we do not have key-person life insurance on any of our employees. The loss of our key personnel or an inability to continue to attract, retain and motivate key personnel could adversely affect our business.
Our indebtedness and debt service obligations may adversely affect our cash flows and operating flexibility.
If we are unable to generate sufficient cash to meet our interest and principal payment obligations under the Convertible Notes and our other debt obligations (including the Term Note), we may have to restructure or limit our operations. The Convertible Notes mature on February 27, 2014. Interest is payable on a bi-annual basis either in cash or in kind through the issuance of additional notes with the same terms. We have paid all interest in kind to date. Our Convertible Notes and other indebtedness could have significant additional negative consequences, including, but not limited to:

 
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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.
 
requiring the dedication of a substantial portion of our expected cash flow from operations to service the indebtedness, thereby reducing the amount of expected cash flow available for other purposes, including capital expenditures;
increasing our vulnerability to general adverse economic and industry conditions;
limiting our ability to obtain additional financing;
limiting our flexibility to plan for, or react to, changes in our business and the industry in which we compete; and
placing us at a possible competitive disadvantage to competitors with less debt obligations and competitors that have better access to capital resources.
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.
 
Our Convertible Notes provide that uponIt may be difficult for any of the occurrenceCompany’s stockholders to effect service of various events of default, one of our investors would be entitled to require us to prepayprocess against the Convertible Notes for cash, which could leave us with littleCompany or no working capital for operations or capital expenditures.its officers and directors.
 
The terms of our Convertible Notes require us to prepay the Convertible Notes upon the occurrence of various events of default, such as the failure to pay any principal payments due and for the breach of any representations and warranties under the Convertible Notes, the Securities Purchase Agreement, or SPA, or the related transaction documents with the investor. The Convertible Notes also contain a cross-acceleration provision, which means that an acceleration of payment under other instruments (including the Term Note) would give the investor the right to accelerate repayment under the Convertible Notes. If we are unable to comply with the covenants under the Convertible Notes, the investor may declare us in default and may declare all amounts due under the notes, including any accrued interest and penalties. As of December 31, 2010, we were in compliance with the covenants under the Convertible Notes and our other indebtedness. We expect to remain in compliance with the covenantsCertain of the Convertible Notes and our other indebtedness. We can make no assurances that we will remainCompany’s operating subsidiaries’ assets are located in compliance with all of the covenants under the Convertible Notes and our other indebtedness.
Israel. As a result, the Company’s stockholders may find it difficult to enforce their legal rights in Israeli courts based on the civil liability provisions of the security interestUnited States federal securities laws in the courts of either the United States or Israel, 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 lien granted in connection withIsrael would permit effective enforcement against the Convertible NotesCompany’s officers and directors that reside outside the Term Note, if we fail to meet our payment or other obligationsUnited States of criminal penalties, under the Convertible Notes, the Term NoteUnited States federal securities laws or our other indebtedness, the investor or Clutterbuck Funds, as the case may be, would be entitled to foreclose on the assets subject to those encumbrances. Under those circumstances, we may not have sufficient funds to service our day-to-day operational needs. Any foreclosure by a lender on the collateral pledged to it would have a material adverse effect on our financial condition.otherwise.
 
In addition, ifCurrency exchange rate fluctuations could adversely affect the Company’s operating results.
Much 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 eventappreciation of default occurs, we may be unableNIS against the U.S. dollar would make any new NIS denominated investments or expenditures more costly to prepay the entire amount due underCompany, to the Convertible Notes in cash as required by their terms. Even if we are ableextent that it needs to prepay the entire amount in cash, anyconvert U.S. dollars into NIS for such prepayment could leave us with little or no working capital for our business. We have not established a sinking fund for paymentpurposes.  Furthermore, because certain parts of our obligations under the Convertible Notes, nor do we anticipate doing so.
The termsbusiness include international business transactions, costs and prices of the SPA and the Clutterbuck Agreement prohibit us from taking certain actions without their prior consent.
Pursuant to the terms of the SPA and the Clutterbuck Agreement, we are prohibited from taking certain corporate actions without the prior consent of the lenders there under.

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The SPA provides that, untilits products or components in overseas countries, such time as no Convertible Notes are outstanding and the investor no longer holds at least 66% of the aggregate number of shares of common stock issuable upon conversion of the Convertible Notes and the warrants, we may not take certain corporate actions without the prior consent of the investor. These actions include, among others:
consummating any transaction that would result in a change of control of us unless such transaction is for consideration that meets certain thresholds specified in the SPA;
acquiring another business or corporation or a substantial portion of the assets of any such entity;
selling any of our assets that are material, individually or in the aggregate, to our business; and
paying dividends to our stockholders.
These restrictive covenants are in addition to the investor’s right of first refusal and preemptive right with respect to future equity issuances and approval right with respect to future debt financings.
The Clutterbuck Agreement provides Clutterbuck Funds with some of the same approval rights that the investor has under the SPA.
If our management and Board of Directors desire to take any of such actions, there can be no assurance that the investor or Clutterbuck Funds will provide its consent as required, despite the fact that such actions may be in the best interests of us and our other stockholders. Any failure of the investor or Clutterbuck Funds, as the case may be, to provide its consent could have a material adverse effect on our business, financial condition and results of operation.
Wetransactions are affected by the market’s currency conditions.foreign exchange rate changes.
 
Substantially all of our operations are conducted in U.S. dollars. Our PTL business, however, is exposed on a minimal basis to currency fluctuations. The majority of sales invoicing for ourthe Company’s PTL business is done in either 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. OurThe 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 or the Euro. To the extent that we adjust ourthe Company adjusts its invoicing practices for ourits PTL business, or if the remainder of ourits business (or any portion thereof) ceases to be conducted primarily in U.S. dollars, ourthe Company’s exposure to the market’s currency conditions could present a greater risk to us.it.
As a result, foreign exchange rate fluctuations may adversely affect the Company’s business, operating results and financial condition.
 
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

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 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 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

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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 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. 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

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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 a 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 approval of a PMA. The PMA process is typically 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 that has FDA clearance), a market that accounted for approximately 61% of the total sales of this line of products for the year ended December 31, 2012, do not currently require FDA marketing clearance. Accordingly, our no!no!® line of products do not 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.

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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 us.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 wethe Company will be able to charge for ourits products, or the amounts of reimbursement available for ourits products from governmental agencies or third-party payors. These limitations could have a material adverse effect on ourthe 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 ourthe Company’s products as well as the way in which we conduct ourthe 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. We anticipateThe Company anticipates that out of the reform legislation will come a reduction in Medicare

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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.
 
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Various healthcare reform proposals have also emerged at the state level. WeThe 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 us.the Company. However, an expansion in government’s role in the U.S. healthcare industry may lower reimbursements for ourthe Company’s products, reduce medical procedure volumes and adversely affect ourthe Company’s business, possibly materially. In addition, if the excise taxes contained in the House or Senate health reform bills are enacted into law, ourthe 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 our productsthe Company’s devices are not supported by long-term data, ourthe Company’s revenues could decline.
 
OurThe Company’s products may not be accepted in the market if we dothe Company does not produce clinical data supported by the independent efforts of clinicians. WeThe Company received clearance from the FDA for the use of the XTRAC system to treat psoriasis based upon ourthe 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, we havethe 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, wethe Company may discover that physicians will expect clinical data on such treatments with the XTRAC system. WeThe Company also may find that data from longer-term psoriasis patient follow-up studies may be inconsistent with those indicated by ourthe 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 ourthe Company’s product is less effective or less safe than ourthe Company’s current data suggests, ourthe Company’s revenues could decline. WeIn 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 weits data will find that our data isbe substantiated in studies involving more patients. In such a case, wethe 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 we arethe 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 we arethe Company is found to be promoting the use of our productsits devices for unapproved or “off-label” uses or engaging in other noncompliant activities, wethe Company may be subject to recalls, seizures, fines, penalties, injunctions, adverse publicity, prosecution, or other adverse actions, resulting in damage to ourits reputation and business.
 
OurThe 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

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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 ourthe 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 ourthe Company’s devices and request that we modify ourthe Company modifies its labeling, advertising, or user training or promotional materials and/or subject usthe 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 ourthe 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, ourwe 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 we intendthe Company intends to refrain from statements that could be considered off-label promotion of ourits products, the FDA or another regulatory agency could disagree and conclude that we havethe 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, theany such off-label use of ourthe Company’s products may increase the risk of injury to patients, and, in turn, the risk of product liability claims. Product liabilityclaims, and such claims are expensive to defend and could divert ourthe Company’s management’s attention and result in substantial damage awards against us.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.
 
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WeThe Company may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws and regulations and could face substantial penalties if we arethe Company is unable to fully comply with such laws.
 
While we dothe 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 ourthe Company’s business. For example, wethe 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 we conduct ourthe Company conducts its business. The healthcare laws and regulations that may affect ourthe Company’s ability to operate include:
 
  
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;
 
  
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 usthe Company to the extent that ourthe Company’s interactions with customers may affect their billing or coding practices;
 
  
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
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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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.
 
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 ourthe 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 us, wethe 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 ourits operations. Any penalties, damages, fines, exclusions, curtailment or restructuring of ourthe Company’s operations could adversely affect ourits ability to operate ourits business and ourits financial results. The risk of ourthe 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 usthe Company for violation of these laws, even if wethe Company successfully defenddefends against it,that action and the underlying alleged violations, could cause usthe Company to incur significant legal expenses and divert ourits management’s attention from the operation of ourits business. If the physicians or other providers or entities with whom we dothe 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 ourthe Company’s business.
 
OurThe 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.
 
OurIn 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 ourthe 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 we seekthe Company seeks to expand sales of ourits skincare products outside the U.S., we may encounter requirements that we did not anticipate or that we may not be able to satisfy.
 

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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 we wishthe Company wishes to market in the U.S. must first receive either 510(k) clearance or premarket

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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 ourthe Company’s revenues and profitability. Although we havethe Company has obtained 510(k) clearances for ourits XTRAC system for use in treating psoriasis, vitiligo, atopic dermatitis and leukoderma, and 510(k) clearances for ourits Omnilux devices as well as extensive 510(k) clearances for ourits surgical products, ourthese 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 ourthe 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 and labeling requirements or such products may be considered adulterated or misbranded by the agency which could subject usthe Company to potential regulatory or legal enforcement actions. Similar, or more stringent, requirements may apply in foreign jurisdictions as well.  WeThe Company may also find that if ourits 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 unapproved new drugs. 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 ourthe 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 we arethe 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.
 
OurThe 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

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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.
 
We haveThe Company has introduced ourits 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. We intendThe Company intends to expand the number of countries in these markets where we distribute ourthe Company distributes its products through the network of distributors which PTL and GlobalMed have built. WeThe Company cannot be certain that ourits distributors will be successful in marketing XTRAC systems in these or other countries or that ourits distributors will purchase XTRAC systems beyond their current contractual obligations or in accordance with ourthe Company’s expectations.
We are regularly audited on the compliance of our quality systems with applicable requirements, which can be extensive and complex and subject to change due to evolving interpretations and changing requirements. Adverse audit findings could negatively affect our ability to market our products.
 
Even if we obtainthe Company obtains and maintainmaintains the necessary foreign regulatory registrations or approvals, market acceptance of ourthe 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. WeThe Company may seek international reimbursement approvals for ourits products, but wethe 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 ourthe Company’s products in that market or others.
 
If wethe Company or ourits third-party manufacturers or suppliers fail to comply with the FDA’s Quality System Regulation or any applicable state equivalent, ourthe Company’s manufacturing operations could be interrupted and ourthe Company’s potential product sales and operating results could suffer.
 
WeThe Company and some of ourits third-party manufacturers and suppliers are required to comply with some or all of the FDA’s Quality System Regulation,drug Good Manufacturing Practices or its QSR, thatwhich 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 ourthe Company’s medical devices. We and our manufacturers and suppliersThe Company
 

 
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and its manufacturers and suppliers are also subject to the regulations of foreign jurisdictions regarding the manufacturing process if we market ourthe Company markets its products overseas. The FDA enforces the QSR through periodic and announced or unannounced inspections of manufacturing facilities. OurThe Company’s facilities have been inspected by the FDA and other regulatory authorities, and we anticipatethe Company anticipates that weit and certain of ourits third-party manufacturers and suppliers will be subject to additional future inspections. If ourthe Company’s facilities or those of ourits manufacturers or suppliers are found to be in significant 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 usthe Company and/or ourits products, including but not limited to the cessation of sales or the recall of distributed products, which could impair ourthe Company’s ability to produce ourits products in a cost-effective and timely manner in order to meet ourits customers’ demands. WeThe Company may also be required to bear other costs or take other actions that may have a negative impact on ourits future sales and ourits ability to generate profits.
 
Although we believe that we are in substantial compliance with all applicable FDA regulations, currentCurrent regulations depend heavily on administrative interpretation. We areIf 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 ourthe 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, or prevent marketing of any cleared/approved products or necessitate the recall of distributed products. WeThe 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.
 
RisksRecently, 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,

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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 Company has already taken considerable measures to address and close all the identified items. The Company awaits final closure from the FDA regarding the Inspectional activities from 2011 and 2012, and the Warning Letter issued in January 2012.
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:
warning letters or untitled letters issued by the FDA;
fines, civil penalties, injunctions and criminal prosecution;
unanticipated expenditures to address or defend such actions;
delays in clearing or approving, or refusal to clear or approve, our products;
withdrawal or suspension of clearance or approval of our products by the FDA or other regulatory bodies;
product recall or seizure;
orders for physician or customer notification or device repair, replacement or refund;
interruption of production; and
operating restrictions.
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

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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 the Merger
The legacy businesses of PhotoMedex and Radiancy may not be able to be successfully integrated and realize the anticipated benefits of the merger.
Realization of the anticipated benefits in the merger will depend on the Company’s ability to successfully integrate the businesses and operations of PhotoMedex and Radiancy. The Company 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:
preserving customer, supplier and other important relationships and resolving potential conflicts that may arise as a result of the merger;
consolidating and integrating duplicative facilities and operations, including back-office systems necessary for internal and disclosure controls and timely financial reporting;
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
adequately addressing business integration issues.
The process of integrating Radiancy’s operations could cause an interruption of, or loss of momentum in, the Company’s business and financial performance, and in legacy Radiancy’s business and financial performance as well. The diversion of management’s attention and any delays or difficulties encountered in connection with the merger and the integration of the two companies’ operations could have an adverse effect on the business, financial results, financial condition, or stock price of the Company. 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 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

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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 $48 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.  The Company is currently evaluating what effect, if any, the reverse merger and integration of Radiancy’s business may have on its U.K. NOLs
The Company incurred substantial expenses related to the merger and the integration of Radiancy’s business during 2012, and may continue to incur additional expense.
The Company has incurred substantial expenses in connection with the merger and the integration of Radiancy’s business during 2012. There were a large number of processes, policies, procedures, operations, technologies and systems that had to be integrated, including purchasing, accounting and finance, sales, payroll, pricing, revenue management, marketing and benefits. While PhotoMedex had assumed that a certain level of expenses would be incurred, there were many factors beyond its control that affected the total amount or the timing of the integration expenses. Moreover, many of the expenses that were incurred were, by their nature, difficult to estimate accurately. Although the integration is substantially complete, the Company may incur additional expenses during 2013 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.
The need to integrate PhotoMedex’s and Radiancy’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 the Company’s operations.
The successful integration of Radiancy and achievement of the anticipated benefits of the merger depend in part on integrating Radiancy’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 the Company’s operations.

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The combined company may be unable to retain key employees.
The success of the Company after the merger will depend in part upon its ability to retain key Radiancy and PhotoMedex employees. 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 the Company or Radiancy following the merger. Accordingly, no assurance can be given that the Company and Radiancy will be able to retain key employees to the same extent as in the past.
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 is now a majority-owned subsidiary of the Company. Radiancy Ltd., a wholly owned subsidiary of Radiancy, 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.
Risk Factors Relating to an Investment in Our Common Stock
Nevada law and our charter documents, as well as the SPA, contain provisions that could delay or prevent actual and potential changes in control, even if they would benefit stockholders.
As of December 30, 2010, PhotoMedex became a corporation chartered in the State of Nevada. We are 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 the Company’s stock. Pursuant to the SPA, the holder of our Convertible Notes must consent to any change of control transaction, subject to certain exceptions. These provisions could delay or prevent actual and potential changes in control, even if they would benefit our stockholders.Securities
 
Potential fluctuations in ourthe Company’s operating results could lead to fluctuations in the market price for ourthe Company’s common stock.
 
OurThe Company’s results of operations are expected to fluctuate significantly from quarter to quarter, depending upon numerous factors, including:
 
  
the present macro-economic downturn in the global economy and financial industry and governmental monetary and fiscal programs to stimulate better economic conditions;
 
  
healthcare reform and reimbursement policies;
 
  
demand for ourthe Company’s products;
 
  
changes in ourthe Company’s pricing policies or those of ourits competitors;
 
  
increases in ourthe Company’s manufacturing costs;
 
  
the number, timing and significance of product enhancements and new product announcements by ourselvesthe Company and ourits competitors;
 
  
the termination or expiration of significant royalty-generating licensing contracts to which we arethe Company is party;
 
  
the expiration of certain of our patents;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;


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ourThe Company’s ability to develop, introduce and market new and enhanced versions of ourits 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; and

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Acted of terrorism in Israel or in other countries in which we do business;
 
  product quality problems, personnel changesdevelopments in existing or new litigation; and changes in our business strategy.

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 ourthe Company’s stock. Our quarter-to-quarter operating results could also be affected by the timing and usage of individual laser units in the treatment of patients, since our revenue model for the XTRAC system is generally based on a payment-per-usage plan.
 
OurThe Company’s stock price has been and continues to be volatile.
 
The market price for ourthe Company’s common stock could fluctuate due to various factors. TheseIn addition to other factors described in this section, these factors may include, among others:
 
  
conversion of the Convertible Notes or outstanding stock options or warrants;
 
  
announcements by usthe Company or ourits competitors of new contracts, products, or technological innovations;
developments in existing or new litigation;
 
  
changes in government regulations;
 
  
fluctuations in ourthe Company’s quarterly and annual operating results; and
 
  general market and economic conditions.
 
In the event the Convertible Notes were to be converted to common stock, such common stock would represent 1,272,009 shares, or 29.30%, of our outstanding common stock, as of March 30, 2011. Such conversion could impact the price of our common stock by virtue of the overall dilution to our stockholders. Currently, $3,072,745 of the principal amount of the Convertible Notes has a conversion price of $11.25850 per share of common stock and $18,374,845 of the principal amount of the Convertible Notes has a conversion price of $18.39172 per share of common stock. 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 our common stock.
Securities analysts may not initiate coverage for our common stock or may issue negative reports and this may have a negative impact on the market price of ourCompany’s common stock.
 
Securities analysts currently doThe Company’s program to repurchase its securities, partially in relation to short-selling of its securities, may not provide research coveragebe successful to stem such short-selling.
The Company embarked on a program of our common stock. The lacklimited repurchases of research coverage may adversely affect the market priceits securities. Short-selling of our common stock. The trading market for our common stock may be affected in part by the research and reports that industry or financial analysts publish about us or our business. It may be difficult for companies such as ours,its securities was believed to have caused investors with smaller market capitalizations, to attract securities analysts that will cover our common stock. If one or more of the analysts who elect to cover us downgrades our stock, our stock price would likely decline rapidly. If one or more of these analysts ceases coverage of our company, we could lose visibilitya long-term interest in the market, which in turn could cause our stock priceCompany to decline. This could have a negative effect ondemand that the market pricecompany share their long-term view. The Company believes that its repurchase program will demonstrate the long-term view of our stock.its long-term investors. However, there can be no guarantee that the program will continue or will be regarded as successful. 
 
Shares eligible for future sale by ourthe Company’s current or future stockholders may cause ourthe Company’s stock price to decline.
 
If ourthe Company’s stockholders or holders of ourthe Company’s other securities sell substantial amounts of ourthe Company’s common stock in the public market, including shares issued in completed acquisitions or upon the exercise of outstanding Convertible Notes, options and warrants, then the market price of ourthe Company’s common stock could fall. As of March 30, 2011, the holder of the Convertible Notes had the right to convert the Convertible Notes into 1,272,009 shares of our common stock and holds a warrant to purchase 293,610 shares of our common stock.
 

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Issuance of shares of ourthe Company’s common stock upon conversion of our Convertible Notes andthe exercise of warrants,options or payment of interest in kind,warrants will dilute the ownership interest of ourthe Company’s existing stockholders and could adversely affect the market price of ourthe Company’s common stock.
 
As of March 30, 2011, we15, 2013, the Company had outstanding stock options to purchase an aggregate of 65,527898,541 shares of common stock and warrants to purchase an aggregate of 632,973 shares of common stock and Convertible Notes convertible into 1,272,0091,068,268 shares of common stock. In addition, we also have 280,996 and 29,913 shares of common stock authorized for issuance and not subject to reserve under our 2005 Equity Plan and our 2000 Non-Employee Director Plan, respectively.
The exercise of the stock options warrants and Convertible Noteswarrants and the sales of stock issuable pursuant to them would further reduce a stockholder’s

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percentage voting and ownership interest. Further, the stock options warrants and Convertible Noteswarrants are likely to be exercised when ourthe Company’s common stock is trading at a price that is higher than the exercise price of these options and warrants and wethe Company would be able to obtain a higher price for ourthe Company’s common stock than wethe Company would receive under such options and warrants. The exercise, or potential exercise, of these options warrants and Convertible Noteswarrants could adversely affect the market price of ourthe Company’s common stock and the terms on which wethe Company could obtain additional financing.
In addition, we may issue additional convertible promissory notes as payment of The ownership interest in kind. Any of these issuances will further dilute the ownership interests of our existing stockholders. Any sales in the public market of this common stock could adversely affect prevailing market prices of our common stock. In addition, the existence of our note and our warrants may encourage short selling by market participants.
The terms of the Convertible Notes issued to one of our investors provides that, if on any date that is at least 31 trading days after the date of issuance, the market price for our common stock, as determined in accordance with the terms and conditions of the SPA, exceeds 300% of the then-effective conversion price of the Convertible Notes, then the entire principal amount and all accrued but unpaid interest under the Convertible Notes will automatically convert into shares of our common stock at the then-effective conversion price. Such a mandatory conversion of the Convertible Notes will dilute the ownership interests of our existing stockholders.
The ownership interests of ourCompany’s existing stockholders may be further diluted through adjustments to the Convertible Notes and certain outstanding warrants under the terms of their anti-dilution provision.provisions.
 
WeSecurities 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.
Securities analysts currently do not provide research coverage of the Company’s common stock. The lack of research coverage may adversely affect 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 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 dodoes not expect to pay dividends in the future.
 
We haveThe Company has never declared or paid cash dividends on ourits capital stock. WeThe Company currently intendintends to retain all future earnings for the operation and expansion of ourits business and, therefore, dodoes not anticipate declaring or paying cash dividends in the foreseeable future. The payment of dividends will be at the discretion of our Boardthe Company’s board of Directorsdirectors and will depend on ourthe Company’s results of operations, capital requirements, financial condition, prospects, contractual arrangements, any limitations on payments of dividends present in any of ourthe Company’s future debt agreements and other factors our Boardthe Company’s board of Directorsdirectors may deem relevant. If we dothe Company does not pay dividends, a return on your investment will only occur if ourthe Company’s stock price appreciates.
 
OurThe Company’s future capital needs could result in dilution of your investment.
 
Our BoardThe Company’s board of Directorsdirectors may determine from time to time that there is a need to obtain additional capital through the issuance of additional shares of ourthe Company’s common stock or other securities. These issuances would likely dilute the ownership interests of ourthe Company’s current investors and may dilute the net tangible book value per share of ourthe Company’s common stock. Investors in subsequent offerings may also have rights, preferences and privileges senior to ourthe Company’s current stockholders which may adversely impact ourthe 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 15, 2013, our directors, executive officers and holders of more than 5% of our common stock, together with their affiliates, beneficially own, in the aggregate, approximately 38.1% 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:

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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.
Item 1B.Unresolved Staff Comments
 
There are no unresolved comments from the staff of the Securities and Exchange Commission.

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We lease a 42,000 sq. ft. facility in Montgomeryville, Pennsylvania that houses our executive offices warehousing operations for our skincare and our domestic PTLrevenue segments and surgical laser manufacturing operations. The term of the lease runs until July 2011.2014. The base rent is $20,475 per month. We anticipate renewing this lease. 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 January 19, 2014. We have an option to extend the lease for this office in Hod-Hasharon for a period of 12 months commencing January 20th, 2014, and we may exercise this option up to five times.
 
We lease an 8,00011,300 sq. ft. facility consisting of office, manufacturing and warehousing space in Carlsbad, California. The lease expires on June 15, 2012. We have a right to cancellation after 5 years, provided that we pay off any remaining obligation for tenant improvements. The outstanding obligation for the tenant improvements was $77,239 as of December 31, 2009. The base rent is $7,256 per month.September 30, 2015. Our Carlsbad facility houses the manufacturing and development operations for our excimer laser business. We also lease a 6,643 sq. ft satellite facility consisting of office and warehousing space in Carlsbad, California. The lease expires on June 14, 2012. The base rent is $6,577 per month.
 
Additionally, PTL leases one facility in the United Kingdom. The lease is a 2,389 sq. ft. facility consisting of office space in Tamworth, UK. The lease expires on April 1, 2011, and we do not expect to renew the lease term. The base rent is $3,896 per month. Previously PTL leased a second facility in the United Kingdom: a 1,500 sq. ft. facility consisting of office space in Altrincham, UK. That lease expired on March 7, 2011. The base rent was $2,856 per month. We are transferring to our Montgomeryville facility the functions which were performed at Tamworth and Altrincham.
Item 3.  
Ra Medical
We have been involved in a number of disputes with Ra Medical Systems, Inc. and Dean Irwin, one of our former employees. We refer to Ra Medical Systems, Inc. and Dean Irwin, collectively, in this Report as Ra Medical. In January 2004, we brought an action against Ra Medical for falsely advertising that it had clearance from the Food and Drug Administration, for falsely claiming in March 2003 that its laser would be available for purchase in August 2003, and for falsely claiming the Irwin was the sole inventor of the XTRAC laser system. In November 2004, Ra Medical brought a malicious prosecution action against us, which was subsequently settled in May 2007, with the assistance of our insurer, St. Paul. In June 2006, Ra Medical brought an action against us for unfair competition. In that action, we brought counterclaims under Federal and State law addressing such issues as misappropriation, unfair competition and unfair advertising. In October 2008, Ra Medical brought a second malicious prosecution action against us and our outside counsel in California Superior Court, alleging that the action we brought in January 2004 against Ra Medical was initiated and maintained with malice. Ra Medical withdrew the complaint without prejudice in July 2010.
In the action we brought against Ra Medical in January 2004 in the United States District Court for the Southern District Court of California, the Ninth Circuit Court of Appeals ruled, in April 2010, in our favor on two counts, and has reversed the summary judgments on those counts and remanded them back to the District Court. We are preparing for trial, which is scheduled in June 2011.
In the action brought by Ra Medical in June 2006 and which we removed to the United States District Court for the Southern District Court of California, all of our counterclaims against Ra Medical which the trial court had dismissed have been reinstated and remanded by the Ninth Circuit Court of Appeals and remanded to the trial court. Among such counterclaims are one for misappropriation of our XTRAC technology and another for interference in the contracts we have with our customers. We have brought a motion to dismiss Ra Medical’s single claim against us for unfair competition under the California Business and Professions Code on the grounds that Ra Medical fails to meet the standing and evidentiary requirements of that Code. We await the decision of the Court. We expect that the case will soon move into active discovery phase. Trial has been targeted for the first quarter 2012.

 
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St. Paul Fire and Marine Insurance Company
    Legal Proceedings
 
In January 2009,During the year ended December 31, 2012, we broughtentered into a second coverage action against St. Paul in the U.S. District Court for the Easternsettlement agreement with TRIA Beauty, Inc. (“TRIA”). All matters of pending litigation between Radiancy and TRIA have been dismissed with prejudice, including: (i) TRIA Beauty, Inc. v. Radiancy, Inc., Case No. CV-10-5030 (NJV) USDC District of Pennsylvania in which we argued that the policy provided coverage for the new malicious prosecution claim asserted by Ra Medical,Northern California; and the court granted our motion for summary judgment on the issue of whether the policy covers malicious prosecution claims.  Accordingly, the only issue before the U.S. District Court for the Southern District of California, where St. Paul had brought a declaratory judgment action, is whether St. Paul has been released from any further coverage arising out of a claim by Ra Medical for malicious prosecution.  The parties have filed cross-motions for summary judgment on the issue of the effect of the release.
Dermatologist’s action against Ra Medical and PhotoMedex
On or about October 14, 2009, a dermatologist brought an action against Ra Medical in the Circuit(ii) Radiancy, Inc. v. TRIA Beauty, Inc, Index No. 650025/2011 Supreme Court of the Sixth Judicial Circuit, Macon County, Illinois, docket no. 09-L-175.State of New York. The plaintiff has two principal grievances against Ra Medical: (i) that Ra Medical sold the dermatologist one of its Pharos lasers in September 2006, before Ra Medical had the right under FDA regulations to sell the laser in the United States, and (ii) that the laser failed to perform according to its specifications in that it repeatedly failed to deliver the dosage of light demanded by the laser operator for the patient’s treatment, with the result that some patients were under-dosed and showed negligible or no improvement while other patients were over-dosed and their skin blistered. The plaintiff seeks damages from Ra Medical.
The plaintiff joined us as co-defendant. It seeks a declaratory judgment from the court that when PhotoMedex and the plaintiff had tested the performanceterms of the laser from Ra Medical, they had not acted improperly – as alleged by an attorney for Ra Medical – but within their rights and privileges. Wesettlement agreement were reduced to a written agreement dated June 29, 2012; such terms are confidential to the parties. The settlement is deemed to have answeredno material effect on the complaint and also lodged against Ra Medical a claim for interference with prospective economic advantage from the plaintiff and from other similarly situated customers of ours.
Ra Medical has moved that the Court should dismiss our claim against Ra Medical on various grounds. The Court heard the motion on March 24, 2011. The Court ruled that we must amend our counterclaim to exclude injury from any interference by Ra Medical in our contracts.
OtherCompany’s consolidated financial statements.
 
We are involved in certain other legal actions and claims arising in the ordinary course of 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.
 
Removed and Reserved    Mine Safety Disclosures
 
None.


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PART II
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
As of March 30, 2011,18, 2013, we had 3,069,74921,043,947 shares of common stock issued and outstanding, including 230,144367,655 shares of issued and outstanding restricted stock. This did not include (i) options to purchase 65,527898,541 shares of common stock, of which 44,909178,541 were vested as of March 30, 2011,18, 2013, or (ii) warrants to purchase up to 632,9731,063,268 shares of common stock, all of which warrants were vested, or (iii) 1,272,009 shares that may be issued upon a presently vested right of conversion of the Convertible Notes.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, as adjusted for the reverse stock split of 1-for-7 effective January 26, 2009 and the reverse stock split of 1-for-6 effective February 3, 2010:stock:
 
 
High
  
Low
  
High
  
Low
 
Year Ended December 31, 2010:      
Year Ended December 31, 2012:      
Fourth Quarter $6.15  $4.84  $15.05  $11.18 
Third Quarter  6.20   4.76   14.55   10.93 
Second Quarter  10.70   5.11   18.34   10.69 
First Quarter  13.74   5.70   14.55   10.83 
Year Ended December 31, 2009:        
Year Ended December 31, 2011:        
Fourth Quarter $5.82  $3.78  $16.33  $11.20 
Third Quarter  6.42   3.96   14.10   11.38 
Second Quarter  12.30   5.52   11.83   6.61 
First Quarter  22.80   8.16   7.37   5.39 
 
On March 30, 2011,15, 2013, the closing marketlast reported sale price for our common stock in Theon Nasdaq National Market System (“Nasdaq”) was $7.35$16.17 per share. As of March 30, 2011,15, 2013, we had approximately 880725 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.
 

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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, 2010.2012. See Notes 1 and 1411 to the consolidated financial statements for additional discussion.
 

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 EQUITY COMPENSATION PLAN INFORMATION  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))  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)  (A)  (B)  (C) 
Equity compensation plans                  
approved by security holders  70,517  $28.70   535,957   1,961,809  $18.42   1,464,629 
                        
Equity compensation plans not approved by security holders    144  $77.70     -     -     -     - 
                        
Total  70,661  $28.70   535,957   1,961,809  $18.42   1,464,629 
 
Since January 1, 2006, no optionsOptions have been granted to employees and/or consultants out of any of our equity compensation plans except the 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 without necessity of further approval by our stockholders.
 
Recent Issuances of Unregistered Securities
 
On October 22, 2009, we closed a private placement of 4,165,765 common shares of our common stock at a price of $0.65 per share. Gross proceeds from the private placement were approximately $2.7 million. The purchasers were accredited investors some of which were institutions. On November 10, 2009, we issued to an affiliate of one of the accredited investors participating in the October 22, 2009 closing an additional 230,000 shares at a price of $0.65 per share, which yielded additional gross proceeds of $149,500 in the placement. No finders’ fees or warrants were involved in the placement. We intend to use the proceeds from the private placement for general working capital purposes.
In connection with the issuance of the Term Note to Clutterbuck,that we issuedentered into on March 19, 2010 with Clutterbuck Funds (“Clutterbuck”), we also issued a warrant to Clutterbuck which was exercisable for the purchase of 102,180 shares of our common stock for an initial exercise price of $7.34. The warrant iswas exercisable at any time on or prior to the fifth anniversary of its issue date.date, or March 19, 2015. Pursuant to the terms of thesuch warrant, the exercise price iswas subject to a one-time downward adjustment if we makemade certain issuances of our equity securities at a price per share less than $7.34 during the 36-month period following the issuance of the warrant. Clutterbuck exercised its warrants in August 2011.

In connection with the amendment of the Term Note to Clutterbuck Funds, we issued to it on March 28, 2011, we issued Clutterbuck a warrant to purchase 109,650 shares of our common stock for an initial exercise price of $5.70. The warrant iswas exercisable at any time on or prior to the fifth anniversary of its issue date.date, or March 28, 2016. Pursuant to the terms of the warrant, the exercise price iswas subject to a one-time downward adjustment if we makemade certain issuances of our equity securities at a price per share less than $5.70 during the 36-month period following the issuance of the warrant. Clutterbuck exercised its warrants in August 2011. The underlying shares were not registered.
On August 8, 2012, the Board of Directors approved a stock repurchase program up to a maximum of $25 million. As of December 2012, the Company had repurchased 842,961 shares of stock at an average price of $12.76 per share for a total of $10,756.  There is no guarantee that plan will be continued or renewed or that the repurchase plan will have a positive effect upon the price of the Company’s stock.

 
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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, 2010,2012, December 31, 20092011 and December 31, 2008,2010, and the selected historical consolidated balance sheet data as of December 31, 20102012 and December 31, 2009,2011, 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, 20072009 and December 31, 20062008 and the selected historical consolidated balance sheet data as of December 31, 2008,2010, December 31, 20072009 and December 31, 20062008 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, 2012 and 2011.
 
  Year Ended December 31, 
  (In thousands, except per-share data) 
  2012  2011  2010  2009  2008 
Statement of Operations Data:               
Revenues $220,651  $132,082  $70,071  $16,037  $21,537 
Costs of revenues  46,642   26,296   16,465   6,181   8,231 
  Gross profit  174,009   105,786   53,606   9,856   13,306 
Selling, general and administrative  143,817   107,377   34,596   7,568   8,801 
Engineering and product development  2,914   1,057   839   711   1,289 
  Income (loss) from operations before financing income (expense) and interest  27,278   (2,648)  18,171   1,577   3,216 
Interest and other financing income (expenses), net  (351)  (68)  (283)  65   (526)
  Income (loss) before tax expense (benefit)  26,927   (2,716)  17,888   1,642   2,690 
Income tax (expense) benefit  (4,438)  2,022   (6,287)  3,643   (550)
Net income (loss) $22,489  $( 694) $11,601  $5,285  $2,140 
                     
Net income (loss) per share:                    
  Basic $1.10  $(0.06) $1.13  $0.51  $0.20 
  Diluted $1.08  $(0.06) $0.99  $0.45  $0.18 
Shares used in computing net income (loss) per share                    
  Basic  20,356   11,602   10,256   10,332   10,467 
  Diluted  20,764   11,602   11,725   11,646   12,166 
Balance Sheet Data (At Period End):                    
Cash, cash equivalents and short-term deposits $62,348  $16,549  $22,081  $10,449  $9,443 
Working capital  90,076   30,768   27,511   12,949   12,686 
Total assets  212,705   144,331   46,387   24,833   20,227 
Long-term debt (net of current portion)  -   8   -   -   - 
Long-term liabilities  4,067   2,405   837   402   2,296 
Stockholders’ equity $167,327  $110,725  $28,900  $16,907  $13,075 

  Year Ended December 31, 
  (In thousands, except per-share data) 
  2010  2009  2008  2007  2006 
Statement of Operations Data:               
Revenues $34,802  $32,688  $34,770  $31,046  $26,246 
Costs of revenues  18,720   17,426   16,995   13,486   12,768 
  Gross profit  16,082   15,262   17,775   17,560   13,478 
Selling, general and administrative  19,995   23,083   26,797   22,375   19,722 
Engineering and product development  1,344   1,138   1,073   799   1,007 
  Loss from continuing operations before refinancing charge and interest  (5,257)  (8,959)  (10,095)  (5,614)  (7,251)
Interest income  7   8   156   384   149 
Interest expense  (3,276)  (2,379)  (1,189)  (913)  (671)
Change in the fair value of warrant liability  (197)  809   -   -   - 
Refinancing charge  -   -   -   (442)  - 
  Loss from continuing operations  (8,723)  (10,521)  (11,128)  (6,585)  (7,773)
Discontinued operations:                    
  Income from discontinued operations  -   -   286   231   281 
  Loss on sale of discontinued operations  -   -   (449)  -   - 
Net loss $(8,723) $(10,521) $(11,291) $(6,354) $(7,492)
                     
Basic and diluted net loss per share(1):                    
  Continuing operations $(3.37) $(6.42) $(7.41) $(4.40) $(6.02)
  Discontinued operations  (0.00)  (0.00)  (0.11)  0.15   0.22 
Basic and diluted net loss per share $(3.37) $(6.42) $(7.52) $(4.25) $(5.80)
Shares used in computing basic and diluted net loss per share (1)   2,590    1,640    1,501    1,496    1,290 
Balance Sheet Data (At Period End):                    
Cash and cash equivalents $3,524  $2,195  $3,737  $9,954   12,886 
Working capital  3,123   2,215   3,408   13,706   16,070 
Total assets  49,496   53,168   46,714   56,687   57,482 
Long-term debt (net of current portion)  44   807   3,985   5,709   3,727 
Convertible Debt  20,283   18,111   -   -     
Stockholders’ equity $18,678  $22,922  $29,682  $39,533   44,103 
(1)  For all periods, all common stock equivalents and convertible issues are antidilutive and, therefore, are not included in the weighted shares outstanding during the years in which we incurred net losses. Share amounts and basic and diluted net loss per share amounts shown on the condensed statements of operations have been adjusted to reflect the 1-for-7 reverse stock split effective January 26, 2009 and the 1-for-6 reverse stock split effective February 3, 2010.

 
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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 fourthree key components – leveraging ourskilled direct sales force through training focused on superior skin healthto target Physician and Professional Segments; expertise and incremental product offerings, expanded international capabilities, the development of alternate channels for our varied product linesin global consumer marketing and a renewed commitment to innovation of our technologies.
We concentrate our strategic efforts primarily in the physician market both domestically and internationally. Supporting those efforts management has initiated a renewed commitment to innovation, whereby we look to maximize the application of our technologies and utilize the significant scientific resources available to us in each of ourfull product areas. In the U.S. we market and sell our products through a direct sales organization capable of addressing each product area with specific expertise. Our focus on enhanced training of the sales organization has createdlife cycle model representing the ability to drive salesdevelop and to support our customer base with a leanercommercialize innovative products from concept through regulatory and more cost-effective sales force since the strategy change in 2009. And, finally we look to leverage our experiencephysician acceptance, and substantial product advancements in the physician market into non-physician based markets, or alternate channels, that may benefit from those technological advancements.
On January 1, 2010, we reorganized our business into four operating units which resulted in a change in reportable segments. For financial reporting purposes, we view our current business as comprised of the following four business segments:
Physician Domestic;
Physician International;
Other Channels; and
Surgical Products.
Physician Domestic
In early 2010, we modified our discrete product sales approach for each of our segments and implemented a strategy to develop a skin health solutions-based sales force. We believe this solutions-based sales force is cost-efficient, more productive and scalable and can better increase sales and financial leverage while providing solutions across our product suite to our customers.
Our XTRAC treatment services are a U.S.-based business with revenues generally derived from procedures performed by dermatologists. We are engaged in the development, manufacturing and marketing of our proprietary XTRAC excimer laser and delivery systems and techniques used in the treatment of inflammatory skin disorders, including psoriasis, vitiligo, atopic dermatitis and leukoderma.
As part of our commercialization strategy in the United States, we generally offer the XTRAC laser system to targeted dermatologists at no initial capital cost to those dermatologists. Under this contractual arrangement, we maintain ownership of the laser and generally earn revenue each time a physician treats a patient with the equipment. We believe this arrangement will increase market penetration. We also may sell the laserultimately marketed directly to the customer for certain reasons, including the costs of logistical support and customer preference andconsumer as a means of addressing under-performing accounts while still preserving a vendor-customer relationship. dictated by normal product life-cycle evolution.
We believe that we are thus ableone of only a few aesthetic dermatology companies to reach, at reasonable margins, a sectorhave 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 the laser market that is better suited to a sale model than a per-procedure model.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 also used in the no!no! Skin™, a handheld consumer product sold worldwide under the no!no!® brand. The no!no! Skin™ is a 510(k)-cleared product that has been clinically shown to reduce acne by 81% over 24 hours.
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. Nearly 65% of 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.

 
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For the last several years we have sought to obtain health insurance coverage for XTRAC laser therapy to treat inflammatory skin disease, particularly psoriasis. We now benefit from the fact that, by our estimates, more than 90% of the insured United States population are covered by policies that provide nearly full reimbursement for the treatment of psoriasis by means of an excimer laser.
 
Our skincare products are aimedrevenue generation is categorized as either 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 growing demand for skin health and hair care products, includinghome-use arena. Cumulatively, we have sold more than 4.0 million no!no!® products to enhance appearanceconsumers, the majority of whom have been in Japan and addressNorth America.
Even at this level of sales, we believe we have ample opportunity for further expansion, as Japan’s 2012 population was over 127 million people and North America’s was approximately 314 million people—far greater than the effects of aging on skin and hair. Our skincare products are formulated and branded for and targeted at specific markets. Our initial products addressed the dermatology and plastic and cosmetic surgery markets for use after various procedures. We added anti-aging skincare products to offer a comprehensive approach for a patient’s skincare regimen. In addition tomore than four million who have already purchased our copper peptide based skincare products, in 2009, we introduced DNA topical products, which include DNA Nourishing Lotion and DNA Total Repair which use innovative technology to address the effects of photo-damage. In September 2010, we launched combination therapy products by uniquely combining Copper Peptide Complex and DNA repair technologies. These products are designed to activate self-healing, boost essential skin cell function and maximize results for sustained skin health. The products include Refining Eye Lift, Eye Therapy, Day Therapy SPF 30, Night Therapy, Crème De La Copper and Maximum Body Repair.products.
 
Our PTL products are non-laser light aesthetic devices for the treatmentconsumer 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 a range of clinicaltelevision, online, print and non-clinical dermatological conditions. We have incorporated our PTL technology offering into professional products comprising the Omnilux™ systems for the medical market. Our PTL business has a portfolio of independent, experimental research that supports the efficacy and safety of our Omnilux technology system. Based on a patented technology platform comprised of a unique light-emitting diode (“LED”) array, our Omnilux technology delivers narrow-band, spectrally pure light of specific intensity, wavelength and dose to achieve clinically proven results via a process called photo bio-modulation. Since this technology generates nearly no heat, a patient feels no pain or discomfort, resulting in improved regime compliance and a higher likelihood of repeat procedures; this is in direct contrast to the current laser light-based technologies serving the aesthetics market today. Our PTL LED products compete in the professional aesthetics device market for LED aesthetic medical proceduresradio direct-response advertising, as well as other non-medical markets aroundhigh-end retailers. We believe that this marketing and distribution model, through which each channel complements and supports the world.others, provides:
 
Physician International
greater brand awareness across channels;
cost-effective consumer acquisition and education;
premium brand building; and
improved convenience for consumers.
 
Direct to Consumer. Our international operationsdirect-to-consumer channel consists of sales generated through infomercials, websites and selling approachcall 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 been realignedthe ability to promote our products through their existing retail and management believes our international organization has been dramatically enhanced through two initiatives. First, we have entered into an expanded management relationship with The Lotus Global Group, Inc., doing business as GlobalMed Technologies Co., or GlobalMed, with respect to our laserhome shopping networks.
Markets
North America. Our consumer distribution segment in North America had sales of approximately $141.5 million, $89.6 million and light-based devices. GlobalMed is an international distribution and management company focused on creating increased market opportunity through the engagement and management of local in-country distributors and providing assistance in expediting regulatory approvals. Historically, GlobalMed managed our distribution relationships in the Pacific Rim$33.8 million for the XTRACyears ended December 31, 2012, 2011 and VTRAC product lines, which represented2010, respectively. We use a majoritymix of our total international device sales. As a result of its success in managing our Pacific Rim distribution relationships, we have now expanded GlobalMed’s responsibilities to include all of our laserdirect-to-consumer advertising that includes infomercials, commercials, catalog and light-based devices in substantially all markets outside of the U.S. Second, we have begun to undertake significant efforts to expand the international reach of our skincare business in both the physician and consumer channels by reformulating our current products to meet local standards and registering these products in major international markets. Third, we have made the XTRAC easier to maintain at the distributor locations, employing a modular approach to replacement of chambers. These are the first steps in the implementation of our international skincare expansion strategy.internet-based marketing campaigns, coupled with select retail resellers, such as Neiman Marcus, Henri Bendel, Planet Beauty,
 
In the international market, we derive revenues by selling our dermatology laser and lamp systems and replacement parts to distributors and directly to physicians. In this market, we have benefited from both our clinical studies and from the improved reliability and functionality of the XTRAC laser system. Compared to the domestic segment, the sales of laser and lamp systems in the international segment are influenced to a greater degree by competition from similar laser technologies as well as non-laser lamp alternatives. Over time, this competition has reduced the prices we are able to charge to international distributors for our XTRAC products. To compete with other non-laser UVB products, we offer a lower-priced, lamp-based system called the VTRAC. We have expanded
 

 
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Bed, Bath & Beyond and others; home shopping channels such as HSN; and online retailers such as Amazon, 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 $47.0 million, $36.0 million and $32.8 million for the years ended December 31, 2012, 2011 and 2010, 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. Our distribution has become geographically diverse over the past year: for example as revenues have increased, our Japanese distributor, Ya-Man, Ltd., accounted for approximately 9% of our total revenues for the year ended December 31, 2012, compared to 20% and 42% of total revenues for the years ended December 31, 2011 and 2010, respectively.
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 VTRAC since its introductionNEOVA skin care products at present are driven by physicians, who act as spokespersons to their patients in 2006. The VTRAC is usedsupport of the NEOVA line. We have historically marketed to treat psoriasisphysicians in the dermatology and vitiligo.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.
 
In addition, we also derive revenues by selling our skincare and PTL products to distributors in international markets.Professional
 
Other Channels
InSales under the Other Channelsprofessional business segment we derive revenues by sellingare mainly generated from capital equipment, such as our skincareVelocity and haircareVTRAC equipment, our LHE® brand products through non-physician channels. In addition, through our PTL products we derive revenues from the sale of the Lumiere® systems in the non-medical professional market and our hand-held consumer devices in various on-lineOmnilux and television retail channels.Lumière Light Therapy systems.
 
We are focusedview this segment as an area of opportunity for us since the reverse acquisition with Radiancy, Inc. or Radiancy, completed on expanding ourDecember 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 to non-physician related channels, including the indoor tanning and spa markets and in-store, on-line and television retail channels. We access the indoor tanning and spa markets either through direct relationships with multiple-location market participants or indirectly through industry-leading distributors. To further expand our retail channels, we have entered intoforce that already reaches a relationship with GlobalBeauty Group, or GlobalBeauty, to assistnetwork of approximately 3,000 physician locations in the developmentU.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 new sales channels in the direct to consumer skincare market, including in-store, on-line and television retail channels. GlobalBeauty connects product-focused companies with emerging retail channels in order to expand domestic and international market opportunities.our revenues.
 
Surgical Products
Our Surgical Products segment generates revenues by selling laser products and disposables to hospitals and surgery centers both within and outside of the United States. Also included in this segment are various non-laser surgical products (e.g. the ClearEss® II suction-irrigation system). We believe that sales of surgical laser systems and the related disposable base will tend to erode as hospitals continue to seek outsourcing solutions instead of purchasing lasers and related disposables for their operating rooms. We are working to offset such erosion by increasing sales of the Diode surgical laser, including original equipment manufacturer (“OEM”) arrangements.
Sales and Marketing
 
As of December 31, 2010,2012, our sales and marketing personnel consisted of 6571 full-time positions directed to sales as follows: 59 in Physician Domestic, three in Physician International and three in Other Channels.
Sale of Surgical Services Business
Our Surgical Services segment was a fee-based procedures business using mobile surgical laser equipment operated by our technicians at hospitals and surgery centers in the United States. We decided to sell this division primarily because the growth rates and operating margins of the division had decreased as the business changed to rely more heavily upon procedures performed using equipment from third-party suppliers, thereby limiting the profit potential of these services. On August 8, 2008, we sold certain assets of the business, including accounts receivable, inventory and equipment, for $3,149,737.
Reverse Stock Split
On February 3, 2010, we completed a reverse split of our issued and outstanding shares of common stock at a ratio of 1-for-6, whereby, once effective, every six shares of our common stock was exchanged for one share of our common stock. Our common stock began trading on Nasdaq on a reverse stock split-adjusted basis at the market opening on February 4, 2010. As of December 31, 2010 we had 2,843,749 shares of common stock outstanding on a post-split basis, taking into account the rounding up of fractional shares.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

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generally accepted in the United States. The preparation of financial statements requires management to make

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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.Recognition
XTRAC-Related Operations
.  We have two distribution channels for our phototherapy treatment equipment. We either (x) sellrecognize revenues from the laser through a distributor or directly to a physician or (y) place the laser in a physician’s offices (at no charge to the physician) and generally charge the physician a fee for an agreed-upon number of treatments. In some cases, we 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 we sell an XTRAC laser to a distributor or directly to a foreign or domestic physician, revenue is recognizedproduct 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. The criteria described in the clauses (i) through (iv)Revenues from product sales are collectively referred to as the Criteria. At times, units are shipped, but revenue is not recognized until allrecorded net of the Criteria have been met,provisions for estimated chargebacks, rebates, expected returns and until that time, the unit is carried on our books as inventory.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 inwhen 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 criteriacriterion are recognized when invoiced amounts are fully paid or fully assured.
 
UnderFor revenue arrangements with multiple deliverables within a single contractually binding arrangement (usually sales of products with separately priced extended warranty), each element of the termscontract is accounted for as a separate unit of our distributor agreements, distributorsaccounting 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 unilateralprovision 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, 2012, accrued sales returns provision was $11,901 or 5.4% of total recognized revenues of $220,651. As of December 31, 2011, accrued sales returns provision was $6,143 or 4.7% of total recognized revenues of $132,082.
Revenues received with respect to return any unit that theyextended warranty on consumer products are recognized over the duration of the warranty period. As of December 31, 2012, deferred revenues for the extended warranties amounted to $7,766 or 3.5% on total recognized revenues. As of December 31, 2011, deferred revenues for the extended warranties amounted to $2,826 or 2.1% on total recognized revenues.
We have purchased. However,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 do allow productsstipulate to a quarterly or other periodic target of procedures to be returned, under warranty, by our distributors for product defects or other claims.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 oursthe Company because the treatments can only be performed on our equipment.equipment which we own and place with the customer. Once the treatments are delivered to a patient, this obligation has been satisfied.
 

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We defer substantially all sales of treatment codes ordered by and delivered to ourits customers within the last two weeks of the period in determining the amount of procedures performed by ourits physician-customers. Our managementManagement believes this approach closely approximates the actual numberamount of unused treatments that existed at the end of a period. ForAs 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 yearsyear ended December 31, 2010 and 2009,2011 was $298. As we deferred $229,099 and $303,868, respectively, under this approach.
Skin Care Operations
We generatecompleted the reverse acquisition on December 13, 2011, Pre-merged PhotoMedex revenues from our Skin Care business primarily through product sales for skin health, hair care and wound care. We recognize revenues on the products and copper peptide compound when they are shipped, net of returns and allowances. We ship the products FOB shipping point.

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Photo Therapeutics Operations
We have generated revenues from our Photo Therapeutics business primarily from two channels. The first is through product sales of LEDs and skincare products. The second has been through milestone payments and potential royalty payments from a licensing agreement. We have recognized revenuesincluded only from the product sales, including sales to distributors and other customers, when the Criteria have been met. We recognize the milestone payments when the milestones have been achieved and potential royalty revenues as they are earned from the licensee. The licensee has opted not to continue its development activities under the license, and therefore we anticipate no further milestone payments unless and until we secure a replacement distribution partner.
Surgical Products and Service Operations
We generate revenues from our surgical products business primarily from product sales of laser systems, related maintenance service agreements, recurring laser delivery systems and laser accessories. Domestic sales generally are direct to the end-user, though we have some sales to or through a small number of domestic distributors; foreign sales are to distributors. We recognize revenues from surgical laser and other product sales, including sales to distributors and other customers, when the Criteria have been met.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 (first-in, first-out) 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. The majority of receivables related to phototherapy sales are due from various distributors located outside of the United States and from physicians located inside the United States. The majority of receivables related to skincare products and surgical products are due from various customers and distributors located inside the United States. 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, 2012 and 2011, allowance for doubtful accounts was $6,917 and $3,196 or 3.1% and 2.4%, respectively of the total recognized revenues of each year.
 
Property and Equipment.  As of December 31, 20102012 and 2009,2011, we had net property and equipment of $6,918,944$6,759 and $9,293,482,$5,324, respectively. The most significant component of these amounts 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

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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, including property and equipment, acquired from ProCyte, 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.
 

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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, 20102012 and 2009,2011, we had $28,071,080$51,379 and $29,244,974, respectively,$53,631 of goodwill and other intangibles, accounting for 57%24% and 55%37% of our total assets, at the respective dates.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 fourthree operating units which resulted in a change in reporting segments effective January 1, 2010.December 13, 2011. For the purposes of goodwill impairment testing, our reporting units are defined as Physicians Domestic, Physicians InternationalConsumer, Physician Recurring and Other Channels.Professional Equipment. The balance of our goodwill for each of our segments as of December 31, 20102012 is as follows: Consumer $23,772, Physician Domestic $12,793,455, Physician International $4,037,934Recurring $4,080 and Other Channels $2,737,811.Professional Equipment $0. We completed our annual goodwill impairment analysis as of December 31, 2010.2012. 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 threetwo reporting units with goodwill, Physicians DomesticConsumer has a fair value that is in excess of its carrying value by approximately 28%787%, while Physicians InternationalPhysician Recurring has a fair value that is approximately 25% in excess of its carrying value. The third reporting unit, Other Channels has a fair value that is approximately 14%33% 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 Photo TherapeuticsPre-merged PhotoMedex on February 27, 2009,December 31, 2011, we acquired certain intangibles recorded at fair value as of the date of acquisition and allocated them fully to the Photo Therapeutics segment.
acquisition. The balances of these acquired intangibles, net of amortization, were:
 
  December 31, 2010 
PTL Customer Relationships $408,333 
PTL Tradename  816,667 
PTL Patented Technologies  6,043,333 
Goodwill  2,651,392 
     Total $9,919,725 
  December 31, 2012 
Customer Relationships $5,708 
Tradename  5,146 
Product and Core Technologies  12,673 
Goodwill  27,852 
     Total $51,379 
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. We estimate for book purposes, the usability of the net operating losses to be based on a five-year projected income. The balance of the net operating losses is put under a valuation allowance. For the net operating losses in the UK, we are continuing to evaluate the position of using the UK net operating losses in the future. Until such time, we have applied a 100% valuation allowance. 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.
 


 
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Derivative Financial Instruments.
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 all derivative financial instruments as assets or liabilities in theour financial statements and measures them at fair valuethe 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 changes in fair value reflected as current period income or loss unless the derivatives qualify as hedges. As a result, certain warrants are now accounted for as derivatives. As of December 31, 2010 and 2009, we had $938,623 and $741,525, respectively, in derivative financial instruments.taxing authority is recorded.
 
Fair Value Measurements.Stock-based compensation. We measure fair valueaccount for stock based compensation to employees in accordance with Financial Accounting Standards Board Accounting Standards Codification 820, Fair Value Measurements and Disclosures (“ASC Topic 820”). ASC Topic 820 defines“Share-Based Payment” accounting standard. The standard requires estimating the fair value establishes a framework and gives guidance regardingof equity-based payment awards on the methods used for measuring fairdate of grant using an option-pricing model. The value and expands disclosures about fair value measurements. Fair value is an exit price, representingof the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. 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 prioritizesportion of the inputs used in measuring fair value. Our derivative financial instruments are considered to be significant unobservable inputs (level 3).
Deferred Income Taxes.  We have a deferred tax assetaward that is fully reserved by a valuation allowance. We have notultimately expected to vest is recognized as an expense over the deferred tax asset, givenrequisite service periods in our historical losses and the lack of certainty of future taxable income. However, if and when we become profitable and can reasonably foresee continuing profitability, then under FASB ASC 740, Income Taxes (“ASC Topic 740”) we may recognize some of the deferred tax asset. The recognized portion may variously reduce acquired goodwill, increase stockholders’ equity directly and/or benefit theconsolidated statement of operations.
 
Warranty Accruals.  We establishThe fair value of employee stock options is estimated using a liabilityBlack-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 $6,197 and $34,001 for warranty repairs based on estimated future claims for XTRAC systemsthe years ended December 31, 2012 and based on historical analysis of the cost of the repairs for surgical laser systems. However, future returns of defective laser systems and related warranty liability could differ significantly from estimates, and historical patterns, which would adversely affect our operating results.2011, respectively.
 
Results of Operations
 
Revenues
 
The following table illustrates revenues from our fourthree business segments for the periods listed below:
 
  For the Year Ended December 31, 
  2010  2009  2008 
Physician Domestic $20,196,688  $18,844,995  $21,058,919 
Physician International  8,381,136   6,665,199   6,005,170 
Other Channels  2,551,429   3,555,310   1,968,155 
Total Dermatology Revenues  31,129,253   29,065,504   29,032,244 
             
Surgical Products  3,672,282   3,622,580   5,738,048 
             
Total Revenues $34,801,535  $32,688,084  $34,770,292 
  For the Year Ended December 31, 
  2012  2011  2010 
Consumer $188,425  $125,581  $66,655 
Physician Recurring  21,284   829   - 
Professional  10,942   5,672   3,416 
             
Total Revenues $220,651  $132,082  $70,071 
 
RevenuesWe completed the reverse acquisition on December 13, 2011 and as such, our Pre-merged PhotoMedex revenues are included only from our Surgical Services segment,the completion date forward. There are, therefore, no corresponding activities from the Pre-Merged PhotoMedex in the amount of $4,398,047 through August 4, 2008,results for the date of sale, have been accounted for in 2008 as a discontinued operation.year ended December 31, 2010 and 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:
  For the Year Ended December 31, 
  2012  2011  2010 
Direct-to-consumer $125,208  $75,904  $29,865 
Distributors  24,851   28,948   31,087 
Retailers and home shopping channels  38,366   20,729   5,703 
             
Total Consumer Revenues $188,425  $125,581  $66,655 


 
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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:
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 United Kingdom (“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.
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 United States (“US”) and the UK.
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.
For the year ended December 31, 2011, consumer products revenues were $125,581 compared to $66,655 in the year ended December 31, 2010. The increase of 88.4% in the year was mainly due to the following reasons:
Direct to Consumer. Revenues for the year ended December 31, 2011 were $75,904 compared to $29,865 for the year ended December 31, 2010. The increase of 154% was mainly due to our successful marketing programs which have led to rapid year-over-year revenue growth. Additionally, the Company has recently (in May 2011) expanded into the United Kingdom (“UK”), resulting in approximately $3,600 in revenues for the year ended December 31, 2011.
Retailers and Home Shopping Channels. Revenues for the year ended December 31, 2011 were $20,523 compared to $5,703 for the year ended December 31, 2010. The increase of 260% was also mainly due to our successful marketing programs to the various home shopping channel customers, mainly in the United States (“US”) and the UK.
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, 
  2012  2011  2010 
North America $141,478  $89,571  $33,823 
International  46,947   36,010   32,832 
             
Total Consumer Revenues $188,425  $125,581  $66,655 


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Physician DomesticRecurring Segment
 
The following table illustrates the key changes in the revenues of the Physician DomesticRecurring segment for the periods reflected below:
 
  For the Year Ended December 31, 
  2010  2009  2008 
XTRAC treatments $9,492,465  $9,736,800  $8,500,452 
XTRAC laser sales  4,227,061   3,054,148   3,919,520 
Skincare products  5,136,617   4,982,763   8,638,947 
PTL products  1,051,854   1,071,284   - 
Metvixia  288,691   -   - 
             
Total Physician Domestic Revenues $20,196,688  $18,844,995  $21,058,919 
  For the Year Ended December 31, 
  2012  2011  2010 
XTRAC Treatments $8,441  $298  $- 
Neova skincare  8,156   385   - 
Other  4,687   146   - 
             
Total Physician Recurring Revenues $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”) these revenues are included only for the period of December 14, 2011 through December 31, 2011 for the year ended December 31, 2011. There are, therefore, no corresponding activities in for the year ended December 31, 2010 and up to and including December 13, 2011.
 
XTRAC Treatments
 
Recognized treatment revenue for the yearsyear ended December 31, 2010, 2009, and 20082012 was $9,492,465, $9,736,800 and $8,500,452, respectively, reflecting billed procedures of 145,083, 145,521 and 133,594, respectively. In addition, 6,163, 6,567 and 6,899 procedures were performed$8,441, which approximates 125,000 treatments with prices between $65 to $85 per treatment. Recognized treatment revenue for the years endedperiod, beginning with the merger date on December 13, 2011 through December 31, 2010, 2009 and 2008, respectively, without billing from us, in connection with clinical research and customer evaluations of the XTRAC laser.2011, was $298. Increases in procedures are dependent upon building market acceptance through marketing programs with our physician partners and their patients that the XTRAC procedures will be of clinical benefit and be generally reimbursed.
 
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, 2010,2012, we recognizeddeferred net revenues of $38,704 (594 procedures)$283 under this approach.
NEOVA skincare
For the year ended December 31, 2012 revenues were $8,156. 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 care and wound products to physicians in both the domestic and international markets.
Surgical products
For the year ended December 31, 2012, revenues were $2,147. 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.

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The following table illustrates the key changes in the revenues of the Physicians Recurring segment, by markets, for the periods reflected below:
  For the Year Ended December 31, 
  2012  2011  2010 
North America $18,607  $806  $- 
International  2,677   23   - 
             
Total Physicians Recurring Revenues $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, 
  2012  2011  2010 
Dermatology equipment $4,174  $429  $- 
LHE equipment  4,241   5,000   3,416 
Omnilux/Lumiere equipment  2,124   150   - 
Surgical lasers  403   93   - 
             
Total Professional Revenues $10,942  $5,672  $3,416 
The Dermatology equipment, Omnilux/Lumiere equipment and Surgical laser revenues in this segment are all generated through the Pre-merged PhotoMedex products. As we completed the reverse acquisition on December 13, 2011 and in accordance with generally accepted accounting principles these revenues are included only for the period of December 14, 2011 through December 31, 2011 for the year ended December 31, 2009, we recognized net revenues of $278,343 (4,282 procedures), respectively, under this approach. 2011. There are, therefore, no corresponding activities in for the year ended December 31, 2010.
Dermatology equipment
For the year ended December 31, 2008, we deferred net2012, dermatology equipment revenues of $216,987 (3,325 procedures) underwere $4,174. Included in this approach.
The following table illustrates the above analysis for the Domestic XTRAC segment for the periods reflected below:
  
For the Year Ended December 31,
 
  2010  2009  2008 
Recognized treatment revenue $9,492,465  $9,736,800  $8,500,452 
   Change in deferred treatment revenue  (38,704)  (278,343)  216,987 
Net billed revenue $9,453,761  $9,458,457  $8,717,439 
   Procedure volume total  151,246   152,088   140,493 
   Less: Non-billed procedures  (6,163)  (6,567)  (6,899)
Net billed procedures  145,083   145,521   133,594 
   Avg. price of treatments billed $65.15  $65.00  $65.25 
Change in procedures with deferred treatment revenue, net  (594)  (4,282)  3,325 
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The average price for an XTRAC treatment may be reduced in some instances based on the volume of treatments performed. The average price for a treatment also varies based upon the mix of mild and moderate psoriasis patients treated by our physician partners. We charge a higher price per treatment for moderate psoriasis patients due to the increased body surface area required to be treated, although there are fewer patients with moderate psoriasis than there are with mild psoriasis.
XTRAC laser sales
For the years ended December 31, 2010 and 2009,amount were domestic XTRAC laser sales were $4,227,061 and $3,054,148, respectively. There were 99 and 84of $899 on 20 lasers sold, respectively. There were 78 XTRAC lasers sold for the year ended December 31, 2008 for a total of $3,919,520. Included in the year ended December 31, 2008 laser sales was a sale of one Omnilux product from PTL for which we had been acting as a distributor in the United States.sold. We sell the laser directly to the customer for certain reasons, including the costs of logistical support and customer preference. Our preference as well asis to consign lasers to customers which will thrive under the per-procedure model. The international sales of our XTRAC and VTRAC systems were $3,275 for the year ended December 31, 2012. We sold 121 systems for the year ended December 31, 2012, 82 of which were VTRAC systems, a means of addressing under-performing accounts while preserving the vendor-customer relationship. We believelamp-based alternative UVB light source that we are able to reach, at reasonable margins,has a sector of the laser marketwholesale sales price that is better suited to a sale model than a per-procedure, or consignment, model.below our competitors’ international dermatology equipment and below our XTRAC laser.
 
SkincareFor 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 year ended December 31, 20102012, LHE® brand products revenues were $5,136,617$4,241 compared to $4,982,763 and $8,638,947 in$5,000 for the yearsyear ended December 31, 2009 and 2008, respectively. These2011.

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For the year ended December 31, 2011, LHE® brand products revenues are generated fromwere $5,000 compared to $3,416 for the saleyear ended December 31, 2010. The increase of various skin, hair care and wound products to physicians46.4% in the domestic market. We believeyear was primarily due to an increase in our skincare products are more susceptible tomarketing efforts mainly in the macro-economic conditions than our other products because cosmetic products are more likely to be discretionary and not medically necessary.FSD product.
 
PTL productsOmnilux/Lumiere equipment
 
For the year ended December 31, 2010, PTL product2012 Omnilux/Lumiere equipment revenues were $1,051,854.$2,124. 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. There were 93 LEDThe Omnilux units are sold duringfor medical applications and the year ended December 31, 2010. FromLumière is a sister technology to Omnilux with the date of acquisition of Photo Therapeutics on February 27, 2009 through December 31, 2009,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 PTL products were $1,071,284 representing 39 LED units. There were no corresponding revenues for the year ended December 31, 2008.
Metvixia
sales of surgical laser systems. For the year ended December 31, 2010, Metvixia2012 surgical lasers revenues were $288,691. There were no corresponding revenues for$403, representing 13 laser systems. For the years endedperiod beginning with the merger date on December 13, 2011 through December 31, 2009 and 2008 as the co-promotion agreement with Galderma began in January 2010 and concluded in December 2010.
Physician International Segment2011, surgical lasers revenues were $93, comprising of three laser systems.
 
The following table illustrates the key changes in the revenues of the Physician InternationalProfessional segment, by markets, for the periods reflected below:
 
  For the Year Ended December 31, 
  2010  2009  2008 
International dermatology equipment $6,110,610  $3,996,067  $3,782,456 
Skincare products  1,341,121   1,057,397   2,222,714 
PTL products  929,405   1,611,735   - 
             
Total Physician International Revenues $8,381,136  $6,665,199  $6,005,170 
International dermatology equipment
International sales of our XTRAC and VTRAC systems and related parts were $6,110,610 for the year ended December 31, 2010 compared to $3,996,067 and $3,782,456 for the years ended December 31, 2009 and 2008, respectively. We sold 161 systems in the year ended December 31, 2010 which compared to 94 and 86

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systems in the years ended December 31, 2009 and 2008, respectively. The average price of dermatology equipment sold internationally varies due to the quantities of VTRAC systems and refurbished domestic XTRAC systems sold. Both of these products have lower average selling prices than new XTRAC laser systems. However, by adding these to our product offerings along with expanding into new geographic territories where the products are sold, we have been able to increase overall international dermatology equipment revenues.
We sold 75 lasers to Amico Group, our distributor in the Middle East, as part of the multi-million dollar purchase order received in July 2010. We sold 10 and 11 lasers to Amico Group in the comparable years of 2009 and 2008, respectively; and
We also sell refurbished domestic XTRAC laser systems into the international market. The selling price for used equipment is substantially less than new equipment, some of which may be substantially depreciated in connection with its use in the domestic market. We sold 16 of these used lasers in the year ended December 31, 2010 at an average price of $21,900. We sold 25 and 11 of these used lasers, at an average price of $23,500 and $33,000 for the years ended December 31, 2009 and 2008, respectively; and
In addition to the XTRAC laser system (both new and used), we sell the VTRAC, 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. We sold 58 of these lasers in the year ended December 31, 2010 at an average price of $24,800. We sold 35 and 34 of these lasers, at an average price of $25,000 and $25,800 for the years ended December 31, 2009 and 2008, respectively.
The following table illustrates the key changes in the International dermatology equipment for the periods reflected below:
  
For the Year Ended December 31,
 
  2009  2009  2008 
Revenues $6,110,610  $3,996,067  $3,782,456 
   Less: part sales  (1,039,360)  (852,767)  (664,456)
Laser/lamp revenues  5,071,250   3,143,300   3,118,000 
   Laser/lamp systems sold  161   94   86 
Average revenue per laser/lamp $31,498  $33,439  $36,256 
International Skincare products
For the year ended December 31, 2010 revenues were $1,341,121 compared to $1,057,397 and $2,222,714 in the years ended December 31, 2009 and 2008, respectively. These revenues are generated from the sale of various skin, hair care and wound products to distributors in international markets. We believe our skincare products are more susceptible to the macro-economic conditions than our other products because cosmetic products are more likely to be discretionary and not medically necessary.
International PTL products
These revenues are generated from the sale of LED devices. For the year ended December 31, 2010, PTL product revenues were $929,405, representing 109 LED units. From the date of acquisition of Photo Therapeutics on February 27, 2009 through December 31, 2009, revenues from the PTL products were $1,611,735 representing 69 LED units. There were no corresponding revenues for the year ended December 2008. The decline in PTL product revenues in the 2010 period described above was due to a large decrease in handheld unit sales as compared to the prior year periods. In addition, the decrease in the year also resulted from the renegotiation of international distribution relationships and associated contracts, due to the transition of distributor management responsibilities to GlobalMed Technologies, the Company’s master distributor.

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Other Channels Segment
The following table illustrates the key changes in the revenues of the Other Channels segment for the periods reflected below:
  For the Year Ended December 31, 
  2010  2009  2008 
Skincare products $1,327,036  $1,855,314  $1,968,155 
PTL products  1,224,393   1,699,996   - 
             
Total Other Channels revenues $2,551,429  $3,555,310  $1,968,155 
Skincare products
For the year ended December 31, 2010 revenues from our skincare products were $1,327,036 compared to $1,855,314 and $1,968,155 for the years ended December 31, 2009 and 2008, respectively. These revenues are generated from the sale of various skin, hair care and wound and from the sale of copper peptide compound in non-physician related channels. Included in the skincare product revenues for the years ended December 31, 2009 and 2008 were $239,760 and $256,000 from bulk compound sales, respectively. There were no such sales in the year ended December 31, 2010.
PTL products
For the year ended December 31, 2010 PTL product revenues were $1,221,393. From the date of acquisition of Photo Therapeutics on February 27, 2009 through December 31, 2009, revenues from the PTL products were $1,855,314. PTL revenues are generated from the sale of LED devices in the spa and indoor tanning markets and milestone payments on a licensing agreement targeting the mass consumer acne market. There were no corresponding revenues for the year ended December 2008. Included in the year ended December 31, 2009, there were milestone payments of $407,971; inasmuch as the licensee terminated the license in the quarter ended September 30, 2010, we do not anticipate further milestone payments. There was no such milestone payments in the year ended December 31, 2010.
We are actively seeking distribution channels to reach the home-use consumer market with our Clear-U™ and New-U™ hand-held LED devices.
Surgical Products Segment
The following table illustrates the key changes in our Surgical Products segment for the periods reflected below:
  For the Year Ended December 31, 
  2010  2009  2008 
Revenues $3,672,282  $3,622,580  $5,738,048 
Percent increase/(decrease)  1.4%  (36.9%)    
   Laser systems sold  35   30   145 
Laser system revenues $943,480  $600,841  $2,236,000 
   Average revenue per laser $26,957  $20,028  $15,422 
Surgical Products segment revenues include revenues derived from the sales of surgical laser systems together with sales of related laser fibers and laser disposables. Laser fibers and laser disposables are more profitable than laser systems, but the sales of laser systems generate subsequent recurring sales of fibers and disposables.

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For the year ended December 31, 2010, surgical products revenues were $3,672,282 compared to $3,622,580 in the year ended December 31, 2009. The increase in the year was mainly due to the increase in laser sales. Offsetting the increase was a decrease in fiber and other disposables sales by 10% with the comparable year ended December 31, 2009. We expect that our disposables base will continue to erode over time as hospitals continue to seek outsourcing solutions instead of purchasing lasers and related disposables for their operating rooms. For the year ended December 31, 2008, surgical products revenues were $5,738,048. The decrease was mainly related to the termination of an OEM contract in 2008 with AngioDynamics. Sales to AngioDynamics were $1.4 million for the year ended December 31, 2008.
The change in average price per laser between the periods, as set forth in the table below, was largely due to the mix of lasers sold and partly due to the trade level at which the lasers were sold (i.e. wholesale versus retail). Our diode laser has replaced our Nd:YAG laser, which had a substantially higher sales price. Included in laser sales during the years ended December 31, 2010, 2009 and 2008 were sales of 28, 26 and 141 diode lasers, respectively. The diode lasers have lower sales prices than our other types of lasers. During the year ended December 31, 2010, we sold our last six holmium laser systems, which completed the phase out of these laser systems.
  For the Year Ended December 31, 
  2012  2011  2010 
North America $3,026  $2,624  $1,149 
International  7,916   3,048   2,267 
                    
Total Professional Revenues $10,942  $5,672  $3,416 
 
Cost of Revenues: all segments
 
OurThe following table illustrates cost of revenues is comprised of productfrom our three business segments for the periods listed below:
  For the Year Ended December 31, 
  2012  2011  2010 
Consumer $28,965  $23,309  $15,039 
Physician Recurring  11,512   456   - 
Professional  6,165   2,531   1,426 
             
Total Revenues $46,642  $26,296  $16,465 
Overall, cost of revenues and service costhas increased in all segments due to the related increases in revenues for each of revenues. Within productthe three segments. As we completed the reverse acquisition on December 13, 2011 the Pre-merged PhotoMedex cost of revenues are included only for the costsperiod of products sold in our Physicians Domestic segment (with XTRAC treatments included in the services side of the segment), Physician International segment, Other Channels (with royalties and licensing fees included in the services side of the segment), and our Surgical Products segment (with laser maintenance fees included in the services side of this segment). Within services cost of revenues are the costs associated with our XTRAC treatment revenues, as well as costs associated with royalties and licensing fees and maintenance revenue.
Product cost of revenues during the year endedDecember 14, 2011 through December 31, 2010 were $13,024,156, compared to $11,675,2332011 for the year ended December 31, 2009. The $1,348,923 increase is due to the increases2011. There are, therefore, no corresponding activities in laser sales for XTRAC lasers in the international segment of $2,080,000. This increases in costs was offset in part by the relocation our skincare and PTL facilities into our Pennsylvania facility, during 2009, which allowed us to reduce some of the fixed costs.
Product cost of revenues during the year ended December 31, 2009 were $11,675,233, compared to $11,968,222 for the year ended December 31, 2008. The $292,989 decrease is due to decreases in product cost of sales for surgical products of $1,216,902 related to the decrease in laser sales, a decrease in skincare products of $1,792,332 resulting from the switch to our internally produced Neova product and a decrease in domestic XTRAC laser sales of $338,810. These decreases were partly offset, by an increase in international dermatology equipment sales in the amount of $716,725. In addition, there was an increase due to the inclusion of $2,338,330 in product costs for our PTL business.
Services cost of revenues was $5,695,746 in the year ended December 31, 2010 compared to $5,750,733 in the year ended December 31, 2009, representing a decrease of $54,986. The decrease is directly related to the decrease in Physician Domestic segment costs of $54,013 related to our XTRAC treatments.
Services cost of revenues was $5,750,733 in the year ended December 31, 2009 compared to $5,027,095 in the year ended December 31, 2008, representing an increase of $723,638. The increase is directly related to the increase in our Domestic XTRAC segment costs of $706,393.
Certain allocable XTRAC manufacturing overhead costs are charged against the XTRAC service revenues. Our manufacturing facility in Carlsbad, California is used exclusively for the production of the XTRAC lasers. The unabsorbed costs are allocated to the Physician Domestic and the Physician International segments based on actual production of lasers for each segment. Included in these allocated manufacturing costs are unabsorbed labor and direct plant costs.

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The following table illustrates the key changes in cost of revenues for the periods reflected below:
  For the Year Ended December 31, 
  2010  2009  2008 
Product:         
Physician Domestic $3,895,225  $3,659,679  $4,746,097 
Physician International  6,110,186   3,966,749   2,657,928 
Other Channels  1,467,293   1,397,902   696,388 
Surgical Products  1,551,452   2,650,903   3,867,809 
Total Product costs $13,024,156  $11,675,233  $11,968,222 
             
Services:            
Physician Domestic $5,569,766  $5,623,780  $4,917,389 
Surgical Products  125,980   126,953   109,706 
Total Services costs $5,695,746  $5,750,733  $5,027,095 
             
Total Costs of Revenues $18,719,902  $17,425,966  $16,995,317 
2010.
 
Gross Profit Analysis
 
Gross profit increased to $16,081,633 during$174,009 for the year ended December 31, 20102012 from $15,262,118$105,786 during the same period in 2009.2011. As a percentage of revenues, the gross margin decreased to 46.2%78.9% for the year ended December 31, 20102012 from 46.7%80.1% for the same period in 2009.2011.
 
Gross profit decreasedincreased to $15,262,118 during$105,786 for the year ended December 31, 20092011 from $17,774,975$53,606 during the same period in 2008.2010. As a percentage of revenues, the gross margin decreasedincreased to 46.7%80.1% for the year ended December 31, 20092011 from 51.1%76.5% for the same period in 2008.2010.

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The following table analyzes changes in our gross margin for the periods presented below:
 
Company Profit Analysis For the Year Ended December 31,  For the Year Ended December 31, 
 2010  2009  2008  2012  2011  2010 
Revenues $34,801,535  $32,688,084  $34,770,292  $220,651  $132,082  $70,071 
Percent increase/(decrease)  6.5%  (6.0%)    
Percent increase  67.1%  88.5%    
Cost of revenues  18,719,902   17,425,966   16,995,317   46,642   26,296   16,465 
Percent increase  7.4%  2.5%      77.4%  59.7%    
Gross profit $16,081,633  $15,262,118  $17,774,975  $174,009  $105,786  $53,606 
Gross margin percentage  46.2%  46.7%  51.1%  78.9%  80.1%  76.5%
 
The primary reasons for the changes in gross profit and the gross margin percentage for the year ended December 31, 2010,2012, compared to the same period in 20092011 were as follows:
Indue to a change in the Physicians Internationalsales mix within the Consumer segment we sold 103 XTRAC laser systemswith the direct channel, having the highest product gross margins, growing faster than the distributor and 58 VTRAC lamp-based excimer systems duringretail 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, 2010 and 55 XTRAC laser systems and 39 VTRAC systems2012 are only included in the comparableabove table for the period in 2009. Included in the 103 XTRAC lasers systems sold were 75 laser systems to Amico Group, our distributor in the Middle Eastbetween December 14, 2011 and 16 used laser systems, both of which have a lower average selling price and gross margin percentage, compared to 25 used laser systems sold in the year ended December 31, 2009. Consequently, gross profit in the Physicians International segment decreased as a result of the mix of units sold. The gross margin percentage for the VTRAC is higher than for the XTRAC.
2011.


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Revenues for the year ended December 31, 2009 included milestone payments to us from a licensee of $407,971 under a certain licensing arrangement for the Clear U™ hand-held device.
There was additional excess and obsolete expense of $93,000 for the Skincare products due to discontinuation and/or reformulation of some of the products during the year ended December 31, 2010.
Offsetting the above items that had a negative impact on gross profit, we sold approximately $1,173,000 more in domestic XTRAC lasers in the year ended December 31, 2010 in addition, the cost of sales associated with these sales decreased $60,000 between the comparable periods. The margin on these capital equipment sales was 67% in the year ended December 31, 2010 compared to 52% in the comparable period in 2009. Certain of these lasers were being depreciated until the time of sale, since they were previously utilized as field placements.
The revenues for Metvixia products of $288,691 for the year ended December 31, 2010 have no associated cost of sales. There were no such revenues for the year ended December 31, 2009.
 
The primary reasons for the changes in gross profit and the gross margin percentage for the year ended December 31, 20092011, compared to the same period in 20082010 were as follows:
Our skincare products are more susceptible to the macro economic conditions than our other products because cosmetic products are more likely to be discretionary and not medically necessary. Product sales for the year ended December 31, 2009 were approximately $7.7 million down from approximately $12.6 million for the year ended December 31, 2008. Our skincare products’ margins are substantially higher than the other products and consequently substantive swings in the revenues attributed to Skin Care’s sales will have a significant impact on our overall margins.
In our Surgical Products segment there were 115 fewer laser systems sold in the year ended December 31, 2009 than in the comparable period of 2008. This included 100 sales due to our OEM arrangement, but in the second half of 2008, AngioDynamics elected out of the OEM contract. Since that time, our sales to AngioDynamics have been $0. Additionally, the higher manufacturing levels in 2008 caused better absorption of fixed overheads which lowered average unit costs and resulted in a higher gross margin in 2008 compared to 2009.
We sold approximately $865,000 less in domestic XTRAC lasers in the year ended December 31, 2009 than in the comparable period of 2008. In addition, the current year sales were at lower margins compared to the same period in 2008. Certain of these lasers were previously being depreciated, since they were previously placements. The margin on these capital equipment sales was 52% in the year ended December 31, 2009 compared to 59% in the year ended December 31, 2008.
We recorded severance and lease liability of approximately $226,000 related to the integration of the PTL acquisition and the relocation of our Skin Care facility.
Additional gross profit was realized from our PTL products. We acquired PTL on February 27, 2009; therefore only the activity after that date is recorded in our financial statements. There was no activity recorded in our financial statements in 2008.
We decreased the number of laser systems placed with our customers but sold a greater number of XTRAC treatment procedures in the year ended December 31, 2009 than in the year ended December 31, 2008. Procedure volume increased 8.9% from 133,594 to 145,521 billed procedures in the year ended December 31, 2009 compared to the same period in 2008. Increased usage at existing sites carries negligible variable cost thereby enhancing profit margins. Our ability to increase the number of procedures sold is a direct result of improved insurance reimbursement and increased marketing efforts.
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due to a change in the sales mix resulting from the increase in direct to consumer revenues, which have a higher gross margin percentage than our other sales channels. Direct-to-consumer revenues were 57.5% of total revenues for the year ended December 31, 2011 compared to 42.6% of total revenues in the prior year.
 
 
The following table analyzes the gross profit for our Physician DomesticConsumer segment for the periods presented below:
 
Physician Domestic Segment For the Year Ended December 31, 
Consumer Segment For the Year Ended December 31, 
 2010  2009  2008  2012  2011  2010 
Revenues $20,196,688  $18,844,995  $21,058,919  $188,425  $125,581  $66,655 
Percent increase/(decrease)  7.2%  (10.5%)    
Percent increase  50.0%  88.4%    
Cost of revenues  9,464,991   9,283,459   9,663,486   28,965   23,309   15,039 
Percent increase/(decrease)  5.5%  (3.9%)    
Percent increase  24.3%  55.0%    
Gross profit $10,731,697  $9,561,536  $11,395,433  $159,460  $102,272  $51,616 
Gross margin percentage  53.1%  50.7%  54.1%  84.6%  81.4%  77.4%
 
Gross profit increased for this segment for the year ended December 31, 20102012 increased by $57,188 from the comparable period in 2009 by $1,170,161.2011. The key factors for the increase were as follows:
We sold approximately $1,173,000 more in domestic XTRAC lasers in the year ended December 31, 2010, although the cost of sales associated with these sales decreased $60,000 between the comparable periods. The margin on these capital equipment sales was 67% in the year ended December 31, 2010 compared to 52% in the comparable period in 2009. Certain of these lasers were being depreciated until the time of sale, since they were previously utilized as field placements.
There was a decrease in certain allocable XTRAC manufacturing overhead costs due to better absorption of the overhead costs of approximately $156,000. This decrease was due to greater production during the year ended December 31, 2010.
The revenues for Metvixia products of $288,691 for the year ended December 31, 2010 have no associated cost of sales. There were no such revenues for the year ended December 31, 2009.
Offsetting the above items that had a positive impact on gross profit and gross margin, there was additional excess and obsolete expense for the Skincare products due to discontinuation and/or reformulation of some of the products during the year ended December 31, 2010. The portion allocated to the physician domestic segment was approximately $62,000.
For the year ended December 31, 2010, PTL product revenues decreased $19,000 over the prior year period, while the cost of sales for these products increased $270,000 for the same comparable periods. Due to the acquisition, an additional amortization of $740,000 is allocated to the segments based on each segment’s revenues for PTL products. In addition, the average selling price of the units decreased due to competitive pricing.
Gross profit decreasedfactor for this segmentincrease 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, 20092012 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.
Gross profit for the year ended December 31, 2011 increased by $50,656 from the comparable period in 2008 by $1,833,897.2010. The key factorsfactor for this decrease were as follows: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, 2011 was 81.4%,
 
We sold approximately $865,000 less domestic XTRAC lasers in the year ended December 31, 2009, although the cost of sales associated with these sales only decreased $339,000 between the comparable periods. The margin on these capital equipment sales was 52% in the year ended December 31, 2009 compared to 59% in the comparable period in 2008. Certain of these lasers were being depreciated until the time of sale, since they were previously utilized as field placements.
There was an increase in certain allocable XTRAC manufacturing overhead costs due to an under absorption of the overhead costs of approximately $390,000. This increase was due to less production during the year ended December 31, 2009.



 
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Skincare product sales for the year ended December 31, 2009 were approximately $5.0 million down from approximately $8.6 million for the year ended December 31, 2008. These revenues are generated from the sale of various skin, hair care and wound products to physicians in the domestic market. We believe our skincare products are more susceptible to the macro-economic conditions than our other products because cosmetic products are more likely to be discretionary and not medically necessary. Our Skin Care margins are substantially higher than the other business segments and consequently substantive swings in the revenues attributed to Skin Care’s sales will have a significant impact on our overall margins.
We recorded severance and lease liability related to the integration of the PTL acquisition and the relocation of our Skin Care facility of which approximately $142,000 was allocated to the Physician Domestic segment.
Offsetting the above items that had a negative impact on gross profit, we decreased the number of laser systems placed with our customers but sold a greater number of XTRAC treatment procedures in the year ended December 31, 2009 than in the year ended December 31, 2008. Procedure volume increased 8.9% from 133,594 to 145,521 billed procedures in the year ended December 31, 2009 compared to the same period in 2008. Increased usage at existing sites carries negligible variable cost thereby enhancing profit margins. Our ability to increase the number of procedures sold is a direct result of improved insurance reimbursement and increased marketing efforts.
Additional gross profit was realized from our PTL segment of $495,000. We acquired PTL on February 27, 2009; therefore only the activity after that date is recorded in our financial statements. There was no activity recorded in our financial statements in 2008.
compared to 77.4% for the year ended December 31, 2010. 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 InternationalRecurring segment for the periods presented below:
 
Physician International Segment For the Year Ended December 31, 
Physician Recurring Segment For the Year Ended December 31, 
 2010  2009  2008  2012  2011  2010 
Revenues $8,381,136  $6,665,199  $6,005,170  $21,284  $829  $- 
Percent increase  25.7%  11.0%      2,467.4%  100%    
Cost of revenues  6,110,186   3,966,749   2,657,928   11,512   456   - 
Percent increase  54.0%  49.2%      2,425%  100%    
Gross profit $2,270,950  $2,698,450  $3,347,242  $9,772  $373  $- 
Gross margin percentage  27.1%  40.5%  55.7%  45.9%  45.0%  N/A 
 
Gross profitAll revenues/costs for this segment are generated through the Pre-merged PhotoMedex products. As we completed the reverse acquisition on December 13, 2011 these revenues are included only for the period of December 14, 2011 through December 31, 2011 for the year ended December 31, 2011. There are, therefore, no corresponding activities in for the year ended December 31, 2010 decreased by $427,500 from the comparable period in 2009. The key factors for the decrease were as follows:and up to and including December 13, 2011.
 
We sold 103 XTRAC laser systems and 58 VTRAC lamp-based excimer systems during the year ended December 31, 2010 and 55 XTRAC laser systems and 39 VTRAC systems in the comparable period in 2009. Included in the 103 XTRAC lasers systems sold were 75 laser systems to Amico Group, our distributor in the Middle East and 16 used laser systems, both of which have a lower average selling price and gross margin percentage, compared to 25 used laser systems sold in the year ended December 31, 2009. Consequently, gross profit decreased as a result of the mix of units sold. The gross margin percentage for the VTRAC is higher than for the XTRAC.
Gross profit for the year ended December 31, 2010 was negatively impacted by increases in certain allocable XTRAC manufacturing overhead costs that are charged against international dermatology equipment. These increased costs, which approximated $69,000, related to an overall increase in international production.

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For the year ended December 31, 2010, skincare product revenues increased $284,000 over the prior year period, while the cost of sales for these products increased $162,000 for the same comparable periods, including additional excess and obsolete expense of approximately $16,000.
For the year ended December 31, 2010, PTL product revenues decreased $682,000 over the prior year period, while the cost of sales for these products decreased $298,000 for the same comparable periods. This cost of sales was due to the acquisition of Photo Therapeutics which occurred on February 27, 2009, so there was only ten months’ activity in the comparable prior year period. Due to the acquisition there is additional amortization of $740,000 that is allocated to the segments based on each segment’s revenues for PTL products.
Offsetting the above items that had a negative impact on gross profit, international XTRAC part sales, which have a higher margin percentage than system sales, increased 22% or $186,600 for the year ended December 31, 2010 as compared to the same period in 2009.

Gross profit for the year ended December 31, 2009 decreased by $648,792 from the comparable prior year period. The key factors for the decrease were as follows:
We sold 59 XTRAC laser systems and 35 VTRAC lamp-based excimer systems during the year ended December 31, 2009 and 52 XTRAC laser systems and 34 VTRAC systems in the comparable period in 2008. Included in the 59 XTRAC lasers systems sold were 25 used laser systems, which
have a lower average selling price and gross margin percentage, compared to 11 used laser systems sold in the year ended December 31, 2008. Consequently, gross profit decreased as a result of the mix of units sold. The gross margin percentage for the VTRAC is higher than for the XTRAC.
Gross profit for the year ended December 31, 2009 was negatively impacted by increases in certain allocable XTRAC manufacturing overhead costs that are charged against international dermatology equipment. These increased costs, which approximated $375,000, related to an under-absorption of manufacturing costs.
For the year ended December 31, 2009, skincare product revenues decreased $1,165,000 over the prior year period. These revenues are generated from the sale of various skin, hair care and wound products to physicians in the domestic market. We believe our skincare products are more susceptible to the macro-economic conditions than our other products because cosmetic products are more likely to be discretionary and not medically necessary. Our Skin Care margins are substantially higher than the other business segments and consequently substantive swings in the revenues attributed to Skin Care’s sales will have a significant impact on our overall margins.
Offsetting the above items that had a negative impact on gross profit, international XTRAC part sales, which have a higher margin percentage than system sales, increased 28% or $188,300 for the year ended December 31, 2009 as compared to the same period in 2008.
Additional gross profit was realized from our PTL products of $565,000. We acquired PTL on February 27, 2009; therefore, only the activity after that date is recorded in our financial statements. There was no activity recorded in our financial statements in 2008.


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The following table analyzes the gross profit for our Other ChannelsProfessional segment for the periods presented below:
 
Other Channels Segment For the Year Ended December 31, 
  2010  2009  2008 
Revenues $2,551,429  $3,555,310  $1,968,155 
    Percent (decrease)/increase  (28.2%)  80.6%    
Cost of revenues  1,467,293   1,397,902   696,388 
    Percent increase  5.0%  100.7%    
Gross profit $1,084,136  $2,157,408  $1,271,767 
Gross margin percentage  42.5%  60.7%  64.6%
Gross profit decreased for the year ended December 31, 2010 by $1,073,272 from the comparable period in 2009. The key factors for the changes in this business segment were as follows:
Revenues for the year ended December 31, 2009 included milestone payments of $407,000 under a certain licensing arrangement for the Clear U™ hand-held device. There are no costs associated with this revenue stream.
The cost of sales for the PTL business increased mainly due to the fact that it was acquired on February 27, 2009, and consequently the comparable prior year period reflects only ten months of activity. In addition, due to the acquisition there is additional amortization of $740,000 that is allocated to the segments based on each segment’s revenues for PTL products.
Gross profit increased for the year ended December 31, 2009 by $885,641 from the comparable period in 2008. The key factors for the changes in this business segment were as follows:
Additional gross profit was realized from our PTL products of $985,000, including milestone payments of $213,000 under a certain licensing arrangement for the Clear U™ hand-held device. There are no costs associated with this revenue stream. We acquired PTL on February 27, 2009; therefore only the activity after that date is recorded in our financial statements. There was no activity recorded in our financial statements in 2008.
For the year ended December 31, 2009, skincare product revenues decreased $113,000 over the prior year period, while the cost of sales for these products decreased $14,000 for the same comparable periods. Included in the year ended December 31, 2009 was $239,760 in bulk compound revenues compared to $256,000 in the year ended December 31, 2008.
The following table analyzes our gross profit for our Surgical Products segment for the periods presented below:
Surgical Products Segment For the Year Ended December 31, 
  2010  2009  2008 
Revenues $3,672,282  $3,622,580  $5,738,048 
Percent increase/(decrease)  1.4%  (36.9%)    
Cost of revenues  1,677,432   2,777,856   3,977,515 
Percent decrease  (39.6%)  (30.2%)    
Gross profit $1,994,850  $844,724  $1,760,533 
Gross margin percentage  54.3%  23.3%  30.1%

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Gross profit for our Surgical Products segment in the year ended December 31, 2010 increased by $1,150,126 from the comparable period in 2009. The key factors impacting gross profit were as follows:
This segment includes product sales of surgical laser systems and laser disposables. Disposables are more profitable than laser systems, but the sale of laser systems generates the subsequent recurring sale of laser disposables.
Revenues for the year ended December 31, 2010 increased by $50,000 from the year ended December 31, 2009. There were 5 additional laser systems sold in the year ended December 31, 2010 than in the comparable period of 2009. Additionally, the lasers sold in the 2010 period were sold at higher prices than those sold in the comparable period in 2009. The increase in average price per laser was largely due to the mix of lasers sold and volume discounts. Included in the laser sales for the year ended December 31, 2010 and 2009 were sales of diode lasers of $676,000, representing 28 systems, and $435,000, representing 26 systems respectively, which have substantially lower list sales prices than our other types of surgical lasers.
Beginning in 2010, the various allocable manufacturing costs of the Pennsylvania facility are allocated to surgical products, skincare and PTL products. In prior years, these costs were allocated to surgical products only. During 2009 we relocated our skincare and PTL facilities into our Pennsylvania facility and are now able to spread these fixed costs over many product lines.

Offsetting the above items that had a positive impact on gross profit, there was a decrease in sales of disposables between the periods, which have a higher gross margin as a percent of revenues than lasers. Fiber and other disposables sales decreased 10% between the comparable periods ended December 31, 2010 and 2009.
Professional Segment For the Year Ended December 31, 
  2012  2011  2010 
Revenues $10,942  $5,672  $3,416 
   Percent increase  92.9%  66.0%    
Cost of revenues  6,165   2,531   1,426 
   Percent increase  143.5%  77.5%    
Gross profit $4,777  $3,141  $1,990 
Gross margin percentage  43.7%  55.4%  58.3%
 
Gross profit for the year ended December 31, 2009 decreased2012 increased by $915,809$1,636 from the comparable period in 2008.2011. The key factors impactingfactor for the increase was the increase in revenues. For the year ended December 31, 2012, the gross profit were as follows: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. There are, therefore, no corresponding activities in for the year ended December 31, 2010 and up to and including December 13, 2011.
 
This segment includes product sales of surgical laser systems and laser disposables. Disposables are more profitable than laser systems, but the sale of laser systems generates the subsequent recurring sale of laser disposables.
Revenues for the year ended December 31, 2009 decreased by $2,115,468
Gross profit for the year ended December 31, 2011 increased by $1,151 from the year ended December 31, 2008 while cost of revenues decreased by $1,199,657 between the same periods. There were 115 fewer laser systems sold in the year ended December 31, 2009 than in the comparable period of 2008.
The sales of diode systems, in the year ended December 31, 2008, included 100 sales due to our OEM arrangement, but in the second half of 2008 AngioDynamics elected not to continue the contract. Since that time, our sales to AngioDynamics have been $0. Additionally, the higher manufacturing levels in 2008 caused better absorption of fixed overhead costs, which lowered average unit costs resulting in a higher gross margin in 2008 compared to 2009.

Additionally, there was a decrease in sales of disposables between the periods, which have a higher gross margin as a percent of revenues than lasers. Fiber and other disposables sales decreased 14% between the comparable period in 2008.
2010. The key factor for the increase was the increase in revenues. For the year ended December 31, 2011, the gross margin percentage was 55.4% compared to 58.3% for the year ended December 31, 2010. The change in the gross margin percentage was a result of changes in the sales mix between the periods. 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. There are no corresponding revenues for the year ended December 31, 2010.
 


 
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Selling, General and Administrative Expenses
For the year ended December 31, 2010, selling, general and administrative expenses decreased to $19,995,463 from $23,083,278 for the year ended December 31, 2009 for the following reasons:
There was a decrease related to a $816,000 decrease in salaries, benefits and travel expenses associated with a decrease in the sales and marketing force.
In the year ended December 31, 2009, we expensed $432,000 of legal and transaction costs under ASC Topic 718 incurred in connection with the acquisition of Photo Therapeutics. There was no such corresponding expense in the year ended December 31, 2010.
We expensed approximately $987,000 during the year ended December 31, 2009 related to severance and accelerated vesting of restricted stock and options in connection with the termination of our former chief executive officer. In addition there was a decrease in general and administrative salary and benefit expenses of approximately $214,000.
There was a decrease of approximately $401,000 in legal costs in the current year period.
There was also a decrease in marketing expense of $143,000 which resulted from improved control over marketing efforts.
Additionally, there was a decrease in amortization expense of $243,000 related to intangibles that are fully amortized.
For the year ended December 31, 2009, selling, general and administrative expenses decreased to $23,083,278 from $26,797,107 for the year ended December 31, 2008 for the following reasons:
The majority of the decrease related to a $1,505,000 in salaries, benefits and travel expenses associated with a decrease in the sales force and decreased revenues which generated lower commission expenses, particularly in our Skin Care segment.
There was a decrease in marketing expense of $411,000 which resulted from improved control over marketing efforts.
There was a decrease of bonus expense of $853,000 due to the fact that no bonus accrual was recorded in the current year.
There was a decrease in amortization expense of $480,000 related to the impairment of certain intangibles as of the year end December 31, 2008.
There was a decrease in stock compensation expense of $722,000, mainly due to the reduction in the sales force as well as the termination of an executive officer.
We expensed $432,000 of legal and transaction costs under ASC Topic 718 incurred in connection with the acquisition of Photo Therapeutics compared to $1,533,000 in the year ended December 31, 2008.
Additionally in 2008, we wrote off $353,000 for the investment in AzurTec and the related intangibles, net, due to the dissolution of AzurTec and the impairment of the assets and we wrote down the Neutrogena Agreement intangible due to impairment by $582,000 to its fair value.
Offsetting the above decreases was an increase in the selling, general and administrative expenses related to our PTL segment of $2,072,091. Additionally, we expensed approximately $987,000 related to severance and accelerated vesting of restricted stock and options in connection with the termination of our former chief executive officer.


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Engineering and Product Development
 
Engineering and product development expenses for the year ended December 31, 20102012 increased to $1,343,356$2,914 from $1,137,725$1,057 for the year ended December 31, 2009.2011. 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 PTLPre-merged PhotoMedex products. PTL was acquiredThe reverse merger occurred on February 27, 2009, andDecember 13, 2011 therefore only ten months of expense was included inexpenses from the year ended December 31, 2009 compared to a full year in 2010. In addition, there we recorded $188,089 in severance and related closing costs due to the closing of the offices in the UK.completion date forward are included.
 
Engineering and product development expenses for the year ended December 31, 20092011 increased to $1,137,725$1,057 from $1,073,215$839 for the year ended December 31, 2008.2010. $59 of the increase is directly related to engineering and product development expenses related to the Pre-merged PhotoMedex products. The increase forreverse merger occurred on December 13, 2011, therefore only 18 days of activity was included in the year ended December 31, 20092011. The remaining increase was duerelated to the engineering and product development expenses for the development of our PTL segment of $286,806additional products.
Selling and Marketing Expenses
For the year ended December 31, 2012, selling and marketing expenses increased to $116,487 from $62,185 for the year ended December 31, 2009. Offsetting this increase was meeting our financial sponsorship obligations of $189,000 in March 20082011 for the severe psoriasis study by John Koo, MD,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.
For the University of California San Francisco Medical Center.year ended December 31, 2011, selling and marketing expenses increased to $62,185 from $28,950 for the year ended December 31, 2010 for the following reasons:
The increase was mainly due to the increase in total revenues. We increased no!no! Hair Removal direct to consumer activities in North America and the United Kingdom via infomercial and online campaigns, which resulted in an increase in advertising, media buying, and other related selling and marketing expenses.
The increase in the percentage of selling and marketing expenses compared to total revenues was mainly due to an increase of the direct to consumer advertising and selling activities (media buying, advertisement, public relations, production of commercials and relevant marketing materials). Media buying and advertising expenses in the year ended December 31, 2011 were 24.4% of total revenues compared to 18.1% of total revenues in the year ended December 31, 2010.


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General and Administrative Expenses
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.
For the year ended December 31, 2011, general and administrative expenses increased to $45,192 from $5,646 for the year ended December 31, 2010 for the following reasons:
There was an increase of $32,545 in stock-based compensation for the year. This increase mainly related to the stock bonus of 2,045,318 shares of common stock to Radiancy’s Chief Executive Officer. This also included the cash bonus of approximately $12,300 for the reimbursement of grossed up tax payments (tax obligations, withholdings and other tax-related liabilities in connection with the stock bonus and cash award).
There was a $1,000 expense due to a one-time contingent liability related to former shareholders of Radiancy.
There was $1,110 in merger related costs due to the reverse acquisition which was finalized on December 13, 2011.
There was an increase of approximately $200 in costs related to the Pre-merged PhotoMedex expenses. As we completed the reverse acquisition on December 13, 2011 these expenses were included only for the period of December 14, 2011 through December 31, 2011. There were no corresponding expenses in our financial statements for the years ended December 31, 2010 and 2009.
 
Interest and Other Financing Expense, Net
 
Net interest and other financing expense for the year ended December 31, 20102012 increased to $3,268,905,$351, as compared to $2,370,676$68 for the year ended December 31, 2009.2011. The changeincrease of $283 in netfinancing 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 resultreverse merger. There was no corresponding expense in the year ended December 31, 2011. The remaining change was due to currency fluctuation of the interest expense onU.S. Dollar versus the convertible debtNew 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 was issued on February 27, 2009. The following table illustrates the change in net interest expense:
  December 31, 2010  December 31, 2009  Change 
          
Interest expense $3,275,720  $2,378,863  $896,857 
Interest income  (6,815)  (8,187)  1,372 
Net interest expense $3,268,905  $2,370,676  $898,229 
             
has a functional currency of GBP.
 
Net interest and other financing expense for the year ended December 31, 2009 increased2011 decreased to $2,370,676,$68, as compared to $1,032,597$283 for the year ended December 31, 2008.2010. The changedecrease of $215 in financing expenses is mainly due to a decrease in exchange rate gains (losses), from net interest expense wasloss of $192 in the result of the interest expense on the convertible debt which was issued on February 27, 2009. The following table illustrates the change in net interest expense:
  December 31, 2009  December 31, 2008  Change 
          
Interest expense $2,378,863  $1,188,783  $1,190,080 
Interest income  (8,187)  (156,186)  147,999 
Net interest expense $2,370,676  $1,032,597  $1,338,079 
             
Change in Fair Value of Warrants
In accordance with FASB ASC 470, “Debt – Debt with Conversion and Other Options” (“ASC Topic 470”) warrants issued in connection with the financing to acquire PTL were recorded at fair value and recognized as liabilities. In accordance with the provisions of FASB ASC 820, Fair Value Measurements and Disclosures (“ASC Topic 820”), we measured the fair value of these warrants as ofyear ended December 31, 2010 to net gain of $105 in the year ended December 31, 2011. This change was due to currency fluctuation of the U.S. Dollar versus the New Israeli Shekel, the Euro, the GBP and recorded $197,098the Australian Dollar.

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Taxes on Income, Net
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. The Company recorded a federal income tax receivable in 2012; the refund was received on February 28, 2013, due to the expected carryback of our 2011 net operating loss from Radiancy, Inc. for a refund of the 2010 in other expense in recordingfederal taxes paid.
For the liabilities associated with these warrants at their fair value as ofyear ended December 31, 2010. We measured the fair value2011, net benefit from taxes on income amounted to $2,022 as compared to net taxes on income of these warrants as of December 31, 2009, and recognized $808,786$6,287 for the year ended December 31, 2009, in other income in recording2010. This change was mainly due to the liabilities associated with these warrants at their fair value as offact that for the year ended December 31, 2009.2011 we recorded loss before tax of $2,716 as compared to income before tax of $17,888 for the period and for the year ended December 31, 2010.
 

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Net LossIncome (Loss)
 
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 $8,723,189$694 during the year ended December 31, 2011.
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, 
  2012  2011  Change 
          
Net income (loss) $22,489  $(694) $23,183 
             
Adjustments:            
Depreciation and amortization  5,611   590   5,021 
Stock-based compensation expense  6,197   34,001   (27,804)
Other merger related expenses  -   2,110   (2,110)
Completed litigation expense  5,398   3,798   1,600 
Other investment financing costs  400   -   400 
Severance and related costs  254   -   254 
Interest expense, net  398   24   374 
Income tax expense  4,438   (2,022)  6,460 
Non-GAAP adjusted income $45,185  $37,807  $7,378 
The factors discussed above resulted in net loss of $694 during the year ended December 31, 2011, as compared to net income of $11,601 during the year ended December 31, 2010, as compared to a net loss of $10,520,775 during the year ended December 31, 2009, a decrease of 17.1%106%.
 
Management utilizes certain non-GAAP financial measures to monitor our performance. While we believe the presentation of non-GAAP financial measures provides additional insight into our operating performance, readers of this report are urged to review the GAAP results as presented in the Financial Statements and Supplementary Data in Item 8 below.
We present a computation of non-GAAP adjusted net loss and non-GAAP adjusted loss per share. We define non-GAAP adjusted net loss as net loss before depreciation and amortization, stock based compensation expense, severance costs, interest expense - net, change in fair value of warrants, inventory valuation expense, bad debt expense, impairment on intangibles and other long lived assets and loss on sale of discontinued operations. We believe that non-GAAP adjusted net loss is a meaningful measure which may be used when making period-to-period comparisons. Non-GAAP adjusted net loss is considered to be a non-GAAP financial measure and should be viewed in conjunction with net loss on the Consolidated Statement of Operations.
We also present non-GAAP adjusted income (loss) per share which is derived by dividing non-GAAP adjusted income (loss) by the shares used in computing basic and diluted net loss per share. Non-GAAP adjusted income (loss) per share is considered to be a non-GAAP financial measure and should be viewed in conjunction with basic and diluted net loss per share on the Consolidated Statement of Operations.
The following table illustrates the impact of major expenses, in particular depreciation, amortization and stock option expense, between the periods:
  For the Year ended December 31, 
  2010  2009  Change 
          
Net loss $(8,723,189) $(10,520,775) $1,797,586 
             
Components included in net loss:            
Depreciation and amortization $4,369,841  $4,610,265  $( 240,424)
Stock-based compensation expense  973,143   1,262,027   (288,884)
Inventory valuation, severance and bad debt expenses  723,961   301,931   422,030 
Interest expense, net  3,268,905   2,370,676   898,229 
Change in fair value of warrants  197,098   (808,786)  1,005,884 
Non-GAAP adjusted income (loss) $809,759  $(2,784,662) $3,594,421 
             
Shares used in computing basic and diluted net loss per share  2,589,519   1,640,006     
             
Non-GAAP adjusted income (loss) per share $0.31  $(1.70) $2.01 
The factors discussed above resulted in a net loss of $10,520,775 during the year ended December 31, 2009, as compared to a net loss of $11,290,907 during the year ended December 31, 2008, a decrease of 6.8%. The year ended December 31, 2008 included a loss on sale of discontinued operations of $448,675.

 
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The following table illustrates the impact of major expenses, namely depreciation, amortization, interest and stock optionstock-based compensation expense between the periods:periods (in thousands, except earnings per share data):
 
  For the Year ended December 31, 
  2009  2008  Change 
          
Net loss $(10,520,775) $(11,290,907) $770,132 
             
Components included in net loss:            
Depreciation and amortization  4,610,265   4,542,038   68,227 
Stock-based compensation expense  1,262,027   1,395,538   (133,511)
Interest expense, net  2,370,676   1,032,597   1,338,079 
Change in fair value of warrants  (808,786)  -   (808,786)
Inventory valuation, severance and bad debt expenses  301,931   374,060   (72,129)
Impairment on intangibles and other long-lived asset  -   934,612   (934,612)
Loss on sale of discontinued operations  -   448,675   (448,675)
Non-GAAP adjusted income (loss) $(2,784,662) $( 2,563,387) $( 221,275)
             
Shares used in computing basic and diluted net loss per share  1,640,006   1,500,767     
             
Non-GAAP adjusted income (loss) per share $(1.70) $(1.71) $0.01 
Income taxes were immaterial, given our current period losses and operating loss carryforwards.
  For the Year ended December 31, 
  2011  2010  Change 
          
Net income (loss) $(694) $11,601  $(12,295)
             
Adjustments:            
Depreciation and amortization  590   388   202 
Stock-based compensation expense  34,001   392   33,609 
Other merger related expenses  2,110   -   2,110 
Litigation expense  3,798   300   3,498 
Interest expense, net  24   -   24 
Income tax expense  (2,022)  6,287   (8,309)
Non-GAAP adjusted income $37,807  $18,968  $18,839 
             
 
Liquidity and Capital Resources
We have historically financed our operations with cash provided by equity financing and from lines of credit.
 
At December 31, 2010,2012, our current ratio was 1.303.18 compared to 1.201.98 at December 31, 2009.2011. As of December 31, 20092012 we had $3,122,545$90,076 of working capital compared to $2,214,505$30,768 as of December 31, 2009.2011. Cash and cash equivalents were $3,523,948$44,348 as of December 31, 2010,2012, as compared to $2,194,788$16,549 as of December 31, 2009. We2011. In addition, we had $0 and $78,000 of cash that was classified$18,000 in short term bank deposits as restrictedcompared to $0 as of December 31, 2010 and 2009, respectively.
Based on our resources available at December 31, 2010, including the public offering of our securities described below, and the substantial reduction in the use of cash in the last year, we believe that we can fund our operations through and beyond the first quarter of 2012. However, given the uncertainty in the general economic conditions and its impact on our business and industry, and in light of our historical operating losses and negative cash flows, there is no assurance that we will not require additional funds in order to continue as a going concern beyond the first quarter of 2012.
We have restructured our operations and redirected our efforts in a manner that management believes will continue to improve results of operations. As part of such redirected efforts, management continues comprehensive efforts to minimize our operational costs and capital expenditures and continues the implementation of strategies that were developed to increase ongoing revenue streams.2011.
 
On October 22, 2009, we closed a private placement of our common shares with several accredited investors, which yielded gross proceeds of approximately $2.7 million and which improved our available cash. On November 10, 2009, we issued to an affiliate of one of the accredited investors participating in the October 22, 2009 private placement an additional 230,000 shares, which yielded additional gross proceeds of $149,500. Although this financing, together with our other resources and arrangements with creditors, satisfied our immediate liquidity constraints at such time, we continue to explore additional opportunities to secure capital which might be used to continue to develop new business opportunities or, if necessary, to fund operations.

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On March 19, 2010, we entered into the Clutterbuck Agreement the Term Note with Clutterbuck Funds. We received net proceeds of $2,373,000 in the transaction. The secured term note has a principal amount of $2.5 million (the “Term Note”), which accrues interest at a rate of 12% per annum. The Term Note requires us to make monthly payments of interest only. The principal matures in 18 months and may be prepaid without penalty at any time. The Term Note is secured by XTRAC lasers that we have consigned to physician customers and that are not otherwise pledged to CIT Healthcare LLC and Life Sciences Capital LLC pursuant to our outstanding term notes with such lenders. In connection with the issuance of the Term Note to Clutterbuck, we issued Clutterbuck Funds a warrant to purchase 102,180 shares of our common stock for an initial exercise price of $7.34. The warrant is exercisable at any time on or prior to the fifth anniversary of its issue date. Pursuant to the terms of the warrant, the exercise price is subject to a one-time downward adjustment if we make certain issuances of our equity securities at a price per share less than $7.34 during the 36-month period following the issuance of the warrant.
In order to consummate the bridge financing, it was necessary to secure the consent of the holder of Convertible Notes. As of March 19, 2010, the outstanding principal and accrued interest under the Convertible Notes was $19,546,676. In order to obtain the Holder’s consent, we agreed to the following modifications to the Convertible Notes:
We combined the aggregate outstanding obligations under the Convertible Notes into two convertible notes. Each note matures on February 27, 2014 and is identical to the original form of convertible note except as noted below;
The larger note has a principal amount of $16,746,270. The note remains subject to the same down-round anti-provision adjustment to the conversion price which was in the unmodified notes. The interest rate of this note was increased from 8% to 10%. The incremental 2% increase in the interest rate may be paid in cash, and may not be paid in convertible PIK notes unless and until our stockholders vote to approve payment in the form of a convertible PIK note, which the stockholders have done on October 28, 2010;
The smaller note has a principal amount of $2,800,406. The conversion price of this note was reduced to $11.25850 and the down-round anti-dilution adjustment to the conversion price was removed. The interest rate of this note was increased from 8% to 10%. The full amount of the accrued interest remains payable in cash or convertible PIK notes;
The collateral securing the Convertible Note was expanded by adding a first-priority lien against all of our assets other than the assets pledged with first-priority liens to CIT and to Clutterbuck Funds. When assets are released from the lien of CIT, such assets will become subject to the first-priority lien of Clutterbuck Funds and a second-priority lien of the Investor. Finally, when assets are released from the lien of Clutterbuck Funds, such assets will become subject to the first-priority lien of the Investor; and
Three of our subsidiaries (ProCyte Corporation, Photo Therapeutics, Inc. and SLT Technology, Inc.) have guaranteed our obligations under the modified Convertible Notes.
In conjunction with this, the conversion price of the larger convertible note and the exercise price of the warrants were adjusted by contract using a weighted-average formula specified in the convertible note to have a conversion price and exercise price of $21.47 per share for 780,025 and 251,528, respectively.
In conjunction with the May 7, 2010 public offering of our common stock, the larger convertible note and the warrant were adjusted by contract using a weighted-average formula as specified in the convertible note to have conversion prices and exercise price of $18.39 per share for 910,533 and 293,611 shares, respectively. No change was made to the smaller note, as it has no down-round provision.
Interest at 10% was paid on September 1, 2010 in the form of additional convertible notes of $126,018 and $753,582 for the Series B-1 Convertible Note and Series B-2 Convertible Note, respectively.

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Interest at 10% was paid on March 1, 2011 in the form of additional convertible notes of $146,321 and $874,993 for the Series B-1 Convertible Note and Series B-2 Convertible Note, and the their related additional Convertible Notes, respectively.
On May 7, 2010,April 27, 2012, we closed on a publictwo-tranche registered offering in which we sold an aggregate of our common shares. We sold 534,0003,023,432 shares of ourits common stock at an offering price of $6.00$13.23 per share. The sale resulted in net proceeds to us of approximately $2.0$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 purposes and potentially for pay-down of outstanding debt. The underwriters are also entitled to warrants to purchase, in aggregate, 25,000 shares of our common stock at $7.50 per share.capital.
 
On March 28, 2011, Clutterbuck Funds agreedAugust 18, 2012, the Board of Directors approved a stock repurchase program up to extend the maturitya maximum to $25 million. To date, we have repurchased 842,961 shares at an average price of its loan$12.76 per share for a total of to us,$10,756.
We believe our existing balances of which the principal of $2.5 million was to be paid at maturity. Previously, the loan matured on September 19, 2011; it will now mature on December 1, 2012. Starting in August 2011, we will begin monthly installments of principal such that the final payment at maturitycash and cash equivalents will be $75,000. To induce the modificationssufficient to the terms of its loan, we have issued to Clutterbuck Funds a second warrant which has been modeled aftersatisfy our working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with our existing operations through and beyond the first warrant issued on March 19, 2010 but which will be to purchase 109,650 sharesquarter of our common stock at an exercise price of $5.70 per share. The collateral securing the first-position security interest of Clutterbuck Funds and the second-position security interest of the holder of our convertible notes will remain in place.2014.
 
Net cash and cash equivalents provided by operating activities – continuing operations was $106,210$25,065 for the year ended December 31, 20102012 compared to cash used of $2,254,247$13,459 for the year ended December 31, 2009.2011. The increase was mostly due to the overall increase in net income.
Net cash and cash equivalents provided by operating activities was $13,459 for the year ended December 31, 2011 compared to $13,867 for the year ended December 31, 2010. The decrease was mostly due to the overall decreasereduction in net loss.
Net cash and cash equivalents used in operating activities – continuing operations was $2,254,247 for the year ended December 31, 2009 compared to cash used of $1,294,070 for the year ended December 31, 2008. The change in cash used between the years wasliabilities, which were mostly duerelated to the decreases in accounts receivable and inventories.Pre-merged PhotoMedex business.
 
Net cash and cash equivalents used in investing activities – continuing operations was $631,328$21,863 for the year ended December 31, 20102012 compared to $14,656,266$4,653 for the year ended December 31, 2009.2011. 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.
Net cash and cash equivalents used in investing activities was $4,653 for the year ended December 31, 2011 compared to $14,715 for the year ended December 31, 2010. This was primarily due to acquisition costs, net of cash received, of $12,578,022$18,729 in connection with the Photo Therapeuticsreverse acquisition for the year ended December 31, 2009. The balance2011. This was offset, in part, by the sale of the increase was mainly for the placement of lasers into service.short-term deposits.
 
Net cash and cash equivalents used in investing activities – continuing operations was $14,656,266 for the year ended December 31, 2009 compared to $2,766,153 for the year ended December 31, 2008. This was primarily due to acquisition costs, net of cash received, of $12,578,022 in connection with the Photo Therapeutics acquisition. The balance of the increase was mainly for the placement of lasers into service.
 
The placement of lasers into service is shown net of the remaining net book value of the lasers that we sold during the period presented.
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When we retire a laser from service that is no longer useable, we transfer the laser into inventory and then write off the net book value of the laser, which is typically negligible. Over the last few years, thesuch retirements of lasers from service have been minor or immaterial and, therefore, they are reported with placements on a net basis.immaterial.
 
Net cash and cash equivalents provided by financing activities was $1,904,500$24,592 for the year ended December 31, 20102012 compared to cash provided by financing activities of $15,263,633$160 for the year ended December 31, 2009.2011. In the year ended December 31, 2010,2012, we received $3,773,000 inhad proceeds from the issuance of common stock, and $2,500,000 in proceeds from debt financing,net of $37,514, which werewas partially offset by repaymentthe repurchase of $3,198,954common stock of $10,756, repayments of $2,000 on the line of credit, $493,627long-term debt and $465 for certain notes payable and $754,153 in registration costs.payable.
 
Net cash and cash equivalents used inprovided by financing activities was $15,263,633$160 for the year ended December 31, 20092011 compared to cash providedused by financing activities of $2,634,849$2,020 for the year ended December 31, 2008.2010. In the year ended December 31, 20092011, we received $18 million$410 in proceeds infrom the convertible debt financing and $2,857,250 from private placement equity financing, bothexercise of options into shares of our common stock, which werewas partially offset by repaymentrepurchase of $4,717,381 on the lineour common stock at a value of credit, $415,905 for certain notes payable and registration costs of $460,614.$250.
 

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Contractual Obligations
 
Set forth below is a summary of our current obligations as of December 31, 20102012 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. The obligations under the credit facility from CIT are term notes. Operating lease and rental obligations are respectively for personal and real property which we use in our business. The obligations relating to the Convertible Notes are stated at the principal amount due and are not discounted for related warrants or origination costs.
 
  Payments due by period 
 
Contractual Obligations
 Total  Less than 1 year  1 – 3 years  4 – 5 years 
             
Convertible notes $20,426,276  $-  $20,426,276  $- 
Credit facility obligations  779,343   779,343   -   - 
Term note obligations  2,500,000   500,000   2,000,000   - 
Capital lease obligations  49,225   19,292   29,933   - 
Rental and Operating lease obligations  456,244   363,311   92,933   - 
Notes payable  46,477   32,660   13,817   - 
     Total $24,257,565  $1,694,606  $22,562,959  $- 
Our ability to expand our business operations is currently dependent in significant part on financing from external sources. There can be no assurance that changes in our manufacturing and marketing, research and development plans or other changes affecting our operating expenses and business strategy will not require financing from external sources before we will be able to develop profitable operations. Under the terms of the SPA, we must secure the approval of the holder of the convertible notes for the incurrence of debt. Equity securities must first be offered to the holder of the Convertible Notes. There can be no assurance that additional capital will be available on terms favorable to us, if at all. To the extent that additional capital is raised through the sale of additional equity or convertible debt securities, the issuance of such securities could result in additional dilution to our common stockholders. Moreover, our cash requirements may vary materially from those now planned because of marketing results, product testing, changes in the focus and direction of our marketing programs, competitive and technological advances, the level of working capital required to sustain our planned growth, litigation, operating results, including the extent and duration of operating losses, and other factors. In the event that we experience the need for additional capital, and are not able to generate capital from financing sources or from future operations, management may be required to modify, suspend or discontinue our business plan.
  Payments due by period 
 
Contractual Obligations
 Total  Less than 1 year  1 – 3 years  4 – 5 years 
             
Capital lease obligations $10  $10  $-  $- 
Rental and Operating lease obligations  1,165   720   445   - 
Notes payable  609   609   -   - 
     Total $1,784  $1,339  $445  $- 
 
Off-Balance Sheet Arrangements
 
At December 31, 2010,2012, 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.
 
Item 7A.  Item 7A.Quantitative and Qualitative Disclosure about Market Risk
Certain of our outstanding warrants are accounted for as derivative financial instruments. The derivative financial instruments are revalued each period, which may cause material fluctuations in our results from operations. As a result of this volatility, we may experience material swings in our net loss or income attributable to common stockholders. We are presenting pro-forma information which shows the effect on the derivative liability if our common stock price of $5.94 on December 31, 2010 had been increased or decreased by $1.50.

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The following table shows the effect of changes in the price of our common stock prices on the derivative financial instruments shown in the condensed consolidated balance sheets and the increase in fair value of derivative financial instruments and net loss attributable to our common stockholders shown in the condensed consolidated statement of operations as of December 31, 2010.
     Pro-forma Information 
  As Reported December 31, 2010  Common Stock Price Reduction  Common Stock Price Increase 
          
Common stock price $5.94  $4.44  $7.44 
             
Condensed Consolidated Balance Sheet:            
Derivative financial instruments $938,623  $634,562  $1,261,293 
             
Change in fair value of derivative financial instruments $-  $(304,061) $322,670 
             
Condensed Consolidated Statement of Operations:            
Increase (decrease) in fair value of derivative financial instruments $197,098  $(106,963) $519,768 
             
Net loss attributable to common stockholders $(8,723,189) $(8,419,128) $(9,045,859)
 
Foreign Exchange Risk
 
We are exposed to foreign currency exchange rate fluctuations related to the operation of our international subsidiary.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 the subsidiaryPTL 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 not hedgesome hedging against this foreign currency risk.the New Israeli Shekels. Fluctuations in exchange rates may impact our financial condition and results of operations.
 
Item 8.  Financial Statements and Supplementary Data.
See our Risk Factors regarding foreign currency exchange related risks.
 

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 Item 8.Financial Statements and Supplementary Data
The financial statements required by this Item 8 are included in this Report and begin on page F-1.
Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    On August 16, 2010, the Audit Committee of the Company’s Board of Directors has engaged EisnerAmper LLP to serve as the Company’s new independent registered public accounting firm, after it was notified on August 16, 2010 that Amper, Politziner & Mattia, LLP (“Amper”), an independent registered public accounting firm, would not be able to stand for re-appointment because it combined its practice on that date with that of Eisner LLP (“Eisner”) to form EisnerAmper LLP, an independent registered public accounting firm. . The Company previously filed Form 8-K on August 26, 2010 acknowledging this change.
 
Item 9.    During the Company’s fiscal years ended December 31, 2009Changes in and 2008Disagreements with Accountants on Accounting and through the date we engaged EisnerAmper LLP, the Company did not consult with Eisner regarding any of the matters or reportable events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.Financial Disclosure
 
None.

   The audit report of Amper on the consolidated financial statements of the Company as of Item 9A.           Controls and for the year ended December 31, 2009 and 2008 did not contain an adverse opinion or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles.Procedures
 

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In connection with the auditEvaluation of the Company’s consolidated financial statements for the fiscal year ended December 31, 2009 and 2008 and through August 16, 2010, there were (i) no disagreements between the Company and Amper on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of Amper, would have caused Amper to make reference to the subject matter of the disagreement in their report on the Company’s financial statements for such year or for any reporting period since the Company’s last fiscal year end and (ii) no reportable events within the meaning set forth in item 304(a)(1)(v) of Regulation S-K.
Item 9A.  Controls and Procedures
Disclosure Controls and Procedures
 
As of December 31, 2010, we carried out an evaluation, under the supervision andOur management, with the participation of our chief executive officerChief Executive Officer and chief financial officer, ofChief Financial Officer, has evaluated the effectiveness of the design and operationsoperation of our disclosure controls and procedures as(as such term is defined in RuleRules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as amended, (the “Exchange Act”).
Our chief executive officer and chief financial officer), as of December 31, 2012. Based on that evaluation, management has concluded that, as of the evaluationsuch date, suchour disclosure controls and procedures were effectiveeffective.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act areis recorded, processed, summarized, and reported within the time periods specified in theSEC rules and forms, of the Commission, and that such information is accumulated and communicated to our management, including our chief executive officerChief Executive Officer and chief financial officer,Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. A control system cannot
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 however, that the objectives of the disclosure controls systemand procedures are met,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 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, 2012.
Because of the inherent limitations in a cost-effective control system, no evaluation of controlsinternal 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, with the companywithin 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.

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Changes in Internal Control over Financial Reporting
 
There werehas been no changeschange in our internal controlscontrol over financial reporting during the year ended December 31, 2010in our most recent fiscal quarter that has materially affected, or wereis reasonably likely to materially affect, our internal controlscontrol over financial reporting.
 
Management’s report on our
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Fahn Kanne & Co.
Head Office
Levinstein Tower
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
Board of Directors and Shareholders
   PhotoMedex, Inc.
We have audited the internal controlscontrol over financial reporting can be foundof PhotoMedex, Inc. and Subsidiaries ("The Company") as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the following captioned discussion.
Management's Report on Internal Control Over Financial Reporting

OurCommittee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for establishingmaintaining effective internal control over financial reporting and maintaining an adequate systemfor 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 systemresponsibility 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 accounting principles generally accepted in the United States of America.
Ouraccounting principles. A company’s internal control over financial reporting includes those policies and procedures that: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.
 
·  pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of  our assets;

 
·  provide reasonable assurance that our transactions are recorded as necessary to permit preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our directors; and
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·  provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further,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, effectivenessor that the degree of internal controls over financial reportingcompliance with the policies or procedures may vary over time. Our system contains self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.

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Our management conducted an evaluation of the effectiveness of the system of internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our system of internal control over financial reporting was effective as of December 31, 2010.deteriorate.
 
This annual report does not include an attestation report of
In our registered public accounting firm regardingopinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010. Management’s2012, based on criteria established in 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, 2012 and our report was not required to be nor was subject to attestation by our registered public accounting firm pursuant to the rules of the.dated March 18, 2013, expressed an unqualified opinion on those financial statements.

/s/FAHN KANNE & CO. GRANT THORNTON ISRAEL

Tel-Aviv, Israel
March 18, 2013

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Our management conducted an evaluation of the effectiveness of the system of internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organization of the Treasury Commission. Based on this evaluation, our management concluded that our system of internal control over financial reporting was effective as of December 31, 2009. The effectiveness of our internal control over financial reporting has been audited by Amper, Poliziner & Mattia, LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Item 9B.   Item 9B.Other Information
 
None.
 

 
Item 10.  
 Item 10. Directors,, Executive Officers and Corporate Governance
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 13eight meetings and executed eightthree unanimous written consents in lieu of a meeting in 2010.2012.
 
The following sets forth certain biographical information concerning our current directors and our executive officers.
officers as of March 18, 2013.
     
Name
  
Position
 Age
Richard J. DePianoLewis C. Pell  Non-Executive Chairman of the Board of Directors 69
James W. SightYoav Ben-Dror Non-Executive Vice Chairman of the Board of Director (since May 26, 2010)Directors 5560
Dolev RafaeliChief Executive Officer and Director49
Dennis M. McGrath  President, Chief ExecutiveFinancial Officer and Director 5456
Christina L. AllgeierVice President and Chief Financial Officer38
Michael R. StewartExecutive Vice President and Chief Operating Officer53
David W. AndersonNahum D. Melumad Director 5857
James W. SightDirector57
Stephen P. Connelly  Director 5961
Leonard L. MazurKatsumi Oneda  Director 66
Alan R. NovakDirector76
Paul J. DenbyDirector (since May 26, 2010)5675

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Directors and Executive Officers
 
Richard J. DePianoLewis C. Pell was appointed to our Board of Directors in May 2000 and was unanimously elected to serve as Non-Executive Chairman of the Board on January 31, 2003. Since February, 1996December 12, 2011. Mr. DePianoPell was a member of Radiancy’s Board since 1998. Mr. Pell has beenfounded over a director of Escalon Medicaldozen 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., a publicly traded healthcare business specializingwhich went public in the developmentU.S. in 1992 and marketingwas 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 ophthalmic devicesprivate medical device companies. In 1992, he founded and pharmaceuticalremains the chairman of Vision-Sciences, Inc. (VSCI-NASDAQ). Mr. Pell has a B.S. in political science from Brooklyn College and vascular access products, and has served as its Chairman and Chief Executive Officer since March 1997. Mr. DePiano has beenover 20 years of experience in the Chief Executive Officer of the Sandhurst Company, L.P. and Managing Director of the Sandhurst Venture Fund since 1986. Mr. DePiano medical technology industry.
Yoav Ben-Dror was also the Chairman of theappointed 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 SLT prior to our acquisitionRadiancy’s Board since 2006. He is an entrepreneur with more than 30 years of SLT. Mr. DePianoexperience 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

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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.
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 Drexel Universitythe electronics industry in China and SalusHong 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.
Dennis M. McGrath Mr. DePiano brings professional experienceMcGrath, 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 management experiencevice-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 RICOMM Systems, Inc. and Noninvasive Medical Technologies, Inc. Mr. McGrath graduated with a health-care companyB.S. in accounting from LaSalle University in 1979.
Nahum Melumad was appointed to our Board of Directors on December 12, 2011. Dr. Melumad is the Board.James Dohr Professor of Accounting and Business Law at the Columbia Business School (CBS). He has 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 is 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 has 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 is a CPA and holds an MBA and Ph.D. from the University of California, Berkeley.
 
James W. Sight was appointed to our Board of Directors on May 26, 2010 and serves as Non-Executive Vice Chairman. 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’s experience in corporate restructurings and financings makes him a valuable member of our Board of Directors.
 

Dennis M. McGrath was appointed as our President, Chief Executive Officer and a director in July 2009. Mr. McGrath also served as our Chief Financial Officer and Vice President—Finance and Administration from January 2000 through November 2009. Mr. McGrath has held several senior level positions including, from February 1999 to January 2000, serving as the Chief Operating Officer of Internet Practice, the largest division for AnswerThink Consulting Group, Inc., a public company specializing in business consulting and technology integration. Concurrently, from August 1999 until January 2000, Mr. McGrath served as Chief Financial Officer of Think New Ideas, Inc., a public company specializing in interactive marketing services and business solutions. In addition to the financial reporting responsibilities, Mr. McGrath was responsible for the merger integration of Think New Ideas, Inc. and AnswerThink Consulting Group, Inc. From September 1996 to February 1999, Mr. McGrath was the Chief Financial Officer and Executive Vice-President–Operations of TriSpan, Inc., an internet commerce solutions and technology consulting company, which was acquired by AnswerThink Consulting Group, Inc. in 1999. Mr. McGrath is currently a director of RICOMM Systems, Inc. and Noninvasive Medical Technologies, Inc. Mr. McGrath graduated with a B.S. in accounting from LaSalle University in 1979. Mr. McGrath’s extensive experience in management and finance and his service as Chief Executive Officer make him a valuable member of our Board of Directors
Christina L. Allgeier was appointed as our Vice President and Chief Financial Officer in October 2009. Prior to this time, Ms. Allgeier served as our corporate controller since December 2002. Ms. Allgeier graduated with a B.S. in accounting from Penn State University. Ms. Allgeier holds a license from the Commonwealth of Pennsylvania as a certified public accountant.
Michael R. Stewart was appointed as our Executive Vice President of Corporate Operations on December 27, 2002, immediately following the acquisition of SLT and, on July 19, 2005, he was appointed our Chief Operating Officer. From July 1999 to the acquisition of SLT, Mr. Stewart was the President and Chief Executive Officer of SLT and, from October 1990 to July 1999 he served as SLT’s Vice President Finance and Chief Financial Officer. Mr. Stewart graduated from LaSalle University with a B.S. in accounting and received an M.B.A. from LaSalle University in 1986. Mr. Stewart passed the CPA examination in New York in 1986.

 
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David W. Anderson was appointed to our Board of Directors on September 28, 2004. Mr. Anderson has been the President and Chief Executive Officer of Gentis, Inc. since November 2004. He has over twenty years of entrepreneurial management experience in the medical device, orthopedics and pharmaceutical field. He has served as President and CEO of Sterilox Technologies, Inc., the world’s leader in the development and marketing of non-toxic biocides; Bionx Implants, Inc., a publicly traded orthopedic sports medicine and trauma company, and Kensey Nash Corporation, a publicly traded cardiology and biomaterials company. In addition, Mr. Anderson was previously Vice President of LFC Financial Corp., a venture capital and leasing company, where he was responsible for LFC’s entry into the healthcare market; and was a founder and Executive Vice President of Osteotech, Inc., a high-technology orthopedic start-up. Mr. Anderson is also on the Board of Directors of Vision Sciences, Inc. (Nasdaq: VSCI). Mr. Anderson has executive experience in a variety of health-care companies, which makes him a valuable member of our Board of Directors.

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 has executive experience in seasoned healthcare companies, with particular expertise in international dealings, making him well qualified to serve on our Board of Directors.
 

Leonard L. MazurKatsumi Oneda was appointed to our Board of Directors on May 13, 2009. December 12, 2011. Mr. Mazur is the co-founder of Triax Pharmaceuticals, LLC, or Triax, where he hasOneda co-founded Vision-Sciences Inc., served as Chief Operating Officer since Januaryits president and CEO from October 1993 to February 2003, and served as chairman from October 1993 to October 2005. Prior to joining Triax, he wasHe served as the founder and, from 1995 to 2005, Chief Executive Officer of Genesis Pharmaceutical, Inc., a skincare company that dispenses products through dermatologists’ offices. In addition, Mr. Mazur has extensive sales, marketing and business development experience from his tenures at Medicis Pharmaceutical Corporation, ICN Pharmaceuticals, Inc., Knoll Pharma (a division of BASF), and Cooper Laboratories, Inc. Mr. Mazur is a membervice-chairman of the Board of TrusteesDirectors of ManorVision-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 Jenkintown, PA. Mr. Mazur1964. He has entrepreneurialover 20 years of experience in the healthcare industry, and his experiences in marketing and with dermatological products make him a valuable member of our Board of Directors.

Alan R. Novak was appointed to our Board of Directors in October 1997. Mr. Novak is a managing member of City Interests, LLC, a fully integrated real estate investment and development company. Mr. Novak’s and CityInterests’ projects include the Mandarin Oriental Hotel in Washington, DC; Harbourside & the Swedish Embassy, a mixed-use office and residential project on the Georgetown waterfront in Washington, DC; and Parkside, a mixed-use development on the Metro in Washington DC.  Mr. Novak is a graduate of Yale University, Yale Law School and Oxford University as a Marshall Scholar. Mr. Novak practiced law at Cravath, Swaine & Moore and Swidler & Berlin, Chartered. His public service includes three years as an officer in the U.S. Marine Corps, a U.S. Supreme Court clerkship with Justice Potter Stewart, and service as Senior Counsel to Senator Edward M. Kennedy, Senior Executive Assistant to Undersecretary of State, Eugene Rostow and the Executive Director of President Johnson’s Telecommunications Task Force. Mr. Novak was appointed by President Carter and served for five years as Federal Fine Arts Commissioner. Mr. Novak brings professional experience to the Board and business experience from the vantage point of a non-healthcare company, allowing him to provide our Board of Directors with a valuable outside perspective.

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Paul J. Denby was appointed to our Board of Directors on May 26, 2010. Mr. Denby has over 30 years of experience, through Denby Enterprises, Inc., in the professional hair caremedical technology industry. He has represented over 100 companies covering a gamut of professional appliances, cosmetics, and skincare products. Mr. Denby has served some of the largest beauty companies in the industry, in such capacities as: sales manager and direct agent in marketing, merchandising, positioning and promoting their products. Mr. Denby has extensive experience in sales and marketing of dermatological products, allowing him to provide valuable advice as a member of our Board of Directors.
 
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, and the Securities Purchase Agreement with the holder of our Convertible Notes (the “Investor”), the total number of directors who serve on our Board of Directors is currently set at eight. In order to increase the number of directors serving on the Board from seven to eight, it was necessary to secure the consent of the Investor. The Investor consented to an eight-member Board until such time as the Investor acts on its continuing right under the Securities Purchase Agreement to designate a member for election or appointment to the Board. Upon such designation, we shall take all such actions as are necessary to cause the Board to consist of only seven members, including the member designated by the Investor, even if that should necessitate the resignation of then-incumbent members of the Board. Each incumbent member of the Board has agreed that in such an eventuality, the Chairman may determine which members may be obliged to resign.
 
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, and an Anti-Fraud Program.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

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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 20102012 that, except for Mr.Messrs. Rafaeli and McGrath, who isare 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 The NASDAQ Stock Market, LLC (“Nasdaq”).Nasdaq. Additionally, our Board of Directors believes that it is desirable to have at least one financial expert serving on the Audit Committee.
 

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Compensation Committee.    Our Compensation Committee discharges the Board of Director’sDirectors’ 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:
 
 
reviewing and approving objectives relevant to executive officer compensation;
 
 
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 thosesuch objectives;
 
 
reviewing employment agreements for executive officers;
 
 
recommending to the Board of Directors the compensation for our directors;
 
 
administering our equity compensation plans (except the Non-Employee Director Plan) and other employee benefit plans;
 
 
evaluating human resources and compensation strategies, as needed; and
 
 evaluating periodically the Compensation Committee charter.
 
Our Board of Directors has adopted a written charter for the Compensation Committee. The Compensation Committee is currently composed of Messrs. Novak,Ben-Dror, Connelly and Mazur. Mr. ConnellyPell. Dr. Ben-Dror serves as the Chairman of the Compensation Committee. Our Board of Directors determined that each member of the Compensation Committee in 20102012 satisfies the independence requirements of the Securities and Exchange Commission (the “Commission”) and Nasdaq. The Compensation Committee held onefour formal meetingmeetings during 2010.2012.
 
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 20102012 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. DePiano, Anderson, DenbySight and Connelly.Oneda. Mr. AndersonSight serves as the Chairman of the Nominations and Corporate Governance Committee. Our Board of Directors determined in 20102012 that each member of the Nominations and Corporate Governance Committee satisfies the independence requirements of the Commission and Nasdaq. The Nominations and Corporate Governance Committee held one formal meeting during 20102012 in conjunction with a meeting of the full Board of Directors.
 

 
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The duties and responsibilities of the Nominations and Corporate Governance Committee include:
 
identifying and recommending to our Board of Directors individuals qualified to become members of our Board of Directors and to fill vacant positions on our Board of Directors;
 
 
recommending to our Board of Directors the director nominees for the next annual meeting of stockholders;
 
 
recommending to our Board of Directors director committee assignments;
 
 
reviewing and evaluating succession planning for our Chief Executive Officer and other executive officers;
 
 
monitoring the independence of our board members;directors;
 
 
developing and overseeing the corporate governance principles applicable to members of our Board of Directors, officers and employees;
 
 
reviewing and approving director compensation and administering the Non-Employee Director Plan;
 
 
monitoring the continuing education for our directors; and
 
 evaluating annually the Nominations and Corporate Governance Committee charter.

 
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:
 
 
appointing, evaluating and determining the compensation of our independent auditors;
 
 
reviewing and approving the scope of the annual audit, the audit fee and the financial statements;
 
 
reviewing disclosure controls and procedures, internal control over financial reporting, any internal audit function and corporate policies with respect to financial information;
 
 
reviewing other risks that may have a significant impact on our financial statements;
 
 
preparing the Audit Committee report for inclusion in the annual proxy statement;
 
 
establishing procedures for the receipt, retention and treatment of complaints regarding accounting and auditing matters;
 
 
approving all related party transactions, as defined by applicable NASDNasdaq Rules, to which the Company is a party; and
 
 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 which charterthat meets the applicable standards of the Commission and Nasdaq. The members of the Audit Committee are Messrs. DePiano, AndersonMelumad, Ben-Dror and Connelly. Mr. DePianoDr. Melumad serves as Chairman of the Audit Committee. The Audit Committee meets regularly and held seveneight meetings during 2010.2012.
 
The Board of Directors determined in 20102012 that each member of the Audit Committee satisfies the independence and other composition requirements of 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, 147 Keystone Drive, Montgomeryville, Pennsylvania 18936. Any such communication must contain:
a representation that the stockholder is a holder of record of our capital stock;
the name and address, as they appear on our books, of the stockholder sending such communication; and
the class and number of shares of our capital stock that are beneficially owned by such stockholder.
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 18, 2013, 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, 2012. In addition, on February 28, 2013, Company filed a Form 5 on behalf of director Stephen P. Connelly disclosing the grant of xxx shares by Mr. Connelly to a charitable institution.

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 Item 11.            Executive Compensation
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, 2012, or fiscal 2012. Our Named Executive Officers for fiscal 2012 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 2012 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.

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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 2012 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 26, 2012, the Board of Directors approved and adopted a 2012 annual bonus plan for employees, including Mr. McGrath. The 2012 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 2012 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. 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 achievement of 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.

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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 Terminati 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 cellular telephone and 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 Mr. McGrath. Mr. McGrath also receives a limited matching contribution from the Company to his 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 in the first or second fiscal quarter of a year and 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 2012, our Compensation Committee granted stock options to Dr. Rafaeli and Mr. McGrath to purchase 140,000 and 90,000 shares of our common stock, respectively. The stock options have an exercise price of $20, which is a premium above the closing price on March 16, 2012 (the last trading date prior to the grant date) of $12.73. 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

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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 isentitled 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 2012 annual base salary under his employment agreement is $325,000 and he is eligible to receive an annual bonus of up to 60% of his base salary based on the attainment of individual and corporate goals determined and set by our Board of Directors. In addition, he is entitled to participate in the long-term equity incentive programs established by the Company for its senior level executives generally commensurate with his position. The severance arrangements contained in Mr. McGrath’s employment agreement are summarized in the section below entitled “Potential Payments upon Termination of Employment or Change in Control.”
SUMMARY COMPENSATION TABLE
The following table includes information for the years ended December 31, 2012, 2011 and 2010 concerning compensation for our Named Executive Officers. Mr. McGrath was Chief Executive Officer and President until December 13, 2011, at which time the Board of Directors appointed Dr. Rafaeli to serve as our Chief Executive Officer.
Name and Principal PositionYear
Salary ($)
Non-Equity Incentive Plan Compensation ($) (1)
Stock Awards ($) (2)
Option Awards ($) (2)
All Other Compensation ($) (3)
Total ($)
        
Dolev Rafaeli, Chief Executive Officer (4)2012450,0002,206,98201,106,00040,5493,803,531
2011450,0001,560,26526,226,304047,71828,284,287
        
Dennis M. McGrath, President and Chief Financial Officer2012325,000234,0000711,00018,4871,288,487
2011325,000234,0003,855,000772,68522,1265,208,811
2010324,010161,3790021,195506,584

 (1)
“Non-Equity Incentive Plan Compensation” in the foregoing table is the bonus earned in 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 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 2012 awards, other features of those awards and the grant-date fair value of the awards, see the Grants of Plan-Based Awards Table below.


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(3)
“All Other Compensation” includes car allowance ($1,000 per month), premiums for supplementary life and/or disability insurance of $4,049 and matching 401(k) plan contributions of $2,438 for Mr. McGrath. For Dr. Rafaeli it includes matching 401(k) plan contributions of $34,000 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.
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.

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If any of the events set forth in the table below had occurred by December 31, 2012, 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, 2012 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)
 $881,250  $881,250   0   0   0   N/A 
 Health continuation  26,107   26,107   0   0   0   N/A 
 AD&D insurance  3,895   3,895   0   0   0   N/A 
 Executive life ins.  12,825   12,825   0   0   0   N/A 
 
Accelerated vesting (3)
  0   0   0   0   0   N/A 
 
Tax gross-up (4)
  25,333   25,333   0   0   0   N/A 
 TOTAL $949,410  $949,410   0   0   0   N/A 
                          
Dennis McGrath
Salary & bonus  (1)(2)
 $636,458  $961,458   0   0   0   N/A 
 Health continuation  26,107   41,739   0   0   0   N/A 
 AD&D insurance  3,760   4,316   0   0   0   N/A 
 Executive life ins.  7,929   22,744   0   0   0   N/A 
 
Accelerated vesting (3)
  2,924,099   2,924,099   0   0   0   N/A 
 
Tax gross-up (4)
  19,482   19,482   0   0   0   N/A 
 TOTAL $3,617,835  $3,617,835   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 2012 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, 2012 was $14.53 per share. For stock awarded between January 26, 2009 and February 4, 2010, such shares were purchased for $0.06 (par value of $0.01 per share adjusted for the 1-for-6 reverse stock split).
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, 2012 to our Named Executive Officers . The stock awards and option grants reflected below were awarded under the 2005 Equity Plan.

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GRANTS OF PLAN-BASED AWARDS TABLE
  Estimated Future Payouts Under Equity Incentive Plan AwardsAll 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)
NameGrant DateThreshold (#)
Target
(#)
Maximum (#)    
         
Dolev Rafaeli3/18/12---140,00020.0012.731,106,000
         
Dennis McGrath3/18/12---90,00020.0012.73711,000
         

(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, 2012.
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 Rafaeli0140,000020.003/18/202100N/AN/A
          
Dennis McGrath8,750006.246/15/1900N/AN/A
 0N/A0N/AN/A0066,667968,672
 0N/A0N/AN/A00133,3331,937,328
 10,6000020.0012/13/2100N/AN/A
 50,1000015.6012/13/2100N/AN/A
 090,000020.003/18/2200N/AN/A

(1) The market value of unvested shares of restricted stock is based on $14.53 per share, which was the closing price of our stock on December 31, 2012.
(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 on 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.

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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 - - 100,696 1,418,944
         

(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 InterlocksAccounting and Insider ParticipationTax Considerations
 
No interlocking relationship exists between any member of our Board or Compensation CommitteeWe have adopted accounting standard, FASB ASC Topic 718 under which, we are required to value stock options granted and any memberrestricted stock awarded. We continue to follow this accounting standard after the reverse acquisition on December 13, 2011.
Under Section 162(m) of the boardInternal Revenue Code of directors or compensation committee1986, as amended, the Code, there is a limit placed on tax deductions of any other companies, nor has such interlocking relationship existed in the past.
Stockholder Communications with the Board of Directors
Our Board of Directors has established a processpublicly-held corporation for stockholdersindividual compensation 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 Davis Woodward, Corporate Counsel at dwoodward@photomedex.com or to the following address (our principal executive offices): Board of Directors, c/o Corporate Secretary, 147 Keystone Drive, Montgomeryville, Pennsylvania 18936. Any such communication must contain:
a representation that the stockholder is a holder of record of our capital stock;
the name and address, as they appear on our books, of the stockholder sending such communication; and
the class and number of shares of our capital stock that are beneficially owned by such stockholder.
Mr. Woodward 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 Mr. Woodward 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 30, 2011, we believe, based solely on a review of the copiescertain executives 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 thecorporation (other than its chief financial officer) exceeding $1,000,000 in any taxable year, ended December 31, 2010.

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Item 11.  Executive Compensation
COMPENSATION DISCUSSION AND ANALYSIS
Introduction
The Compensation Committee of our Board of Directors is responsible for reviewing and approving the annual compensation of our executive officers. The Nominations and Corporate Governance Committee of our Board of Directors is responsible for reviewing and approvingunless the compensation of our non-employee directors.
Theis performance-based. Compensation Committeeresulting from options 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 President and Chief Executive Officer and our other executive officersindexed 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 executive officers are base salary and bonus, and long-term incentives in the form of stock options and now, under our 2005 Equity Plan in the form of restricted shares of our common stock. 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 intends to govern and administer compensation plans 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 and our success. 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 by any of the executives. Although incentive compensation is discretionary, the Compensation Committee typically considers overall performance of the Company when granting cash incentive awards and considers each executive’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 non-employee directors and our executive officers, except for our 401(k) plan in which our executive officers are eligible to participate. Compensation is generally paid as earned. 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 stock.
In order to assess whether the compensation program we had been providing to our executive officers was competitive and effective, the Compensation Committee relied 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 executive compensation.
performance-based. To the extent consistent with the foregoing objectives the Compensation Committee also intendsof 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 Internal Revenue Code of 1986, as amended, 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

 
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What Our Compensation Program is Designed to Reward

President of Radiancy. The key componentsemployment agreement has an initial term of three years that commenced on December 13, 2011, the date of the compensation programclosing 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 isentitled to a bonus equal to 1% of the Company’s sales (calculated as 1% of recognized U.S. GAAP sales reported in our executive officers are base salary,consolidated quarterly financial reports presented to our Board of Directors), which bonus, and long-term incentives underwhen combined with his other annual remuneration from the 2005 Equity Plan. These components are administered withCompany 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 goalsales of providing total compensation that is competitivethe Company 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 insofarexcess of such target threshold amount as the priceCompensation Committee shall determine (the "Second-Tier Bonus"). Following the end 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 executive officers to incentivize individual and teameach quarterly performance period, the Compensation Committee shall determine the Second-Tier Bonus for that quarter by providing a meaningful stake in us that links their compensation to our overall success. Through awards of restricted stock, we have attempted to forge a closer link by tying the vestingcalculating 1% of the restricted stock to certain milestone pricesCompany's U.S. GAAP sales in excess of our common stock.
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 ofthreshold amount. Upon the termination of an executive’sDr. Rafaeli's employment with the Company is a secondary but material elementby PhotoMedex without cause or by Dr. Rafaeli for good reason, he will be entitled to severance benefits as described in the package.
Base Salaries.    Base salaries for our 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.
Bonus.    Generally, at the outset of a fiscal year, the Compensation Committee establishes a bonus program for 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.
For 2010, Messrs. McGrath and Stewart were eligible to earn a bonus of 60% of base salary. The bonus opportunity was pre-set against a sliding scale based on adjusted earnings before interest, taxes, depreciation and amortization in the second half of 2010.
Long-Term Incentives.    Grants of stock options under our stock option plans are designed to provide our 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 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 executive officer is set by the Compensation Committee at a level that is intended to create a meaningful opportunity for stock ownership based upon 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. The Compensation Committee also takes into account the number of unvested options held by the 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.
Prior to 2006, stock options granted under the various stock option plans generally had a four-year vesting schedule depending upon the size of the grant, and generally were set to expire five years from the date of grant. In 2006, the Compensation Committee determined that such grants would be for 10 years and vest over five years. The exercise price of options granted under the stock option plans is at no less than 100% of the fair market value of the underlying stock on the date of grant. The number of stock options granted to each executive officer is determined by the Compensation Committee based upon several factors, including the executive officer’s salary grade,

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performance and the estimated value of the stock at the time of grant, but the Compensation Committee has the flexibility to make adjustments to those factors at its discretion. The options granted to executives 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.
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.
The vast majority of the stock options outstanding under our equity plans have exercise prices which are well above the current market price of our common stock. The decline in our stock price over recent years has made our goal of attracting, retaining and motivating employees more challenging. Accordingly, our Board of Directors approved an exchange of certain underwater options held by our named executive officers, other current employees, members of our Scientific Advisory Board and other active consultants and nonemployee members of our Board of Directors. The program concluded on December 30, 2010: participants surrendered 68,653 options and received in exchange 22,063 registered, unrestricted shares from the 2005 Equity Plan.
Compensationsection below entitled “Potential Payments on Termination of Employment or Change of Control.    Control”.
Employment Agreement with Dennis M. McGrath.We haveare party to an employment agreementsagreement with Messrs.Dennis M. McGrath pursuant to which he serves as our President and Stewart.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. O’Donnell terminated on July 31, 2009 as a resultMcGrath’s 2012 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 separation. Each of these agreements provides for severance upon termination of employment, whether in context of a change of control or not. We have an at-will employment agreement with Ms. Allgeier, which provides for severance upon termination of employment after a change in control without cause or for good reason.
In the event of an involuntary termination not in connection with a change in control of the Company, an executive will be vested in those options that were unvested as of the termination but that would have vested in the 12 months following termination. In the event of a change of control, all of an executive’s unvested options will vest. Any unvested shares of restricted stock will vest upon a change of control to the extent that the acquisition price exceeds a milestone price or if an acquirer elects not to continue to employ the services of the executive.
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 isbase salary based on the marketattainment of individual and the companies we compete against for executives. Base salarycorporate goals determined 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 in the first or second fiscal quarter of a year and 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 ofIn addition, he is entitled to participate in 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 afterlong-term equity incentive programs established by the Company has made public disclosurefor 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 its financial results, typicallyEmployment or Change in a conference call on earnings. In such a case,Control.”
SUMMARY COMPENSATION TABLE
The following table includes information for the exercise price is setyears ended December 31, 2012, 2011 and 2010 concerning compensation for our Named Executive Officers. Mr. McGrath was Chief Executive Officer and President until December 13, 2011, 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 towhich time the Board of Directors appointed Dr. Rafaeli to serve as a whole, and the grants or awards made to executives are valued under the same measurement standards as grants made to other grantees.our Chief Executive Officer.
 
Name and Principal PositionYear
Salary ($)
Non-Equity Incentive Plan Compensation ($) (1)
Stock Awards ($) (2)
Option Awards ($) (2)
All Other Compensation ($) (3)
Total ($)
        
Dolev Rafaeli, Chief Executive Officer (4)2012450,0002,206,98201,106,00040,5493,803,531
2011450,0001,560,26526,226,304047,71828,284,287
        
Dennis M. McGrath, President and Chief Financial Officer2012325,000234,0000711,00018,4871,288,487
2011325,000234,0003,855,000772,68522,1265,208,811
2010324,010161,3790021,195506,584

 (1)
“Non-Equity Incentive Plan Compensation” in the foregoing table is the bonus earned in 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 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 2012 awards, other features of those awards and the grant-date fair value of the awards, see the Grants of Plan-Based Awards Table below.


 
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(3)
“All Other Compensation” includes car allowance ($1,000 per month), premiums for supplementary life and/or disability insurance of $4,049 and matching 401(k) plan contributions of $2,438 for Mr. McGrath. For Dr. Rafaeli it includes matching 401(k) plan contributions of $34,000 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.
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.

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If any of the events set forth in the table below had occurred by December 31, 2012, 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, 2012 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)
 $881,250  $881,250   0   0   0   N/A 
 Health continuation  26,107   26,107   0   0   0   N/A 
 AD&D insurance  3,895   3,895   0   0   0   N/A 
 Executive life ins.  12,825   12,825   0   0   0   N/A 
 
Accelerated vesting (3)
  0   0   0   0   0   N/A 
 
Tax gross-up (4)
  25,333   25,333   0   0   0   N/A 
 TOTAL $949,410  $949,410   0   0   0   N/A 
                          
Dennis McGrath
Salary & bonus  (1)(2)
 $636,458  $961,458   0   0   0   N/A 
 Health continuation  26,107   41,739   0   0   0   N/A 
 AD&D insurance  3,760   4,316   0   0   0   N/A 
 Executive life ins.  7,929   22,744   0   0   0   N/A 
 
Accelerated vesting (3)
  2,924,099   2,924,099   0   0   0   N/A 
 
Tax gross-up (4)
  19,482   19,482   0   0   0   N/A 
 TOTAL $3,617,835  $3,617,835   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 2012 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, 2012 was $14.53 per share. For stock awarded between January 26, 2009 and February 4, 2010, such shares were purchased for $0.06 (par value of $0.01 per share adjusted for the 1-for-6 reverse stock split).
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, 2012 to our Named Executive Officers . The stock awards and option grants reflected below were awarded under the 2005 Equity Plan.

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GRANTS OF PLAN-BASED AWARDS TABLE
  Estimated Future Payouts Under Equity Incentive Plan AwardsAll 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)
NameGrant DateThreshold (#)
Target
(#)
Maximum (#)    
         
Dolev Rafaeli3/18/12---140,00020.0012.731,106,000
         
Dennis McGrath3/18/12---90,00020.0012.73711,000
         

(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, 2012.
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 Rafaeli0140,000020.003/18/202100N/AN/A
          
Dennis McGrath8,750006.246/15/1900N/AN/A
 0N/A0N/AN/A0066,667968,672
 0N/A0N/AN/A00133,3331,937,328
 10,6000020.0012/13/2100N/AN/A
 50,1000015.6012/13/2100N/AN/A
 090,000020.003/18/2200N/AN/A

(1) The market value of unvested shares of restricted stock is based on $14.53 per share, which was the closing price of our stock on December 31, 2012.
(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 on 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.

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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 - - 100,696 1,418,944
         

(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.
Accounting and Tax Considerations
 
On January 1, 2006, weWe have adopted accounting standard, FASB ASC Topic 718. Under this accounting standard,718 under which, we are required to value stock options granted and restricted stock awarded, in 2006 and beyond underawarded. We continue to follow this accounting standard after the fair value method and expense those amounts in our income statement over the vesting period of the stock option or restricted stock. We were also required to value unvested stock options granted prior to our adoption of FASB ASC Topic 718 under the fair value method and amortize such expense in our income statement over the stock option’s remaining vesting period. A material portion of such amortizing expense relates to stock option grants made to our executive officers and future option grants and stock awards made in 2006 and beyond to our executive officers will also have a material impactreverse acquisition on such expense.December 13, 2011.
 
Our compensation program has been structured to comply with Sections 409A and 162(m) of the Code. If an executive is entitled to nonqualified deferred compensation benefits that are subject to Section 409A, and such benefits do not comply with Section 409A, then the benefits are taxable in the first year they are not subject to a substantial risk of forfeiture. In such case, the executive service-provider is subject to regular federal income tax, interest and an additional federal income tax of 20% of the benefit includible in income.
Under Section 162(m) of the Internal Revenue Code of 1986, as amended, the Code, there is a limitation waslimit 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 has been advised that based upon prior stockholder approval on January 26, 2009 of the material terms of our 2005 Equity Plan, compensation under our 2005 Equity Plan is excluded from this limitation, provided that the other requirements of Section 162(m) are met. However, when warranted based upon competitive and other factors, the Compensation Committee may however, decide to exceed the tax deductible limits established under Section 162(m). The base salary provided of the Code, when such a decision appears to each of our executives in 2008, 2009be warranted based upon competitive and 2010 did not exceed the limits under Section 162(m) for tax deductibility. None of our executives exercised any options in 2008, 2009 or 2010.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

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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 isentitled 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.    In November 1999, we entered intoWe are party to an employment agreement with Dennis M. McGrath pursuant to servewhich he serves as our Chief Financial Officer and Vice President-Finance and Administration. We amended and restated that agreement in August 2002, September 2007 and May 6, 2008. On July 2, 2009, Mr. McGrath became our President and Chief Executive Officer following Mr. O’Donnell’s separation. Mr. McGrath’sOfficer. The employment agreement has been renewed in accordancean initial term of three years that commenced on December 13, 2011, the date of the closing of our merger with its terms through December 31, 2011.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 2012 annual base salary was approximately $300,000 in 2008under his employment agreement is $325,000 and 2009.
Mr. McGrath’s 2010he is eligible to receive an annual bonus of up to 60% of his base salary was $325,000.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.”
On February 1, 2008, Mr. McGrath was awarded under the 2005 Equity Plan 3,886 options to purchase shares of our common stock at an exercise price of $37.38 per share. These options vest over five years and will expire on February 1, 2018.
On June 15, 2009, Mr. McGrath was awarded under the 2005 Equity Plan 2,917 restricted shares of common stock at a purchase price of $0.06 per share. We have the right to repurchase the shares at $0.06 per share if we do not have positive adjusted net income in the year 2010. “Adjusted net income” is defined as “net income after income taxes, excluding expense from options and warrants.” Mr. McGrath was also granted 8,750 options to purchase shares of our common stock at an exercise price of $6.24 per share. The options vest over five years and will expire on June 15, 2019.
Pursuant to the Company’s Proxy Statement, the stockholders approved on October 28, 2010 the request of the Board of Directors to increase the shares authorized under the 2005 Equity Plan so that, among other purposes set forth in the Proxy Statement, the Board could provide long-term incentive compensation to Messrs. McGrath and Stewart. On March 29, 2011, the Board of Directors awarded Mr. McGrath 100,000 restricted shares of common stock. The shares vest 10% a year for the first ten years after the award and may be accelerated in the event of a change in control. Taxes imposed in the first year due to vesting of shares will be grossed up for taxes and paid provided conditions of cash availability are met.

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Employment Agreement with Michael R. Stewart. Effective August 1, 2002, Michael R. Stewart became our Executive Vice President of Corporate Operations, pursuant to an employment agreement. The employment agreement was amended and restated in September 2007. Mr. Stewart became our Chief Operating Officer on July 19, 2005, at which time he was granted 5,000 options. Mr. Stewart’s annual base salary was $262,500 in 2008 and 2009. Mr. Stewart’s 2010 annual base salary was $300,000. Mr. Stewart’s employment agreement has been renewed in accordance with its terms through December 31, 2011. The severance arrangements contained in Mr. Stewart’s employment agreement are summarized in the section below entitled “Potential Payments upon Termination of Employment or Change in Control.”
 
On February 1, 2008, Mr. Stewart was awarded 3,110 options to purchase shares of our common stock under the 2005 Equity Plan at an exercise price of $37.38 per share. The options vest over five years and will expire on February 1, 2018.
On June 15, 2009, Mr. Stewart was awarded 1,750 restricted shares of common stock under the 2005 Equity Plan at a purchase price of $0.06 per share. We have the right to repurchase the shares at $0.06 per share if we do not have positive adjusted net income in the year 2010. Mr. Stewart was also granted 5,250 options to purchase shares of our common stock at an exercise price of $6.24 per share. The options vest over five years and will expire on June 15, 2019.
Pursuant to the Company’s Proxy Statement, the stockholders approved on October 28, 2010 the request of the Board of Directors to increase the shares authorized under the 2005 Equity Plan so that, among other purposes set forth in the Proxy Statement, the Board could provide long-term incentive compensation to Messrs. McGrath and Stewart. On March 29, 2011, the Board of Directors awarded Mr. Stewart 100,000 restricted shares of common stock. The shares vest 10% a year for the first ten years after the award and may be accelerated in the event of a change in control. Taxes imposed in the first year due to vesting of shares will be grossed up for taxes and paid provided conditions of cash availability are met.
Employment Agreement with Christina L. Allgeier.We have an at-will employment agreement with Ms. Allgeier, which provides for severance upon termination of employment after a change in control without cause or for good reason. If, following a change in control of the Company, Ms. Allgeier’s employment is terminated (a) by the Company without cause or (b) by Ms. Allgeier for good reason, she will be entitled to six months’ salary continuation. On March 29, 2011, Ms. Allgeier was awarded under the 2005 Equity Plan 10,000 restricted shares of common stock. The shares vest 20% a year for the first five years after the award and may be accelerated in the event of a change in control.
 
SUMMARY COMPENSATION TABLE
 
The following table includes information for the years ended December 31, 20102012, 2011 and 20092010 concerning compensation for our named executive officers.Named Executive Officers. Mr. O’DonnellMcGrath was Chief Executive Officer and President until July 2, 2009,December 13, 2011, at which time the Board of Directors appointed Mr. McGrathDr. Rafaeli to serve as our Chief Executive Officer and President. Ms. Allgeier was appointed to serve as our Chief Financial Officer on November 4, 2009.

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Officer.
 
Name and Principal PositionYear 
Salary ($)
  
Bonus ($) (1)
  
Stock Awards ($) (2)
  
Option Awards ($) (2)
  
All Other Compensation ($) (3)
  Total ($) 
                    
Dennis M. McGrath, President and Chief Executive Officer2010  324,010   161,379   0   0   21,195   506,584 
2009  300,000   0   18,025   45,045   20,156   383,226 
                          
Michael R. Stewart, Chief Operating Officer and Executive Vice President2010  298,558   148,965   0   0   19,368   466,891 
2009  262,500   0   10,815   27,027   19,097   319,439 
                          
Christina L. Allgeier, Chief Financial Officer & Vice President2010  130,385   25,000   0   0   13,004   168,389 
2009  101,521   0   0   4,290   2,766   108,577 
                          
Name and Principal PositionYear
Salary ($)
Non-Equity Incentive Plan Compensation ($) (1)
Stock Awards ($) (2)
Option Awards ($) (2)
All Other Compensation ($) (3)
Total ($)
        
Dolev Rafaeli, Chief Executive Officer (4)2012450,0002,206,98201,106,00040,5493,803,531
2011450,0001,560,26526,226,304047,71828,284,287
        
Dennis M. McGrath, President and Chief Financial Officer2012325,000234,0000711,00018,4871,288,487
2011325,000234,0003,855,000772,68522,1265,208,811
2010324,010161,3790021,195506,584

 
 (1)
Bonus”Non-Equity Incentive Plan Compensation” in the foregoing table is the bonus earned in 20102012 and 2009,2011, even though such bonus willmay have been paid in a subsequent period. No bonus has been accrued for 2009 as the condition for accrual has not been met.
 
 (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 2009,2012 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 20092012 awards, other features of those awards and the grant-date fair value of the awards, see the Grants of Plan-Based Awards Table below.


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(3)
“All Other Compensation” includes car allowance ($1,000 per month), premiums for supplementary life and/or disability insurance of $4,049 and matching 401(k) plan contributions of $2,438 for Messrs. McGrathMr. McGrath. For Dr. Rafaeli it includes matching 401(k) plan contributions of $34,000 and Stewart and Ms. Allgeier. Ms. Allgeier’s Other Compensationpremiums for supplementary life and/or disability insurance of $6,549.
(4)All of Dr. Rafaeli’s compensation in 2009 reflects car allowance2011 was paid by Radiancy, Inc., except for November and December, after she had became the Chief Financial Officer.$93,460 of base salary.
 
Non-Equity Incentive Plan; Non-Qualified Deferred Compensation
We do not have a non-equity incentive plan, nor do we have a plan or program of non-qualified deferred compensation.
 
Potential Payments on Termination of Employment or Change of Control
 
Potential payments to our named executive officersNamed 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.agreements or plan document.
 
Pursuant to the terms of their employment agreements, should (1) the Company terminate Mr. McGrath’sDr, Rafaeli’s or Mr. Stewart’sMcGrath’s employment without cause, (2) Mr. McGrathDr. Rafaeli or Mr. StewartMcGrath 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)
a cashContinued payment equal toof 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 12-month periodremainder 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 12-month periodremainder of the initial term or any renewal term  following such termination;termination, or if such coverage is unavailable, a monthly payment equal to the monthly premium for such coverage;

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 (v)
a monthly cash payment for a periodthe remainder of 12 monthsthe 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 during the one-year period immediately followingNamed Executive Officer does not timely execute and deliver a changerelease, then in controllieu of the Company, Mr. McGrath’s or Mr. Stewart’s employment is terminated (1) by the Company without cause, (2) by the individual for good reason or (3) due to non-renewal of the applicable employment agreement,foregoing payments and the individual delivers an effective release to the Company, the affected individualbenefits he will become entitled to receive the following benefits:
(i)
a cash payment equal to two times his annual base salary in effect at the time of such termination, payable in installments in accordance with the Company’s payroll practices based on the terms of the agreement;
(ii)
a pro-rated bonus for the year in which such termination occurs;
(iii)
continued medical and dental coverage for himself and his eligible dependents for the 24-month period following such termination;
(iv)
continued coverage under the Company’s long-term and short-term disability plans for the 24-month period following such termination;
(v)
a monthly cash payment for a period of 24 months 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 full tax gross-up to the extent to which the amounts in subparagraphs (iv) or (v) above are taxable to the individual;
(vii)
full acceleration of all outstanding equity awards held by the individual at the time of such termination, and each outstanding option will remain exercisable until the earlier of the 12-month anniversary of his termination date and the option’s expiration date; and
(viii)a full tax gross-up with respect to any excise tax imposed under Section 4999 of the Code on any payments or benefits received in connection with such change in control (including any accelerated vesting of his equity awards) that are deemed to constitute parachute payments under Section 280G of the Code.
If, following a change in control of the Company, Ms. Allgeier’s employment is terminated (a) by the Company without cause or (b) by Ms. Allgeier for good reason, she shallonly be entitled to six months’ salary continuation.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.

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If any of the events set forth in the table below had occurred by December 31, 2010,2012, then we estimate the value of the benefits that would have been triggered and thus accrued to Messrs.Dr. Rafaeli and Mr. McGrath and Stewart and Ms. Allgeier had the triggering event occurred on December 31, 2010,2012 and they timely delivered a release, would be as set forth below.

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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
 
 
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)
 $881,250  $881,250   0   0   0   N/A 
Health continuation  26,107   26,107   0   0   0   N/A 
AD&D insurance  3,895   3,895   0   0   0   N/A 
Executive life ins.  12,825   12,825   0   0   0   N/A 
Accelerated vesting (3)
  0   0   0   0   0   N/A 
Tax gross-up (4)
  25,333   25,333   0   0   0   N/A 
TOTAL $949,410  $949,410   0   0   0   N/A 
                              
Dennis McGrath
Salary & bonus  (1)(2)
$  325,000$  650,000000N/A
Salary & bonus  (1)(2)
 $636,458  $961,458   0   0   0   N/A 
Health continuation8,19916,398000N/AHealth continuation  26,107   41,739   0   0   0   N/A 
AD&D insurance1,0462,092000N/AAD&D insurance  3,760   4,316   0   0   0   N/A 
Executive life ins.5,85211,705000N/AExecutive life ins.  7,929   22,744   0   0   0   N/A 
Accelerated vesting (3)
69,580000N/A
Accelerated vesting (3)
  2,924,099   2,924,099   0   0   0   N/A 
Tax gross-up (4)
2,5785,156000N/A
Tax gross-up (4)
  19,482   19,482   0   0   0   N/A 
TOTAL$ 387,255$  704,931000N/ATOTAL $3,617,835  $3,617,835   0   0   0   N/A 
     
Michael Stewart
Salary & bonus  (1)(2)
$  300,000$  600,000000N/A
Health continuation8,19916,398000N/A
AD&D insurance1,0462,092000N/A
Executive life ins.5,07610,152000N/A
Accelerated vesting (3)
38,486000N/A
Tax gross-up (4)
2,2364,472000N/A
TOTAL$  317,543$  596,600000N/A
     
Christina L. Allgeier
Salary & bonus  (1)(2)
N/A$  72,500000N/A
Health continuationN/AN/A000N/A
AD&D insuranceN/AN/A000N/A
Executive life ins.N/A000N/A
Accelerated vesting (3)
N/A000N/A
Tax gross-up (4)
N/A000N/A
TOTALN/A$  72,500000N/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 20102012 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, 20102012 was $5.94$14.53 per share All shares were unvested at that date.share. For stock awarded prior tobetween January 26, 2009 the date of our 1-for-7 reverse stock split, such shares were purchased for $0.42 (par value of $0.01 per share adjusted for the 1-for-7 reverse stock split and the assumed 1-for-6 reverse stock split). For stock awarded after January 26, 2009,February 4, 2010, such shares were purchased for $0.06 (par value of $0.01 per share adjusted for the 1-for-6 reverse stock split).
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.
 
 
All unvested options generally become exercisable by reason of a change of control. However, none of the executives’ unvested options were in the money as of December 31, 2010, and therefore there would have been no benefit as of December 31, 2010. Similarly, in the event of an involuntary termination without cause, the executive optionee becomes vested in those options that would otherwise have vested in twelve months following the date of termination. As in the hypothetical change of control, so in this case of hypothetical involuntary termination, there would have been no benefit to the optionee inasmuch as no option was in the money at December 31, 2010.
(4)Tax gross-ups are with respect to supplementary executive life and/or disability insurance benefits.
 
STOCK OPTIONS
Our 2005 Equity Plan is the vehicle by which restricted stock awards and option grants are made to the executives and other service-providers. At the 2010 annual meeting of stockholders, the number of shares reserved for issuance under the 2005 Equity Plan was increased to 650,000 shares of our common stock and to 60,000 shares of our common stock for our 2000 Outside Director Plan.

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Grants of Plan-Based Awards Table
 
None.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, 2012 to our Named Executive Officers . The stock awards and option grants reflected below were awarded under the 2005 Equity Plan.

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GRANTS OF PLAN-BASED AWARDS TABLE
  Estimated Future Payouts Under Equity Incentive Plan AwardsAll 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)
NameGrant DateThreshold (#)
Target
(#)
Maximum (#)    
         
Dolev Rafaeli3/18/12---140,00020.0012.731,106,000
         
Dennis McGrath3/18/12---90,00020.0012.73711,000
         

(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, 2010.

2012.
 
 
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE AS ADJUSTED TO REFLECT THE 1-FOR-6 REVERSE STOCK SPLIT EFFECTIVE FEBRUARY 3, 2010
 
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)
 
 
Dennis McGrath0N/A0N/AN/A007,97747,383
 0N/A0N/AN/A002,08412,379
 1,7507,00006.246/15/19002,91717,327
          
Michael Stewart0N/A0N/AN/A001,6679,902
 0N/A0N/AN/A003,75022,275
 1,0504,20006.246/15/19001,75010,395
          
Christina Allgeier16766706.246/15/1900N/AN/A
          

Dolev Rafaeli0140,000020.003/18/202100N/AN/A
          
Dennis McGrath8,750006.246/15/1900N/AN/A
 0N/A0N/AN/A0066,667968,672
 0N/A0N/AN/A00133,3331,937,328
 10,6000020.0012/13/2100N/AN/A
 50,1000015.6012/13/2100N/AN/A
 090,000020.003/18/2200N/AN/A

(1)The market value of unvested shares of restricted stock is based on $5.94$14.53 per share, which was the closing price of our stock on December 31, 2010.2012.
 
(2)All options granted to Messrs. McGrath and Stewart and Ms. Allgeiergrants were under the 2005 Equity Plan. Options with portions unvested as of December 31, 2010 vest ratably on each of the five anniversary dates from the respective grant dates.
Mr. McGrath vests in the 100,000 shares of restricted stock granted on March 30, 2011 on 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.

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Option Exercises and Stock Vested Table
 
None.
  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 - - 100,696 1,418,944
         

(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.
 

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Compensation Committee
 

Yoav Ben-DrorStephen P. ConnellyAlan R. NovakLeonard L. MazurLewis 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. Each such director received in 2010 non-qualified options to purchase up to 834 shares of our common stock on an annual basis, but starting inEffective December 12, 2011, each such director will instead receive 1,000 shares of our common stock. The shares, like the options before them, vest quarterly in the year of grant, vesting on the last day of service within a quarter. Each outside director receives an annual cash retainer of $20,000,$40,000, payable quarterly; other fees, suchquarterly 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 those based onthe executive director for Radiancy Ltd. and Photo Therapeutics, Ltd. In addition, in 2012, the Directors, elected at the December 12, 2011 stockholders’ meeting, received a director’s chairmanship or the length or mannersign-on bonus of a meeting, will no longer be earned or paid. The Board will have the discretion to pay the quarterly portion of the retainer in cash or in5,000 shares of our common stock. If the Board determines to pay the quarterly portion of the retainer fees in shares of our common stock, the number of shares issued to each director will be calculated by dividing the dollar amount owed by the closing price of our common stock as of the sooner to occur of the close of the quarter, or the resignation date of a director. In December 2010, the directors received unrestricted shares of Company stock in settlement of $274,833 of accrued but unpaid fees of which $125,333 of such fees were earned in 2010. Such shares were issued out of the 2005 Equity Plan. The table below sets forth our non-employee directors’ compensation through December 31, 2010.2012.  
 


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DIRECTOR COMPENSATION TABLE
 
 
Name
 Fees Earned ($)  Option Awards ($) (1)(2)  Total ($) 
          
Richard J. DePiano  31,917   3,818   35,735 
             
James W. Sight (3)  12,000   3,041   15,041 
             
Alan R. Novak  23,500   3,818   27,318 
             
David W. Anderson  28,458   3,818   32,276 
             
Stephen P. Connelly  28,958   3,818   32,776 
             
Leonard L. Mazur  23,500   3,818   27,318 
             
Paul J. Denby (3)  12,000   3,041   15,041 
 
Name
 Fees Earned ($)  Stock Awards ($) (1)  Total ($) 
          
Lewis Pell  40,000   67,500   107,500 
             
Yoav Ben-Dror  405,000   67,500   472,500 
             
Nahum Melumad  50,000   67,500   117,500 
             
Katsumi Oneda  40,000   67,500   107,500 
             
James W. Sight  45,000   67,500   112,500 
             
Stephen P. Connelly  40,000   67,500   107,500 
 

 
(1)The amounts shown for optionstock 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 optionstock awards for financial statement purposes, computed in accordance with FASB ASC Topic 718, but without giving effect to estimated forfeitures.
 (2)The grant date fair value computed in accordance with ASC Topic 718 was $5.70 on January 1, 2010 and $4.87 on May 26, 2010.
 (3)Mr. Sight and Mr. Denby joined our Board of Directors effective May 26, 2010.purposes.


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Limitation on Directors' Liabilities; Indemnification of Officers and Directors
 
Our articlesArticles of incorporationIncorporation and bylaws designate the relative duties and responsibilities of our officers, establish procedures for actions by directors and stockholders and other items. Our articlesArticles of incorporationIncorporation 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 April 15, 2011.December 13, 2013. 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.

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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 30, 2011,18, 2013, 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 (Post February 3, 2010 1-for-6 reverse stock split)
 
Percentage of Shares Beneficially Owned (1)
 
Richard J. DePiano (2)
14,895*
James W. Sight (3)
189,7026.63
Dennis M. McGrath (4)
118,438*
Michael R. Stewart (5)
110,174*
Christina L. Allgeier (6)
10,560*
Alan R. Novak (7)
11,330*
David W. Anderson (8)
10,662*
Stephen P. Connelly (9)
10,516*
Leonard L. Mazur( 10)
7,887*
Paul J. Denby (11)
229,9598.04
Perseus Partners VII, LP (12)
1,566,24433.78
Goldman Capital Management, Inc. (13)
288,28910.08
Corsair Capital Management, LLC(14)
256,4128.97
Leap Tide Management Inc.(15)
210,0637.35
Charles L. Frischer (16)
155,4795.44
LB I Group, Inc. (17)
146,6945.13
Clutterbuck Funds LLC (18)
234,6507.10
All directors and officers as a group (ten persons) (19)
714,12323.20
Name and Address Of Beneficial Owner (1)
 
Number of Shares Beneficially Owned
 
Percentage of Shares Beneficially Owned (1)
 
Lewis C. Pell (2)
1,775,3198.4%
Yoav Ben-Dror (3)
1,380,9216.6%
Dolev Rafaeli (4)
2,045,7039.7%
Dennis M. McGrath (5)
323,3921.5%
Nahum Melumad (6)
8,000*
Katsumi Oneda (7)
1,525,1647.25%
James W. Sight (8)
254,4861.2%
Stephen P. Connelly (9)
20,443*
Shlomo Ben-Haim (10)
1,806,2638.6%
All directors and officers as a group (eight persons) (11)
7,333,42834.5%

*           Less than 1%.

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(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 30, 2011,18, 2013, 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 3,069,74921,043,947 shares of common stock outstanding as of March 30, 2011.18, 2013.
 
(2)  Includes 14,0621,175,319 shares of common stock and options600,000 shares held by trusts with respect to purchase upwhich Mr. Pell may be deemed to 833 shares of common stock.have beneficial ownership. Mr. DePiano’sPell's address is 147 Keystone Drive, Montgomeryville, PA 18936.
 
(3)  Includes 189,0771,380,921 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 147 Keystone Drive, Montgomeryville, PA 18936.
(4)  Includes 1,466,703 shares of common, 551,000 shares held by trusts with respect to which Dr. Rafaeli may be deemed to have beneficial ownership and vested options to purchase 28,000 shares of common stock. Does not include unvested options to purchase up to 112,000 shares of common stock, which may vest more than 60 days after March 18, 2013.
(5)  Includes 261 shares of common stock, 200,000 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 87,450 shares of common stock. Does not include options to purchase up to 62572,000 shares of common stock, which may vest more than 60 days after March 18, 2013.

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(6)  Includes 8,000 shares of common. Dr. Melumad's address is 147 Keystone Drive, Montgomeryville, PA 18936.
(7)  Includes 1,205,164 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 147 Keystone Drive, Montgomeryville, PA 18936.
(8)  Includes 196,208 shares of common stock and warrants to purchase 58,288 shares of common stock. Mr. Sight’s address is 147 Keystone Drive, Montgomeryville, PA 18936.
 
(4)(9)  Includes 3,71115,939 shares of common stock, 112,977 additional250 shares of common stock subjectheld by trusts with respect to restriction agreements with us and vested optionswhich Mr. Connelly may be deemed to have beneficial ownership, warrants to purchase 1,750 shares of common stock. Does not include options to purchase up to 7,000 shares of common stock, which may vest more than 60 days after March 30, 2011.
(5)  Includes 1,957 shares of common stock, 107,167 additional shares of common stock subject to restriction agreements with us and vested options to purchase 1,050 shares of common stock. Does not include options to purchase up to 4,200 shares of common stock, which may vest more than 60 days after March 30, 2011.
(6)  Includes 394 shares of common stock, 10,000 additional shares of common stock subject to a restricted agreement with us and options to purchase up to 166 shares of common stock. Does not include options to purchase up to 667 shares of common stock, which may vest more than 60 days after March 30, 2011.
(7)  Includes 10,497 shares of common stock and options to purchase up to 833 shares of common stock. Mr. Novak’s address is 147 Keystone Drive, Montgomeryville, PA 18936.
(8)  Includes 9,829 shares of common stock and options to purchase up to 833 shares of common stock. Mr. Anderson’s address is 147 Keystone Drive, Montgomeryville, PA 18936.
(9)  Includes 9,6833,422 shares of common stock and options to purchase up to 833 shares of common stock. Mr. Connelly’s address is 147 Keystone Drive, Montgomeryville, PA 18936.
 
(10)  Includes 6,429 sharesShlomo Ben-Haim is, or may be deemed to be, the beneficial owner of common stock and options to purchase up to 1,4581,806,263 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. Mazur’sBen-Haim has voting and/or dispositive power over shares held by Eastnet Investment Limited and Antinori, Ltd. Mr. Ben-Haim's address is 147 Keystone Drive, Montgomeryville, PA 18936.8 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.
 
(11)  Includes 2,000 shares of common stock and options to purchase up to 833 shares of common stock. In addition, Paul J. Denby is deemed to own 227,334 shares of common stock. The Paul J. Denby Revocable Trust holds 112,000 shares of common stock and various custodians of Mr. Denby’s IRAs hold 115,334 shares of common stock. Mr. Denby’s address is 147 Keystone Drive, Montgomeryville, PA 18936.
(12)  Includes (a) $21,447,590 aggregate principal amount of promissory notes convertible into 1,272,009 shares of common stock (272,927 of such shares are issuable upon conversion of the “Series B-1 Note” and  its additional convertible notes issued September 1, 2010 and March 1, 2011 at a conversion price of $11.25850 per share, and 999,082 of such shares are issuable upon conversion of the “Series B-2 Note” and its additional convertible notes issued September 1, 2010 and March 1, 2011 at a conversion price of $18.39172 per share); (b) warrants exercisable into 293,610 shares of common stock at $18.39172 per share and (c) options to purchase up to 625 shares of common stock. Parties related to Perseus Partners VII, L.P. include Perseus Partners VII GP, L.L.C., Perseus Partners VII GP, L.P., Perseus L.L.C., and Perseuspur, L.L.C. The address of Perseus Partners VII, L.P. is c/o Perseus, L.L.C., 2099 Pennsylvania Avenue, NW, Ninth Floor, Washington, D.C. 20006.

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(13)  Includes 288,289 shares of common stock which Goldman Capital Management Inc. owns directly and indirectly through related entities, including without limitation the Goldman Capital Management Money Purchase Plan dated 12/23/87. The foregoing information has been derived in part from a Schedule 13F-HR filed by Goldman Capital Management on October 28, 2009 and from information obtained from the investor on December 22, 2009. The address of Goldman Capital Management is 320 Park Avenue, New York, New York 10022.
(14)  Corsair Capital Management LLC is deemed to own 256,412 shares of common stock held through the following affiliates: Corsair Capital Partners LP owns 211,539 shares of common stock; Corsair Capital Investors, Ltd. owns 26,667 shares of common stock, and Corsair Capital Partners 100, L.P. owns 18,206 shares of common stock. The foregoing information has been derived in part from a Schedule 13G filed by Goldman Capital Management on February 10, 2011. The address of Corsair Capital Management LLC is 350 Madison Avenue, Ninth Floor, New York, NY 10017.
(15)  Leap Tide Management Inc. owns 210,063 shares of common stock. The foregoing information has been derived in part from a Schedule 13G filed on February 16, 2010. The address of Leap Tide Management Inc. is 10451 Mill Run Circle, Suite 400, Owings Mills, MD 21117.
(16)  Charles L. Frischer owns 155,479 shares of common stock, of which he holds 151,851 directly and 3,628 through a family partnership. Abigail Francis, who is Mr. Frischer’s spouse, owns 5,000 shares directly. Each spouse disclaims ownership in the other spouse’s direct holdings, but each spouse claims beneficial ownership in the 3,628 shares owned by the partnership. The foregoing information has been obtained from a Schedule 13D filed by Mr. Frischer on May 17, 2010. The address of Mr. Frischer is 803 Prospect Street, Seattle, WA  98012.
(17)  LB I Group Inc. is a wholly-owned subsidiary of Lehman Brothers Inc, which is a wholly-owned subsidiary of Lehman Brothers Holdings Inc. LB I Group Inc. owns 146,694 shares of common stock and warrants which became exercisable on May 15, 2007 to purchase up to 149,039 shares of common stock but which cannot be exercised if LBI owns more than 4.999% of our stock. The foregoing information has been derived from a Schedule 13G/A filed on behalf of LB I Group, Inc. on February 13, 2008. The address of LB I Group is 745 Seventh Avenue, New York, New York 10019.
(18)  Clutterbuck Funds LLC has warrants exercisable into 234,650 shares of common stock. The address of Clutterbuck Funds is 200 Public Square, Suite 2910, Cleveland, OH 44114.
(19)  Includes 474,9735,448,515 unrestricted shares of common stock, including 1,471,250 held by trusts, and 230,144200,000 restricted shares of common stock warrants to purchase 97,398 shares of common stock and vested options to purchase 9,006116,283 shares of common stock. Does not include options to purchase up to 11,867184,000 shares of common stock, which may vest more than 60 days after March 30, 2011.18, 2013.
 
 Item 13.           Certain Relationships and Related Transactions, Director Independence
 
Related Person Transactions
Item 13.  Certain Relationships and Related Transactions, Director Independence
 
As of March 30, 2011,18, 2013, Messrs. Michael R. Matthias and Jeffrey P. Berg, shareholders in Baker & Hostetler LLP, outside counsel to us in certain litigation,litigations, held in the aggregate 1,034 shares of our common stock. Messrs. Matthias and Berg acquired such shares through the exercise of stock options that they accepted from us in exchange for legal services performed from July 1998 to May 2000.
 
On February 27, 2009, we issued one of the Convertible Notes in an aggregate principal amount of $18.0 million to one of our investors. This Convertible Note was initially convertible into 581,225 shares of our common stock at a conversion price of $30.96912 per share. In connection with the issuance of this Convertible Note, weWe shall also issued to this investor a warrant to purchase 174,368 shares of our common stock at price per share of $30.96912. On September 1, 2009, as payment of interest in kind, we issued a second Convertible Note in an aggregate principal amount of $720,000 to this same investor, which Convertible Note was initially convertible into 23,249 shares of our common stock at a conversion price of $30.96912 per share. On March 1, 2010, as payment of interest in kind, we issued two additional Convertible Notes in an aggregate principal amount of $748,800. These Convertible Notes were initially convertible into an aggregate of 33,869 shares of our common stock at a conversion price of $22.10844 per share. Following the amendments to the Convertible Notes described herein and the issuance as of September 1, 2010 and as of March 1, 2011 of Additional Convertible Notes in payment of accrued interest, as of March 30, 2011, the Convertible Notes are convertible into 1,272,009 shares and the warrant and the option are exercisable into 293,610 and 625 shares of our common stock, which in aggregate would represent 33.78% of our outstanding common stock if converted and exercised.

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Perseus, L.L.C. is the manager of an investment fund that is the holder of the Convertible Notes and related warrant described above and that beneficially owns approximately 33.78% of our voting securities. In addition, such investment fund has the right to appoint a director to our Board of Directors and has certain approval and negative control rights.
We also have enteredenter 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.
 
Item 14.  Principal Accountant Fees and ServicesDirector 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 Audit Committee appointed EisnerAmper LLPboard 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.

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 Item 14.           Principal Accountant Fees and Services
We engaged Fahn Kanne & Co. Grant Thornton Israel (“Grant Thornton Israel”) as our independent auditors for 2011 and 2012, effective January 26, 2012. Prior to the fiscal year ending December 31, 2010 and Amper, Politziner & Mattia, LLPappointment, Grant Thornton Israel had been the independent auditor for the fiscal year ending December 31, 2009.Radiancy Inc.
 
The following table shows the fees paid or accrued by us for the audit and other services provided by EisnerAmper LLPGrant Thornton Israel for 20102012 and Amper, Politziner & Mattia, LLP (“Amper”) for 2009:2011:
 
  2010  2009 
Audit Fees – Amper (1)
 $34,000  $307,000 
Audit Fees –EisnerAmper (1)
  181,000   - 
Audit-Related Fees – Amper (2)
  69,000   126,350 
Audit-Related Fees – EisnerAmper (2)
  40,000   - 
All Other Fees – Amper (3)
  -   11,000 
Total $324,000  $444,350 
  2012  2011 
Audit Fees (1)
 $346,000  $228,000 
Audit-Related Fees (2)
  18,000   58,000 
Tax Fees (3)
  371,000   64,000  
Total $735,000  $350,000 
 
(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:fees” in this table.table, principally related to employee plan benefit audits and due diligence services.
 
(3)  Consists of all other products and services provided other than the services reported under audit fees and audittax related fees.services.
 
Engagement of the Independent Auditor. The Audit Committee is responsible for approving every engagement of EisnerAmper LLPGrant Thornton Israel to perform audit or non-audit services for us before EisnerAmper LLPGrant 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.
 

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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 EisnerAmper LLPGrant 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.
 

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·      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 20112013 The Audit Committee has selected EisnerAmper LLPGrant Thornton Israel to serve as our independent auditors for the year ending December 31, 2011.2013. The Committee’s selection will be submitted to our stockholders for verificationratification at our 20112013 Annual Meeting of Stockholders.
 
Item 15.            Exhibits and Financial Statement Schedules 
 
Item 15.(a)(1)  Exhibits and Financial Statement Schedules Statements
(a)(1)           Financial Statements
 
Consolidated balance sheetsheets of PhotoMedex, Inc. and subsidiaries as of December 31, 20102012 and 2009,2011, 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, 2010.2012.
 
(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
 
1.1Underwriting Agreement dated May 4, 2010 between PhotoMedex, Inc. and Ladenburg Thalmann & Co. Inc. (34)
2.1
  Amended and Restated Agreement and Plan of Merger, dated September 25, 2002, between PhotoMedex, Inc., J Merger Corp., Inc. and Surgical Laser Technologies, Inc. (1)
2.2Agreement and Planas of Merger, dated December 1, 2004, between PhotoMedex, Inc., Gold Acquisition Merger Corp. and ProCyte Corporation (2)
2.3Securities Purchase Agreement, dated October 31, 2006,2011, by and betweenamong Radiancy, Inc., PhotoMedex, Inc. and each purchaser a party thereto (3)
2.4Purchase Agreement, dated August 4, 2008, by and among PhotoMedex,PHMD Merger Sub, Inc., Photo Therapeutics Group Limited and Neil Crabb. (21)
2.5Asset Purchase Agreement, dated August 1, 2008, by and between PhotoMedex, Inc. and PRI Medical Technologies, Inc. (21)
2.6including the Form of Securities Purchase Agreement, dated October 22, 2009, between PhotoMedex, Inc. and each Purchaser (29)
2.7Agreement and Plan of Merger, dated December 28, 2010, between PhotoMedex, Inc. (a Delaware corporation) and PhotoMedex, Inc. (a Nevada corporation).  (36)
Warrant. (23)

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2.8Certificate of Merger, dated December 29, 2010, issued by Delaware Secretary of State (36)
3.1Restated Certificate of Incorporation, filed on August 8, 2000 (4)
3.2Amendment to Restated Certificate of Incorporation, filed on January 6, 2004 (22)
3.3Amendment to Restated Certificate of Incorporation, filed on January 26, 2009 (26)
3.4Amended and Restated Certificate of Incorporation, filed on February 3, 2010 (32)
3.5Amended and Restated Bylaws (5)
3.6Amended Section 6.01 of the By-Laws, October 30, 2007 (19)
3.7Certificate of Amendment of Restated Certificate of Incorporation of PhotoMedex, Inc., filed on February 3, 2010 (32)
3.8Articles of Incorporation of PhotoMedex, Inc. (aa Nevada corporation),corporation, filed on December 28, 2010 (36)12, 2011 with the Secretary of State for the State of Nevada. (23)
3.93.2Bylaws of PhotoMedex, Inc. (a Nevada corporation), adopted December 28, 2010 (36)(18)
4.1Securities Purchase Agreement, dated August 4, 2008, by and between PhotoMedex, Inc. and Perseus Partners VII, LP, including Form of Convertible Note,  Form of Warrant and Registration Rights Agreement (21)to Purchase Shares of Common Stock of PhotoMedex (19)
4.2Amendment No. 1 to Securities Purchase Agreement, dated February 27, 2009. (24)
4.3First Tranche Convertible Promissory Note, dated February 27, 2009. (24)
4.4Pledge and Security Agreement, dated February 27, 2009. (24)
4.5First Tranche Warrant, dated February 27, 2009. (24)
4.6Registration Rights Agreement, dated February 27, 2009 (26)
4.7PhotoMedex Inc. Secured Convertible Promissory Note, dated September 1, 2009 (30)
4.8Amendment No. 2 to Securities Purchase Agreement, dated March 19, 2010 between PhotoMedex, Inc. and Perseus Partners VII, L.P. (33)
4.9Amended and Restated Convertible Promissory Series B-2 Note, dated March 19, 2010 between PhotoMedex, Inc. and Perseus Partners VII, L.P. (33)
4.10Amended and Restated Convertible Promissory Series B-1 Note, dated March 19, 2010 between PhotoMedex, Inc. and Perseus Partners VII, L.P. (33)
4.11Amended and Restated Pledge and Security Agreement, dated March 19, 2010 between PhotoMedex, Inc. and Perseus Partners VII, L.P. (33)
4.12Term Loan and Security Agreement, dated as of March 19, 2010 between PhotoMedex, Inc. and Clutterbuck Funds LLC (33)(26) (Exhibit 4.12 therein)
4.134.3Term Note, dated March 19, 2010, between PhotoMedex, Inc. and Clutterbuck Funds, LLC (33)(26) (Exhibit 4.13 therein)
4.144.4Warrant, dated March 19, 2010, issued to Clutterbuck Funds, LLC (33)
4.15Secured Convertible Promissory Note, dated September 1, 2010, in favor of Perseus Partners VII, L.P. (Series B-1, at 10%) (35)
4.16Secured Convertible Promissory Note, dated September 1, 2010, in favor of Perseus Partners VII, L.P. (Series B-2, at 8%) (35)
4.17Secured Convertible Promissory Note, dated effective September 1, 2010, in favor of Perseus Partners VII, L.P. (Series B-2, at 2%) (36)
4.18Secured Convertible Promissory Note, dated March 1, 2011, in favor of Perseus Partners VII, L.P. (Series B-1, at 10%) (36)
4.19Secured Convertible Promissory Note, dated March 1, 2011, in favor of Perseus Partners VII, L.P. (Series B-2, at 10%) (36)
4.20Amendment No. 1 to Term Loan and Security Agreement, dated April 30, 2010 (36)(27) (Exhibit 4.20 therein)
4.214.5Amendment No. 2 to Term Loan and Security Agreement, dated March 28, 2011 (36)
4.22Warrant, dated March 28, 2011, issued to Clutterbuck Funds, LLC (36)(27) (Exhibit 4.21 therein)
10.1Lease Agreement dated May 29, 1996, between Surgical Laser Technologies, Inc. and Nappen & Associates (Montgomeryville, Pennsylvania) (5)(2)
10.2Lease Renewal Agreement, dated January 18, 2001, between Surgical Laser Technologies, Inc. and Nappen & Associates (5)(2)
10.3Lease Agreement, dated July 10, 2006, PhotoMedex, Inc. and Nappen & Associates (6)(3)
10.4Standard Industrial/Commercial Multi-Tenant Lease - Net, dated July 30, 2008 (additional facility at Carlsbad, California) (26)(15)
10.5Standard Industrial/Commercial Multi-Tenant Lease  Net, dated March 17, 2005 (Carlsbad, California) (8)(5)

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10.6Industrial Real Estate Lease, dated May 3, 2007, and delivered December 14, 2007 (26)
10.7License and Development Agreement, dated May 22, 2002, between Surgical Laser Technologies, Inc. and Reliant Technologies, Inc. (5)(2)
10.810.7Settlement Agreement and Release, dated November 11, 2008, by and among Allergan, Inc., Murray A. Johnstone, MD, PhotoMedex, Inc. and ProCyte Corporation. (26)(15)
10.910.8Master Asset Purchase Agreement, dated September 7, 2004, between PhotoMedex, Inc. and Stern Laser, srl (9)(6)
10.1010.9Master Lease Agreement, dated June 25, 2004, between PhotoMedex, Inc. and GE Capital Corporation. (10)
10.11Investment Agreement, dated March 30, 2006, between AzurTec, Inc. and PhotoMedex, Inc. (11)

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��

10.12License Agreement, dated March 30, 3006, between AzurTec, Inc. and PhotoMedex, Inc. (11)
10.13License Agreement, dated March 31, 2006, and effective April 1, 1006,2006, between the Mount Sinai School of Medicine and PhotoMedex, Inc. (12)(7)
10.1410.102005 Equity Compensation Plan, approved December 28, 2005 (13) *(8)
10.1510.112005 Investment Plan, approved December 28, 2005 (13) *
10.16Amended and Restated 2000 Non-Employee Director Stock Option Plan (1) *
10.1710.12Amended and Restated 2000 Stock Option Plan (1) *
10.1810.132004 Stock Option Plan, assumed from ProCyte (14) *
10.191996 Stock Option Plan, assumed from ProCyte (14) *(9)
10.2010.161991 Restated Stock Option Plan for Non-Employee Directors, assumed from ProCyte (14) *
10.211989 Restated Stock Option Plan, assumed from ProCyte (14) *
10.22Amended and Restated Employment Agreement with Jeffrey F. O'Donnell, dated October 30, 2007 (19) *
10.23Amended and Restated Employment Agreement with Dennis M. McGrath, dated September 1, 2007 (19) *
10.24Amended and Restated Employment Agreement of Michael R. Stewart, dated September 1, 2007 (19) *
10.25Employment Agreement of John F. Clifford, dated March 18, 2005 (2) *
10.26Employment Agreement of Robin L. Carmichael, dated March 18, 2005 (2) *
10.27Separation Agreement, effective June 30, 2006, between PhotoMedex, Inc. and John F. Clifford. (15) *
10.28Restricted Stock Purchase Agreement of Jeffrey F. O’Donnell, dated January 15, 2006 (8) *
10.29Restricted Stock Purchase Agreement of Dennis M. McGrath, dated January 15, 2006 (8)  *(5)
10.3010.17Consulting Agreement dated January 21, 1998 between the Company and R. Rox Anderson, M.D. (7)(4)
10.3110.18Restricted Stock Purchase Agreement of Jeffrey F. O’Donnell, dated May 1, 2007 (17) *
10.32Restricted Stock Purchase Agreement of Dennis M. McGrath, dated May 1, 2007 (17) *(10)
10.3310.21Restricted Stock Purchase Agreement of Michael R. Stewart, dated May 1, 2007 (17) *
10.34Restricted Stock Purchase Agreement of Michael R. Stewart, dated August 13, 2007 (18) *
10.35Amended and Restated 2000 Non-Employee Director Stock Option Plan, dated as of June 26, 2007 (17) *(24)
10.3610.22Amended and Restated 2005 Equity Compensation Plan, dated as of June 26, 2007, as amended on October 28, 2008 (25) *(14)
10.3710.23Master Term Loan and Security Agreement, dated December 31, 2007 among PhotoMedex, Inc., CIT Healthcare LLC, as Agent and Lender, and Life Sciences Capital LLC, as Lender (20)
10.38Omnibus Amendment dated September 30, 2008 by and among CIT Healthcare LLC, Life Sciences Capital LLC and PhotoMedex, Inc. (23)
10.39Amendment No. 1 to Omnibus Amendment, dated February 27, 2009 (24)
10.40Form of Indemnification Agreement for directors and executive officers of PhotoMedex, Inc. (24)(13)
10.4110.24Restricted Stock Purchase Agreement of Dennis M. McGrath, dated June 15, 2009 (28) *(16)
10.4210.26Restricted Stock Purchase Agreement of Michael R. Stewart, dated June 15, 2009 (28) *
10.43Co-Promotion Agreement, dated as of January 7, 2010, between PhotoMedex, Inc and Galderma Laboratories, L.P. (31)(17)
10.4410.27Amended and Restated 2000 Non-Employee Director Stock Option Plan, dated as of August 3, 2010 (36) *(18)
10.4510.28Amended and Restated 2005 Equity Compensation Plan, dated as of August 3, 2010. (36) *(18)
10.4610.29Restricted Stock Agreement of Dennis M. McGrath, dated March 30, 2011 (36) *(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)
10.47Restricted Stock  Unprotected Tenancy Agreement of Michael R. Stewart, dated March 30, 2011 (36) *September 9, 2008 by and between S.A.I. Yarak Buildings and Investments Ltd. and Radiancy (Israel) Ltd. (Hod Hasharon) (25)
10.48Restricted  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 of Christina L. Allgeier, dated March 30, 2011 (36) *18, 2012 between PhotoMedex, Inc. and Dolev Rafaeli (25)
22.110.51  Non-Qualified Stock Option Agreement dated March 18, 2012 between PhotoMedex, Inc. and Dennis McGrath (25)

- 97 -



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)
21.1
23.1
23.2Consent of Amper, PolitzinerFahn Kanne & Mattia LLPCo. Grant Thornton Israel
31.1
31.2
32.1
Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2101.INS*Certificate  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 Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906Regulation 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 Sarbanes-OxleySecurities Act of 2002
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.

*Management contract or compensatory plan or arrangement.

.
(1)  Filed as part of our Registration Statement on Form S-4, as filed with the Commission 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.
 
- 88 -

(3)  Filed as part of our Annual Report on Form 10-K for the year ended December 31, 2006.
 

(2)(4)  Filed as part of our Registration Statement on Form S-4/S-1/A, filed with the Commission on January 21, 2005, and as amended.August 5, 1999.
(3)  Filed as part of our Current Report on Form 8-K, dated November 6, 2006.
 
(4)  Filed as part of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.
(5)  Filed as part of our Annual Report on Form 10-K for the year ended December 31, 2002.2005.
(6)Filed as part of our Annual Report on Form 10-K for the year ended December 31, 2006.
(7)  Filed as part of our Registration Statement on Form S-1, as filed with the Commission on January 28, 1998, as amended.
(8)  Filed as part of our Annual Report on Form 10-K for the year ended December 31, 2005.
(9)  Filed as part of our Current Report on Form 8-K, datedon September 10,13, 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, 2004.2007.
(11)Filed as part of our Current Report on Form 8-K, filed on April 6, 2006.
(12)  Filed as part of our Current Report on Form 8-K, filed on April 10, 2006.
(13)  Filed as part of our Definitive Proxy Statement on Schedule 14A, as filed with the Commission on November 15, 2005.
(14)  Filed as part of our Registration Statement on Form S-8, as filed with the Commission on April 13, 2005.
(15)  Filed as part of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2006.
(16)  Filed as part of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.
(17)  Filed as part of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.
(18)  Filed as part of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2007.
(19)(12)  Filed as part of our Annual Report on Form 10-K for the year ended December 31, 2007.
(20)  Filed as part of our amended Annual Report on Form 10-K/A for the year ended December 31, 2007.
(21)  Filed as part of our Current Report on Form 8-K filed on August 4, 2008.
(22)  Fled as part of our Annual Report on Form 10-K for the year ended December 31, 2003.
(23)  Filed as part of our Current Report on Form 8-K on February 27, 2009.
(24)(13)  Filed as part of our Current Report on Form 8-K on March 5, 2009.
(25)(14)  Filed as part of our Definitive Proxy Statement on Schedule 14A on December 18, 2008.
(26)(15)  Filed as part of our Annual Report on Form 10-K for the year ended December 31, 2008.
(27)(16)  Filed as part of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2009.

- 98 -



(17)  Filed as part of our Current Report on Form 8-K on January 26, 2009.11, 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, 2009.2012.
(29)  Filed as part of our CurrentQuarterly Report on Form 8-K on October 23, 2009.10-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, 2009.2012.
(31)  Filed within this Form 10-K.
*
The certifications attached as part of our CurrentExhibit 32.1 accompany this Annual Report on Form 8-K10-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 JanuaryExhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 2010.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.

(32)  Filed as part of our Current Report on Form 8-K on February 3, 2010.
(33)  Filed as part of our Current Report on Form 8-K on March 23, 2010.
(34)  Filed as part of our Current Report on Form 8-K on May 4, 2010.
(35)  Filed as part of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2010.
(36)  Filed with this Form 10-K.

 
- 8999 -

 


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.
 

 
- 90100 -

 

SIGNATURES
 
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 31, 201118, 2013 By:/s/ Dennis M. McGrathDr. Dolev Rafaeli 
   Dennis M. McGrath     Dr. Dolev Rafaeli 
   President, 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/ Richard J. DePianoLewis C. Pell Chairman of the Board of Directors March 31, 201118, 2013
Richard J. DePiano
Lewis C. Pell
    
/s/ James W. SightDr. Yoav Ben-Dror Vice Chairman of the Board of Directors March 31, 201118, 2013
James W. Sight
Dr. Yoav Ben-Dror
/s/ Dr. Dolev RafaeliChief Executive Officer and Director (Principal Executive Officer)March 18, 2013
Dr. Dolev Rafaeli    
/s/ Dennis M. McGrath President, Chief ExecutiveFinancial Officer and Director (Principal ExecutiveFinancial Officer) March 31, 201118, 2013
Dennis M. McGrath
    
/s/ Christina L. Allgeier Chief FinancialAccounting Officer (Principal Financial and Accounting Officer) March 31, 201118, 2013
Christina L. Allgeier
    
/s/ Alan R. NovakJames W. Sight Director March 31, 201118, 2013
Alan R. Novak
James W. Sight
    
/s/ David W. AndersonDr. Nahum Melumad Director March 31, 201118, 2013
David W. Anderson
Nahum Melumad
    
/s/ Stephen P. Connelly Director March 31, 201118, 2013
Stephen P. Connelly
    
/s/ Leonard L. MazurKatsumi Oneda Director March 31, 201118, 2013
Leonard L. Mazur
/s/ Paul J. DenbyDirectorMarch 31,2011
Paul J. DenbyKatsumi Oneda    


 
- 91101 -

 


PHOTOMEDEX, INC. AND SUBSIDIARIES44
SUBSIDIARIES
 
Index to Consolidated Financial Statements
 
Page
 
 Page
ReportsReport of Independent Registered Public Accounting Firm
F-2
Reports of Independent Registered Public Accounting FirmF-3
Consolidated Balance Sheets, December 31, 20102012 and 20092011F-4
F-3
Consolidated Statements of Operations,Comprehensive Income, Years ended December 31, 2010, 20092012, 2011 and 20082010F-5
F-4
Consolidated Statements of Stockholders’Changes in Equity, Years ended December 31, 2012, 2011 and 2010
   2009 and 2008F-6
F-5
Consolidated Statements of Cash Flows, Years ended December 31, 2010, 20092012, 2011 and 20082010F-7
F-6
Notes to Consolidated Financial StatementsF-8F-7

 

 

     

 
F - 1

 


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders of
   PhotoMedex, Inc. and Subsidiaries
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Fahn Kanne & Co.
Head Office
Levinstein Tower
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
Board of Directors and Shareholders
   PhotoMedex, Inc.

We have audited the accompanying consolidated balance sheetsheets of PhotoMedex, Inc. and Subsidiaries (the “Company”) as of December 31, 2010,2012 and 2011, and the related consolidated statements of operations, stockholders’comprehensive income, changes in equity and cash flows for then ended.each of the three years in the period ended December 31, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.audits.

We conducted our auditaudits 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropri­ate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,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 auditaudits 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, 2010,2012 and 2011, and the results of itstheir operations and itstheir cash flows for each of the year thenthree years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.


/s/ EisnerAmper LLP
March 31, 2011
Edison, New Jersey

F - 2



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders of
   PhotoMedex, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheet of PhotoMedex, Inc. and Subsidiaries (the “Company”) as of December 31, 2009, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2009. We also have audited, PhotoMedex, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). PhotoMedex, Inc.’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal controls over financial reporting, included in the accompanying consolidated financial statements. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

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 financial statements referred to above present fairly, in all material respects, the financial position of PhotoMedex, Inc. and Subsidiaries as of December 31, 2009, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, PhotoMedex, Inc. and Subsidiaries maintained, in all material respects, effectiveCompany's internal control over financial reporting as of December 31, 2009,2012, based on criteria established in Internal Control-InternalControl – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). and our report dated March 18, 2013 expressed an unqualified opinion.



/s/ Amper, PolitzinerFahn Kanne & Mattia, LLPCo. Grant Thornton Israel
Tel Aviv, Israel
March 23, 201018, 2013
Edison, New Jersey


     

 
F - 32

 

PHOTOMEDEX, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
ASSETS December 31, 
  2010  2009 
Current assets:      
Cash and cash equivalents
 $3,523,948  $2,116,788 
Restricted cash  -   78,000 
Accounts receivable, net of allowance for doubtful accounts of $265,000 and $400,000, respectively  3,277,095   3,998,785 
Inventories
  6,141,179   7,002,850 
Prepaid expenses and other current assets
  671,192   345,673 
Total current assets  13,613,414   13,542,096 
         
Property and equipment, net  6,918,944   9,293,482 
Patents and licensed technologies, net  6,813,528   7,751,662 
Goodwill, net  19,569,200   19,472,686 
Other intangible assets, net  1,688,352   2,020,625 
Other assets  892,280   1,087,595 
Total assets $49,495,718  $53,168,146 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
         
Current liabilities:        
Current portion of notes payable
 $77,796  $129,696 
   Current portion of long-term debt  2,867,720   3,179,469 
Accounts payable
  2,801,568   4,171,707 
Accrued compensation and related expenses
  1,782,793   1,133,346 
Accrued interest payable
  699,025   499,200 
Other accrued liabilities
  1,765,523   1,601,414 
Deferred revenues
  496,443   612,757 
Total current liabilities  10,490,868   11,327,589 
         
Long-term liabilities:        
Notes payable, net of current maturities  13,817   46,477 
Long-term debt, net of current maturities  29,933   760,783 
Convertible debt  19,344,136   17,369,943 
Warrants related to convertible debt  938,623   741,525 
Total liabilities  30,817,377   30,246,317 
         
Commitment and contingencies        
         
Stockholders' Equity:        
Common Stock, $.01 par value, 35,000,000 shares authorized; 2,843,749 and 2,238,157 shares issued and outstanding
  28,437   22,382 
Additional paid-in capital
  143,106,355   138,639,143 
Accumulated deficit
  (124,564,120)  (115,840,931)
    Cumulative translation adjustment  107,669   101,235 
Total stockholders' equity  18,678,341   22,921,829 
Total liabilities and stockholders’ equity $49,495,718  $53,168,146 
(In thousands, except share and per share amounts)
 



  December 31, 
  2012  2011 
ASSETS      
Current assets:      
Cash and cash equivalents
 $44,348  $16,549 
Short term bank deposit  18,000   - 
Accounts receivable, net of allowance for doubtful accounts of $6,917 and $3,196, respectively  19,064   12,393 
Inventories, net
  22,467   19,208 
   Deferred tax asset  18,633   10,079 
Prepaid expenses and other current assets
  12,853   3,611 
Total current assets  135,365   61,840 
         
Property and equipment, net  6,759   5,324 
Patents and licensed technologies, net  12,673   14,435 
Other intangible assets, net  10,854   11,950 
Goodwill, net  27,852   27,246 
Deferred tax asset  18,457   22,977 
Funds in respect of employee rights upon retirement and others  745   559 
Total assets $212,705  $144,331 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
         
Current liabilities:        
   Current portion of notes payable $609  $504 
   Current portion of debt  10   1,720 
Accounts payable
  10,025   8,111 
Accrued compensation and related expenses
  2,494   3,800 
Other accrued liabilities
  22,914   15,110 
Deferred revenues
  5,259   1,948 
Total current liabilities  41,311   31,193 
         
Long-term liabilities:        
Long-term debt, net of current maturities  -   8 
Deferred revenues  3,313   1,381 
Other liabilities  166   504 
Liability for employee rights upon retirement  588   520 
Total liabilities  45,378   33,606 
         
Commitment and contingencies (Note 10)        
         
Stockholders' equity:        
    Preferred Stock, $.01 par value, 5,000,000 shares authorized; 0 shares issued and outstanding at December 31, 2012 and 2011  -   - 
Common Stock, $.01 par value, 50,000,000 shares authorized; 21,043,947 and 18,821,728 shares issued and outstanding at December 31, 2012 and 2011, respectively
  210   188 
    Treasury Stock at cost, 0 and 16,056 shares of common stock at December 31, 2012 and 2011, respectively  -   (250)
Additional paid-in capital
  130,954   97,972 
Retained earnings
  35,302   12,813 
Accumulated other comprehensive income
  861   2 
Total stockholders' equity  167,327   110,725 
Total liabilities and stockholders’ equity $212,705  $144,331 
 
The accompanying notes are an integral part of these consolidated financial statements.

     

F - 3


PHOTOMEDEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except share and per share amounts)

        
  For the Year Ended December 31,
  2012 2011 2010
       
Revenues $ 220,651 $ 132,082 $ 70,071
       
Cost of revenues 46,642 26,296 16,465
       
Gross profit 174,009 105,786 53,606
       
Operating expenses:      
Engineering and product development 2,914 1,057 839
Selling and marketing 116,487 62,185 28,950
General and administrative 27,330 45,192 5,646
  146,731 108,434 35,435
 
Operating profit (loss)
 27,278 (2,648) 18,171
       
Other income (loss):      
Interest and  other financing income (expense), net (351) (68) (283)
       
Income (loss) before income tax (expense) benefit 26,927 (2,716) 17,888
       
Income tax (expense) benefit (4,438) 2,022 (6,287)
       
Net income (loss) $22,489 ($694) $11,601
       
Net income (loss) per share (Note 1):      
Basic $ 1.10 ($ 0.06) $ 1.13
    Diluted $ 1.08 ($ 0.06) $0.99
       
Shares used in computing net income (loss) per share:      
Basic 20,355,520 11,602,049 10,256,364
    Diluted 20,764,354��11,602,049 11,724,569
       
Other comprehensive income:      
Foreign currency translation adjustments $ 859 $  2 $  -
       
Comprehensive income $23,348 ($692) $11,601
       








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


 
F - 4

 

PHOTOMEDEX, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONSCHANGES IN EQUITY
 
(In thousands, except share and per share amounts)
        
  For the Year Ended December 31,
  2010 2009 2008
Revenues:      
Product sales $ 25,191,017 $ 22,452,724 $ 26,144,084
Services 9,610,518 10,235,360 8,626,208
  34,801,535 32,688,084 34,770,292
       
Cost of revenues:      
Product cost of revenues 13,024,156 11,675,233 11,968,222
Services cost of revenues 5,695,746 5,750,733 5,027,095
  18,719,902 17,425,966 16,995,317
       
Gross profit 16,081,633 15,262,118 17,774,975
       
Operating expenses:      
Selling, general and administrative 19,995,463 23,083,278 26,797,107
Engineering and product development 1,343,356 1,137,725 1,073,215
  21,338,819 24,221,003 27,870,322
 
Operating loss from continuing operations
 (5,257,186) (8,958,885) (10,095,347)
       
Other income (loss):      
Interest expense, net (3,268,905) (2,370,676) (1,032,597)
Change in fair value of warrants (see Note 1) (197,098) 808,786 -
       
Loss from continuing operations (8,723,189) (10,520,775) (11,127,944)
       
Discontinued operations:      
Income from discontinued operations, net of tax - - 285,712
Loss on sale of discontinued operations - - (448,675)
       
Net loss ($8,723,189) ($10,520,775) ($11,290,907)
       
Basic and diluted net loss per share (Note 1):      
Continuing operations ($  3.37) ($  6.42) ($  7.41)
Discontinued operations (0.00) (0.00) (0.11)
Basic and diluted net loss per share ($  3.37) ($  6.42) ($  7.52)
       
Shares used in computing basic and diluted net loss per share (Note 1) 2,589,519 1,640,006 1,500,767
       

 
  Common Stock  Additional Paid-In  Treasury  Retained  Accumulated Other Comprehensive    
  
Shares
  
Amount
  
Capital
  
stock
  
Earnings
  
Income
  
Total
 
BALANCE, JANUARY 1, 2010  10,256,364  $103  $14,898  $-  $1,906  $-  $16,907 
Stock-based compensation expense  -   -   392   -   -   -   392 
Net income  -   -   -   -   11,601   -   11,601 
BALANCE, DECEMBER 31, 2010  10,256,364  $103   15,290   -   13,507   -   28,900 
Stock-based compensation related to stock options and restricted stock  -   -   7,774   -   -   -   7,774 
Stock-based compensation - grant of Common stock  2,045,571   20   13,843   -   -   -   13,863 
Exercise of stock options  2,783,303   28   382   -   -   -   410 
Reverse merger acquisition  3,736,490   37   60,683   -   -   -   60,720 
Purchase of Company stock (16,056 shares)  -   -   -   (250)  -   -   (250)
Other comprehensive income  -   -   -   -   -   2   2 
Net loss  -   -   -   -   (694)  -   (694)
BALANCE, DECEMBER 31, 2011  18,821,728   188   97,972   (250)  12,813   2   110,725 
Issuance of warrants to consultants for services  -   -   98   -   -   -   98 
Stock-based compensation - grants of common stock  30,000   -   405   -   -   -   405 
Stock-based compensation related to stock options and restricted stock  -   -   5,709   -   -   -   5,709 
Stock options issued to consultants for services  -   -   83   -   -   -   83 
Issuance of common stock, net  3,023,432   30   37,484   -   -   -   37,514 
Repurchase and retirement of common stock  (842,961)  (9)  (10,747)  -   -   -   (10,756)
Options exercised  10,048   -   67   -   -   -   67 
Warrants exercised  17,756   1   133   -   -   -   134 
Retirement of treasury stock (16,056 shares)  (16,056)  -   (250)  250   -   -   - 
Other comprehensive income  -   -   -   -   -   859   859 
Net income  -   -   -   -   22,489   -   22,489 
BALANCE, DECEMBER 31, 2012  21,043,947  $210  $130,954  $-  $35,302  $861  $167,327 
 

 

 

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

 

 
F - 5

 

PHOTOMEDEX, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

           Accumulated    
  Common Stock  Additional     Other    
     Paid-In  Accumulated  Comprehensive    
  
Shares (1)
  
Amount (1)
  
Capital (1)
  
Deficit
  
Income
  
Total
 
BALANCE, JANUARY 1, 2008  1,500,767  $15,008  $133,547,671  $(94,029,249) $-  $39,533,430 
Stock options issued to consultants for services  -   -   92,501   -   -   92,501 
Share-based compensation expense related to employee options  -   -   888,546   -   -   888,546 
Share-based compensation related to restricted stock  -   -   414,491   -   -   414,491 
Issuance of warrants for draws under line of credit  -   -   44,366   -   -   44,366 
Net loss  -   -   -   (11,290,907)  -   (11,290,907)
BALANCE, DECEMBER 31, 2008  1,500,767   15,008   134,987,575   (105,320,156)  -   29,682,427 
Stock options issued to consultants for services  -   -   54,181   -       54,181 
Share-based compensation expense related to employee options  -   -   552,608   -   -   552,608 
Share-based compensation related to restricted stock  -   -   655,237   -   -   655,237 
Round up for fractional shares due to the reverse stock split  96   1   (1)  -   -   - 
Sale of stock net of expenses  732,627   7,326   2,824,146   -   -   2,831,472 
Registration costs  -   -   (434,836)  -   -   (434,836)
Issuance of restricted stock  4,667   47   233   -   -   280 
Change in cumulative translation adjustment  -   -   -   -   101,235   101,235 
Net loss  -   -   -   (10,520,775)  -   (10,520,775)
BALANCE, DECEMBER 31, 2009  2,238,157   22,382   138,639,143   (115,840,931)  -   22,921,829 
Stock options issued to consultants for services  -   -   102,532   -       102,532 
Share-based compensation expense related to employee options  -   -   375,772   -   -   375,772 
Share-based compensation related to restricted stock  -   -   206,128   -   -   206,128 
Round up for fractional shares due to the reverse stock split  480   4   (4)  -   -   - 
Issuance of common stock in connection with a public offering  534,000   5,340   3,198,660   -   -   3,204,000 
Registration costs in connection with a public offering  -   -   (743,166)  -   -   (743,166)
Registrations costs  -   -   (10,987)  -   -   (10,987)
Issuance of stock in connection with an option exchange program  22,063   221   288,490   -   -   288,711 
Issuance of stock in connection with payment of board director fees  49,049   490   280,033   -   -   280,523 
Issuance of warrants related to debt financing  -   -   769,754   -   -   769,754 
Change in cumulative translation adjustment  -   -   -   -   6,434   6,434 
Net loss  -   -   -   (8,723,189)  -   (8,723,189)
BALANCE, DECEMBER 31, 2010  2,843,749  $28,437  $143,106,355  $(124,564,120) $107,669  $18,678,341 


(1)  Adjusted to reflect the reverse stock split of 1-for-7 effective January 26, 2009 and to reflect the reverse stock split of 1-for-6 effective February 3, 2010.




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


F - 6


PHOTOMEDEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
  For the Year Ended December 31, 
  2010  2009  2008 
Cash Flows From Operating Activities:         
Net loss $(8,723,189) $(10,520,775) $(11,290,907)
Adjustments to reconcile net loss to net cash used in operating activities-continuing operations:            
Depreciation and amortization  4,369,841   4,610,265   4,172,436 
Loss on sale of discontinued operations  -   -   448,675 
Impairment on intangibles and other long-lived assets  -   -   934,611 
Loss on disposal of property and equipment  2,306   904   4,658 
Provision for doubtful accounts  118,892   93,741   137,766 
Stock options issued to consultants for services  102,532   54,181   92,501 
Stock-based compensation  581,900   1,207,845   1,303,037 
Change in estimated fair value of warrant liability (See Note 1)  197,098   (808,786)  - 
Changes in operating assets and liabilities, net of effects from discontinued operations:            
Accounts receivable  588,565   2,172,169   238,166 
Inventories  733,138   1,995,795   (63,946)
Prepaid expenses and other assets  890,131   524,123   932,306 
Accounts payable  (1,362,685)  (1,968,726)  1,569,815 
Accrued compensation and related expenses  649,417   (389,713)  (93,889)
Other accrued liabilities  168,477   317,798   190,058 
Interest accrued on convertible debt  1,906,101   1,219,200   - 
Deferred revenues  (116,314)  (762,267)  130,643 
Net cash provided by (used in) operating activities-continuing operations  106,210   (2,254,246)  (1,294,070)
Net cash provided by operating activities-discontinued operations  -   -   584,838 
Net cash provided by (used in) operating activities  106,210   (2,254,246)  (709,232)
             
Cash Flows From Investing Activities:            
Purchases of property and equipment  (112,619)  (137,434)  (261,822)
Lasers placed into service  (422,195)  (1,940,810)  (5,089,137)
Proceeds from disposition of discontinued operations  -   -   3,149,736 
Deferred costs on proposed acquisition  -   -   (564,930)
Acquisition costs, net of cash received  (96,514)  (12,578,022)  - 
Net cash used in investing activities-continuing operations  (631,328)  (14,656,266)  (2,766,153)
Net cash used in investing activities-discontinued operations  -   -   (68,462)
Net cash used in investing activities  (631,328)  (14,656,266)  (2,834,615)
             
Cash Flows From Financing Activities:            
Proceeds from issuance of common stock, net  3,773,234   2,831,472   - 
Proceeds from issuance of restricted common stock  -   280   - 
Registration costs  (754,153)  (434,836)  - 
Payments on long-term debt other than line of credit  (493,627)  (415,902)  (107,376)
Payments on notes payable  -   -   (911,350)
Proceeds from term debt  2,500,000   -   - 
Advances on line of credit  -   -   3,580,933 
Repayments on line of credit  (3,198,954)  (4,717,381)  (5,236,056)
Decrease in restricted cash and cash equivalents  78,000   -   39,000 
Proceeds from convertible debt  -   18,000,000   - 
Net cash provided by (used in) financing activities-continuing operations  1,904,500   15,263,633   (2,634,849)
Net cash provided by financing activities-discontinued operations  -   -   - 
Net cash provided by (used in) financing activities  1,904,500   15,263,633   (2,634,849)
Effect of exchange rate changes on cash  27,778   105,060   - 
Net increase (decrease) in cash and cash equivalents  1,407,160   (1,541,819)  (6,178,696)
Cash and cash equivalents, beginning of year  2,116,788   3,658,607   9,837,303 
             
Cash and cash equivalents, end of year $3,523,948  $2,116,788  $3,658,607 
(In thousands, except share and per share amounts)
  For the Year Ended December 31, 
  2012  2011  2010 
Cash Flows From Operating Activities:         
Net income (loss) $22,489  $(694) $11,601 
Adjustments to reconcile net income (loss) to net cash used in operating activities:            
Depreciation and amortization  5,611   590   388 
Provision for doubtful accounts  4,629   2,595   1,509 
Deferred income taxes  (3,132)  (5,751)  2,018 
Stock-based compensation  6,197   21,637   392 
Accrued interest on long-term loan  -   -   96 
Changes in operating assets and liabilities:            
Accounts receivable  (11,254)  (6,135)  (6.295)
Inventories  (3,195)  (993)  (6,380)
Prepaid expenses and other assets  (8,583)  (641)  (947)
Accounts payable  1,787   (3,413)  3,992 
Accrued compensation and related expenses  (1,316)  976   564 
Other accrued liabilities (see Note 8)  6,521   3,036   6,291 
Other liabilities  68   76   41 
Deferred revenues  5,243   2,176   597 
Net cash provided by operating activities  25,065   13,459   13,867 
             
Cash Flows From Investing Activities:            
Purchases of property and equipment  (573)  (358)  (93)
Lasers placed into service  (3,221)  15   - 
Proceeds from (investments in) short-term deposit  (18,000)  14,500   (14,500)
Amounts carried to patents  -   -   (80)
Increase in funds – employees retirement rights  (69)  (81)  (42)
Acquisition of business, net of cash acquired  -   (18,729)  - 
Net cash used in investing activities  (21,863)  (4,653)  (14,715)
             
Cash Flows From Financing Activities:            
Repurchase of common stock  (10,756)  (250)  - 
Proceeds from issuance of common stock, net  37,514   -   - 
Issuance of warrants  98   -   - 
Proceeds from option exercises  67   410   - 
Proceeds from warrant exercises  134   -   - 
Repayment of stockholders’ loan  -   -   (2,020)
Payments on notes payable  (465)  -   - 
Repayment of long-term debt  (2,000)  -   - 
Net cash provided by (used in) financing activities  24,592   160   (2,020)
Effect of exchange rate changes on cash  5   2   - 
Net increase (decrease) in cash and cash equivalents  27,799   8,968   (2,868)
Cash and cash equivalents, beginning of year  16,549   7,581   10,449 
             
Cash and cash equivalents, end of year $44,348  $16,549  $7,581 
             
Supplemental information:            
Cash paid for income taxes $12,976  $6,373  $1,793 
Cash paid for interest $79  $-  $- 
             
Fair value of assets, excluding cash, acquired in exchange for securities in a business combination (See Note 2) $-  $66,351  $- 
             
Fair value of liabilities assumed in exchange for securities in a business combination (See Note 2) $-  $11,035  $- 
             
Goodwill resulting from a business combination (See Note 2) $-  $27,246  $- 
 
The accompanying notes are an integral part of these consolidated financial statements.

 

 
F - 7F-6

 

PHOTOMEDEX, INC. AND SUBSIDIARIES
NOTES TO 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 Solutions™ company that providesproviding integrated disease management and aesthetic solutions through innovative laser systems, light-based devicesto dermatologists, professional aestheticians and science-based skincare products. Through its relationships with dermatologistsconsumers. The Company provides proprietary products and plastic surgeons, the Company’s productsservices that address multiple skin diseases and skin conditionconditions including psoriasis, vitiligo, acne, actinic keratosis (a precursor to certain types of skin cancer) and sunphoto 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 experience in addressing these diseases and conditions in the physician market has allowed it to expand itsmanagement structure, products and services to provide skin health solutions to certain non-physician markets.
The Company’s current strategic focus is built upon four key components – leveraging its sales force through training focused on superior skin health expertiseoffered, markets served and incremental product offerings, expanded international capabilities, the developmenttypes of alternate channels for its varied product lines and a renewed commitment to innovation of its technologies.
The Company concentrates its strategic efforts primarily in the physician market both domestically and internationally. Supporting those efforts management has initiated a renewed commitment to innovation, whereby the Company looks to maximize the application of its technologies and utilize the significant scientific resources available to it in each of its product areas. In the U.S. the Company markets and sells its products through a direct sales organization capable of addressing each product area with specific expertise. The Company’s focus on enhanced training of the sales organization has created the ability to drive sales and to support its customer base with a leaner and more cost-effective sales force since the strategy change in 2009. And, finally the Company looks to leverage our experience and substantial product advancements in the physician market into non-physician based markets, or alternate channels, that may benefit from those technological advancements.customers.
 
Based upon this strategic focus, effective January 1, 2010,December 13, 2011, management has updated the segments that the Company now currently operates. There are now fouroperates following the merger to three distinct business units or segments (as described in Note 14): three in Dermatology –Consumer, Physician Domestic, Physician International,Recurring and Other Channels; and one in Surgical,– Surgical Products.Professional. The segments are distinguished by the Company’s management structure and the markets or customers served.
 
The Consumer segment, the Company’s largest business unit, generates revenues by bringing professional technologies into the home-use arena, through the no!no!® product line. The Physician DomesticRecurring segment primarily generates revenues from two of our product lines: (A) the XTRAC®, a noninvasive, FDA-cleared solution for psoriasis and vitiligo, and (B) NEOVA®, a topical therapy combining DNA repair enzymes and copper peptide complexes to prevent premature skin aging. The Professional segment generates revenues by sellingfrom capital equipment, such as the XTRAC treatments and lasers, skincare and LEDLHE® brand products and Metvixia®, a Galderma Laboratories, L. P. drug, which the Company’s sales representatives promoteOmnilux® and sell to domestic physicians. Collaborations with Galderma ended in December 2010. The Physician International segment generates revenues by selling dermatology equipment and skincare and LED products to international physicians through distributors. The Other Channels segment generates revenues by selling skincare and LED products to indoor tanning and spa markets and on-line and television retail consumer markets for home use. The Surgical Products segment generates revenues by selling laser and non-laser products including disposables to hospitals and surgery centers both domestically and internationally.Lumière Light Therapy systems.
 
The Company’s Board of Directors approvedWith a 1-for-6 reverse stock split of the Company’s common stock, which became effective upon receiving stockholder approval on February 3, 2010. As a result of the reverse stock split, every six shares of common stock were combined and reclassified into one share of common stock and the total number of shares outstanding was reduced from approximately 13.5 million sharesview to approximately 2.2 million shares for all periods presented. With stockholder approval rendered on October 28, 2010, the Company changedrealigning its charter state of organization from Delawareoperations to Nevadatrack to operating entities, on December 30, 2010.
Liquidity
As of December 31, 2010, the Company had an accumulated deficit of $124,564,120. To date, the Company has dedicated most of its financial resources to research and development, sales and marketing, and general and administrative expenses.


F - 8


Cash and cash equivalents as of December 31, 2010 were $3,523,948. The Company has historically financed its activities with cash from operations, the private placement of equity and debt securities and borrowings under lines of credit.
Based on its resources available at December 31, 2010, including the public offering of its securities described below, coupled with the substantial reduction in the use of cash in the last year, the Company believes that it can fund operations through and beyond the first quarter of 2012. However, given the uncertainty in the general economic conditions and its impact on the Company’s industry, and in light of the Company’s historical operating losses and negative cash flows, there is no assurance that the Company will not require additional funds in order to continue as a going concern beyond the first quarter of 2012.
Beginning in August 2009, the Company restructured its operations and redirected its efforts27, 2012, PhotoMedex transferred in a manner that management expects will continuetaxable intercompany transaction its operating businesses to improve results of operations. As part of such redirected efforts, management continues comprehensive efforts to minimize the Company’s operational costsPhotoMedex Technology, Inc., and capital expenditures and continues to implement the strategies that were developed to increase ongoing revenue streams.
On October 22, 2009, the Company closedthereby became a private placement of its common shares with several accredited investors, which yielded gross proceeds of approximately $2.7 million and which improved the available cash. On November 10, 2009, the Company issued to an affiliate of one of the accredited investors participating in the October 22, 2009 private placement an additional 230,000 shares at a price of $0.65 per share, which yielded additional gross proceeds of $149,500 in the placement. Although this financing, together with the Company’s other resources and arrangements with creditors, satisfied its immediate liquidity constraints at such time, the Company continued to explore additional opportunities to secure capital which might be used to continue to develop new business opportunities and be used to fund operations, if necessary.
On March 19, 2010, the Company entered into a Term Loan and Security Agreement with Clutterbuck Funds LLC (“Clutterbuck Funds”), a registered investment advisor located in Cleveland, Ohio. The Company received net proceeds of $2,373,000 in the transaction. The secured term note has a principal amount of $2.5 million (the “Term Note”), which accrues interest at a rate of 12% per annum. The Term Note requires the Company to make monthly payments of interest only. The principal matures on September 19, 2011 and may be prepaid without penalty at any time. The note is secured by XTRAC lasers that the Company has consigned to physician customers and that are not otherwise pledged to CIT Healthcare LLC and Life Sciences Capital LLC (collectively, “CIT”) pursuant to the outstanding term notes with such lenders. In connection with the issuance of the Term Note to Clutterbuck Funds, the Company issued Clutterbuck Funds a warrant to purchase 102,180 shares of the Company’s common stock for an initial exercise price of $7.34. The warrant is exercisable at any time on or prior to the fifth anniversary of its issue date. Pursuant to the terms of the warrant, the exercise price is subject to a one-time downward adjustment if the Company makes certain issuances of its equity securities at a price per share less than $7.34 during the 36-month period following the issuance of the warrant. As a result of the public offering of our common stock on May 7, 2010, the exercise price of the warrant was reduced to $6.00 and the number of shares that could be obtained by exercise was increased to 125,000.
In order to consummate the bridge financing with Clutterbuck Funds, it was necessary to secure the consent of the holder of the Company’s Convertible Notes (the “Investor”). See Note 11, Convertible Debt. As of March 19, 2010, the outstanding principal and accrued interest under the Convertible Notes was $19,546,676. In order to obtain the Investor’s consent, the Company agreed to the following modifications to the Convertible Notes:
The Company combined the aggregate outstanding obligations under the Convertible Notes into two convertible notes. Each note matures on February 27, 2014 and is identical to the original form of convertible note except as noted below;
The larger note, the Series B-2 Note, has a principal amount of $16,746,270. This note remains subject to the same down-round anti-dilution adjustment to the conversion price which was in the unmodified notes. The interest rate of this note was increased from 8% to 10%. The incremental 2% increase in the interest rate may be paid in cash, or, pursuant to the vote of our stockholders at the Annual Meeting of Stockholders on October 28, 2010, may be paid in convertible PIK notes;



F - 9



The smaller note, the Series B-1 Note, has a principal amount of $2,800,406. The conversion price of this note was reduced to $11.26 and the down-round anti-dilution adjustment to the conversion price was removed. The interest rate of this note was increased from 8% to 10%. The full amount of the accrued interest remains payable in cash or convertible PIK notes;
The collateral securing the Convertible Notes was expanded by adding a first-priority lien against all of the Company’s assets other than the assets pledged with first-priority liens to CIT and to Clutterbuck Funds. When assets are released from the lien of CIT, such assets will become subject to the first-priority lien of Clutterbuck Funds and a second-priority lien of the Investor. Finally, when assets are released from the lien of Clutterbuck Funds, such assets will become subject to the first-priority lien of the Investor; and
Three of the Company’s subsidiaries (ProCyte Corporation, Photo Therapeutics, Inc. and SLT Technology, Inc.) have guaranteed the Company’s obligations under the modified Convertible Notes.
On May 7, 2010, the Company closed on a public offering of its common shares. The Company sold 534,000 shares of its common stock at an offering price of $6.00 per share. The sale resulted in net proceeds to the Company of approximately $2.4 million. The net proceeds will be used for general working capital purposes and potentially for pay-down of outstanding debt. The underwriters are also entitled to warrants to purchase, in aggregate, 25,000 shares of the Company’s common stock at $7.50 per share.
As of December 31, 2010, the Convertible Debt was $20,426,276. The Company paid interest due on September 1, 2010 with additional convertible notes amounting to $728,884 (for the Series B-1 interest at 10% $126,018 andparent holding company for the Series B-2 interest at 8% $602,866) and through an escrow of cash paid provisionally in lieu of an additional convertible note for the 2% incremental interest on the Series B-2 Convertible Note. Given that the stockholders approved the issuance of convertible notes for this incremental interest, the escrowed cash was returned to the Company on November 1, 2010 and a convertible note for $150,716 was issued to the Investor, effective September 1, 2010.
On March 28, 2011, Clutterbuck Funds agreed to extend the maturity date of its loan with the Company, of which the principal of $2.5 million was to be paid at maturity. Previously, the loan matured on September 19, 2011; it will now mature on December 1, 2012. Starting in August 2011, we will begin monthly installments of principal such that the final payment at maturity will be $75,000. To induce the modifications to the terms of its loan, we have issued to Clutterbuck Funds a second warrant which has been modeled after the first warrant issued on March 19, 2010 but which will be to purchase 109,650 shares of our common stock at an exercise price of $5.70 per share. The collateral securing the first-position security interest of Clutterbuck Funds and the second-position security interest of the holder of our convertible notes will remain in place.group. 
 
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.

F-7


Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-ownedthe wholly and majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated.eliminated in consolidation. The former subsidiaries of Photo Therapeutics Group Ltd. have been included in the financial statements include the results from February 27, 2009,the entities defined as Pre-merged PhotoMedex from December 14, 2011 (the day following the closing date of the acquisition.reverse acquisition) forward. There are, therefore, no corresponding activities in for the year ended December 31, 2010 and up to and including December 13, 2011.
During the measurement period of the reverse acquisition, provisional amounts have been retroactively adjusted to reflect new information obtained about facts and circumstances that existed as of the acquisition date in connection with certain tax positions of the acquired entity and also with respect to adjustment to the calculation of the acquisition consideration (which was based on the equity interest that the accounting acquirer would have had to issue to the accounting acquiree equity interest holders). As such, the comparative information for the prior periods presented have been revised, specifically for deferred tax asset, other accrued liabilities, goodwill and additional paid in capital.
 
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 inof assets and liabilities at the date of the financial statements and accompanying notes.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. Future eventsAs of December 31, 2012, the more significant estimates include (1) revenue recognition, including provision for sales return and their effects cannot be predicted with certainty; estimating, therefore, requiresvaluation 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 exerciseprimary economic environment in which the operations of judgment.the Company and its subsidiaries are conducted is the US dollar ("$" or "dollars"), except the Photo Therapeutics, Ltd. which is conducted in the GBP. 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, accounting estimates change as new eventsthe functional (and reporting currency) of the Company and its subsidiaries 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 prevailing economic conditions occur, as more experience is acquired,the exchange rates used in the translation of such balances are carried to financing income or as additional information is obtained.expenses.
 


Assets and liabilities of a foreign subsidiary, 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 of foreign subsidiary for which the local currency is the functional currency 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.
 
F - 10


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.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:
 

F-8



Level 1 - unadjusted quoted prices are available in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date.

 Level 2 -– pricing inputs are other than quoted prices included within Level 1in active markets that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.
   
 Level 3 -– pricing inputs are unobservable inputs 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 Company’s recurring fair value measurements at December 31, 2010 and December 31, 2009 are as follows:
  Fair Value as of December 31, 2010  
Quoted Prices in Active Markets for Identical Assets
(Level 1)
  
Significant Other Observable Inputs
(Level 2)
  
Significant Unobservable Inputs
(Level 3)
 
Liabilities:            
Derivative financial instruments (Note 12) $938,623  $-  $-  $938,623 
                 
  Fair Value as of December 31, 2009  
Quoted Prices in Active Markets for Identical Assets
(Level 1)
  
Significant other Observable Inputs
(Level 2)
  
Significant Unobservable Inputs
(Level 3)
 
Liabilities:                
Derivative financial instruments (Note 12) $741,525  $-  $-  $741,525 
The fair value of cash and cash equivalents is 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. The estimated fair values of notes payable and long-term debtmaturity 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. The carrying amount of derivative instruments is marked to fair value. See Note 12, Warrants, for additional discussion.
 
Derivative Financial Instruments
The Company recognizes all derivative financial instruments as assets or liabilities in the financial statements and measures themare measured at fair value, with changes inon a recurring basis. The fair value reflected as current period incomeof derivatives generally reflects the estimated amounts that the Group would receive or loss unlesspay to terminate the derivatives qualify as hedges. As a result, certain warrants are now accounted for as derivatives. See Note 12, Warrants, for additional discussion.


contracts at the reporting dates, based on the prevailing currency prices and the relevant interest rates. Such measurement is classified within Level 2.
 
F - 11In 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 and Restricted Cash
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, 20102012 and 2009. Cash that is pledged to secure obligations is disclosed separately as restricted cash. The Company maintains its cash and cash equivalents in accounts in one bank, the balances2011.
Short-term Deposits
Short-term deposits are deposits with maturities of which at times may exceed federally insured limits. Deposits at the institution are insured by the Federal Deposit Insurance Corporation up to $250,000 through December 31, 2010. As of December 31, 2010, the Company had uninsured cash balances of approximately $2,982,000 on deposit with the bank. The bank is participating in the FDIC’s Transaction Account Guarantee Program, whereby all non-interest bearing checking accounts (including accounts with interest ratesmore than three months but less than 0.50%) were fully guaranteed by the FDIC for the entire amount through December 31, 2010.one year. Short-term deposits are presented at their costs including accrued interest.
 
Accounts Receivable
The majority of the Company’s accounts receivablesreceivable are due from consumers, distributors (domestic and international), hospitals, universities and physicians and other entities in the medical field. Credit is extended based on evaluation of a customer’s financial condition and, generally, collateral is not required. 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 become 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.
 

F-9


Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or market. Cost is determined to be purchased cost for raw materials and the production cost (materials, labor and indirect manufacturing cost)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 disorder treatment equipmentdisorders (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. 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 (as defined below under Revenue Recognition) for revenue recognition have been met, and until that time, the unit is carried on the books of the Company as inventory. Revenue is not recognized from these distributors until payment is either assured or paid in full. Until this time, the cost of these shipments continues to be recorded as finished goods 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.cost, net of accumulated depreciation. Excimer lasers-in-service wereare 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. Expenditures for major renewals and betterments to property and equipment are capitalized, while expenditures for maintenance and repairs are charged to operationsas 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 operations.comprehensive income. Useful lives are determined based upon an estimate of either physical or economic obsolescence or both.


F - 12


Laser units and laser accessories located at medical facilities for sales evaluation and demonstration purposes or those units/accessories used for development and medical training are included in property and equipment under the caption “machinery and equipment”. These units and accessories are being depreciated over a period of up to five years.
 
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 the net realizable value. As of December 31, 2010,2012, 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. DevelopedCore and product technology was also recorded in connection with the reverse acquisition of ProCyte in March 2005on December 13, 2011 and is being amortized on a straight-line basis over seven years.
Significant patent costs were recorded in connection with the acquisition of Photo Therapeutics in February 2009ten years for core technology and are being amortized on a straight-line basis over ten years. Other licenses, including the Sternfive years for product technology. (See Note 2, Acquisition and Mount Sinai licenses, are capitalized and amortized over the estimated useful lives of 10 years. (See 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, 2010,2012, 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 of ProCyte in March 2005. With the exception of the Neutrogena intangible,on December 13, 2011. The assets which has been written downwere determined to zero, the assetshave definite useful lives are being amortized on a straight-line basis over 5 to 10ten years. In addition, other intangibleSuch assets were recorded in connection with the acquisition of Photo Therapeutics in February 2009. These assets are being amortized on a straight-line basis over 10 years.primarily include customer relationships and trademarks. (See Note 2, Acquisition)ReverseAcquisition 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, 20102012 no such write-down was required. (See Impairment of Long-Lived Assets and Intangibles).
 

F-10


Accounting for the Impairment of Goodwill
Goodwill consistsThe Company evaluates the carrying value of the excess of cost overgoodwill annually and also between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of net assets of businesses acquired. Management evaluates the recoverability of suchreporting 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 for impairment, at least annually. The first step of the impairment test requires that the Company assessinvolves a two-step process. Step 1 compares the fair value of eachthe Group’s reporting unit, and compareunits to which goodwill was allocated to their carrying values. If the fair value toof the reporting unit’sunit exceeds its carrying amount. Tovalue, 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 extentrisk involved. If the carrying amount of athe reporting unit exceeds its fair value, an indication exists thatStep 2 must be completed to quantify the reporting unit’s goodwill may be impaired and the Company must perform a second, more detailed assessment. The second step in an assessment involves allocating the reporting unit’s fair value to allamount of its recognized and unrecognized assets and liabilities in order to determineimpairment. 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’s goodwill asunit, from the fair value of the assessment date.reporting unit as determined in Step 1. The implied fair value of the reporting unit’s goodwill determined in this step is then compared to the carrying amountvalue of goodwill. If the implied fair value of goodwill to quantifyis less than the carrying value of goodwill, an impairment charge asloss, equal to the difference, is recognized. As of the assessment date. There has beenDecember 31, 2012, no impairment of goodwill recorded through December 31, 2010.
Foreign currency translation
Assets and liabilities of foreign subsidiaries, whose functional currencies are the local currency, are translated from their respective functional currencies 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. Foreign exchange gains and losses resulting from translation of account balances are included in income or loss in the year in which they occur. The adjustment resulting from translating the financial statements of such foreign subsidiaries into U.S. dollars is reflected as a separate component of stockholders’ equity.


has been recorded.
 
F - 13


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 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, 20102012 and 20092011 is summarized as follows:
 
 December 31,  December 31, 
 2010  2009  2012  2011 
Accrual at beginning of year $773,628  $442,527  $1,661  $260 
Additions due to PTL acquisition  -   227,334 
Additions due to reverse acquisition  -   955 
Additions charged to warranty expense  703,512   369,081   1,497   813 
Expiring warranties  (204,739)  (53,149)  (442)  (-)
Claims satisfied  (271,165)  (212,165)  (1,276)  (367)
Accrual at end of year $1,001,236  $773,628 
Total  1,440   1,661 
Less: current portion  (1,274)  (1,157)
Accrued warranty $166  $504 
 
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 other non-current 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 $179, $185 and $162 for the years ended December 31, 2012, 2011 and 2010, respectively.

F-11


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 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 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 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 sells an XTRAC laser to a distributor or directly to a foreign or domestic physician, revenue is recognized when the following four criteria have been met: (i) the product has been shipped 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 probable (the “Criteria”). At times, units are shipped, but revenue is not recognized, until all of the Criteria have been met and, until that time, the unit is carried on the books of the Company as inventory.
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 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.
Under the terms of the Company’s distributor agreements, distributors do not have a unilateral right to return any unit that they have purchased. However, the Company does allow products to be returned by its distributors for product defects or other claims.
 
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. TreatmentsAmounts collected with respect to 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 Company-owned equipment. Once the treatments are delivered to a patient, this obligation has been satisfied.
 
The Company defers substantially all revenue from 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, 2010 and 2009, the Company deferred $229,099 and $303,868, respectively, under this approach. The Company generates revenues from its Skin Care business primarily through product sales for skin health, hair care and wound care. The Company recognizes revenues on its products and copper peptide compound when they are shipped, net of returns and allowances. The Company ships the products FOB shipping point.
 

 

F - 14F-12

 


The Company generatesShipping and Handling Costs
Shipping and handling fees billed to customers are reflected as revenues from its Photo Therapeutics business primarily from two channels. The first is through product sales of LEDswhile the related shipping and skincare products. The second is through milestone paymentshandling costs are included in selling and potential royalty payments from a licensing agreement. The Company recognizes revenues from the product sales, including sales to distributorsmarketing expense. To date, shipping and other customers, when the Criteriahandling costs have not been met. The Company recognizes the milestone payments when the milestones have been achieved and potential royalty revenues as they are earned from the licensee.
The Company generates revenues from its Surgical Products business primarily from product sales of laser systems, related maintenance service agreements, recurring laser delivery systems and laser accessories. Domestic sales generally are direct to the end-user, though the Company has some sales to or through a small number of domestic distributors; foreign sales are to distributors. The Company recognizes revenues from surgical laser and other product sales, including sales to distributors and other customers, when the Criteria have been met.
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.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 $60,651, $32,303 and $12,435 for the years ended December 31, 2012, 2011 and 2010, 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, 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, 2012 consist of forward transactions for the exchange of $8,400 into NIS.
Income Taxes
The Company accounts for income taxes in accordance with FASB ASC 740, Income Taxes (“ASC Topic 740”). ASC Topic 740 prescribes that the use ofusing the liability method be used for income taxes.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.
 
Net LossThe 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.

F-13


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, 2012, 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 2012 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 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 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.
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 (commencing January 1, 2009), 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 net lossearnings (net loss) per share in accordance with ASC Topic. 260, Earnings per share. Basic earnings per share are computed by dividing net loss available to common stockholdersincome by the weighted averageweighted-average number of common shares outstanding forduring the period.period, net of the weighted average number of treasury shares. Diluted net lossearnings per common share are computed similar to basic earnings per share, reflectsexcept that the denominator is increased to include the number of additional potential common shares that would have been outstanding if the potential dilution fromcommon shares had been issued and if the conversion or exercise intoadditional common stock of securities such as stock options and warrants.
In these consolidated financial statements, diluted net loss per share from continuing operations is the same as basic net loss per share. Thus, no additional shares for the potential dilution from the conversion of the Convertible Notes, or from exercise of warrants related to the Convertible Notes or from other warrants or from the exercise of options intowere dilutive. Potential common stockshares are treated as outstanding in the calculation of diluted net loss per share, since the result would be anti-dilutive. Common stock options and warrants of 593,984; 482,142 and 224,854 as of December 31, 2010, 2009 and 2008, respectively, were excluded from the calculationcomputation 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 fullystock 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 each 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 all prior periods to the acquisition date presented have been retroactively adjusted to give effect to the exchange ratio.

F-14


Basic and diluted earnings per common share from continuing operations since their inclusion would have been anti-dilutive. Share amounts shown onwere calculated using the consolidated balance sheets and share amounts and basic and diluted net loss per share amounts shown on the consolidated statements of operations have been adjusted to reflect the reverse stock split of 1-for-6 effective February 3, 2010, excluding the rounding up of fractional shares. Share amounts shown on the consolidated balance sheet as of December 31, 2008 have also been adjusted to reflect the reverse stock split of 1-for-7 effective January 26, 2009, excluding the rounding up of fractional shares. Forfollowing weighted average shares outstanding for the years ended December 31, 2008, there was income from discontinued operations, but basic net income2012, 2011 and 2010:
  December 31, 
  2012  2011  2010 
Weighted average number of common and common equivalent shares outstanding:         
Basic number of common shares outstanding  20,355,520   11,602,049   10,256,364 
Dilutive effect of stock options and warrants  408,834   -   1,468,205 
Diluted number of common and common stock equivalent shares outstanding  20,764,354   11,602,049   11,724,569 
Diluted earnings (loss) per share for each of the years ended December 31, 2012 and diluted net income per share from discontinued operations for these periods were immaterial.


F - 15


Comprehensive Income (Loss)
Comprehensive income (loss) is a more inclusive financial reporting method that includes disclosure2011 exclude the impact of certain financial information that historically has not been recognized incommon stock options, warrants and unvested restricted stock totaling 1,920,442 and 1,791,788 shares, respectively, as the calculationeffect of net income (loss). Comprehensive income (loss) is defined as net income and other changes in shareholders’ investment from transactions and events other than with shareholders. Total comprehensive income (loss) is as follows:their inclusion would be anti-dilutive.
  Year Ended December 31, 
  2010  2009  2008 
Net loss $(8,723,189) $(10,520,775) $(11,290,907)
Change in cumulative translation adjustment  107,669   101,235   - 
Comprehensive loss $(8,615,520) $(10,419,540) $(11,290,907)
 
Impairment of Long-Lived Assets and Intangibles
Long-lived assets, such as property and equipment, and purchaseddefinite-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, 2012, 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. As of December 31, 2010, no such impairment exists.
 
Share-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC Topic 718, share- based paymentCompensation – Stock Compensation. Under the fair value recognition provision, of this statement, share-based compensationscompensation 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 straight-linegraded vesting method.
 
Supplemental Cash Flow InformationTreasury Stock
During the year ended December 31, 2010,Shares held by the Company paid interest payable onare presented as a reduction of equity, at their cost to the convertible notesCompany as treasury stock.
Adoption of New Accounting Standards
In May 2011, the Financial FASB issued Accounting Standard Update ("ASU") No. 2011-04, which amends Accounting Standards Codification ("ASC") Topic 820, Fair Value Measurements and Disclosures. This ASU clarifies among other things, the FASB’s intent with an issuancerespect to the application of additional convertible debt amounting to $826,676.  The Company also issued a warrant to purchase 125,000 shares of common stockexisting fair value requirements, including those related to highest and best use concepts, and also expands the Term Note held by Clutterbuck Funds and which is valued at $769,754, and which offsets the carryingdisclosure requirements for fair value measurements categorized within Level 3 of the Term Note. The Company financed certain insurance policies during the period through notes payable for $401,168.
During the year ended December 31, 2009, the Company issued warrants to an investorfair value hierarchy. This ASU clarifies that manages an investment fund (the “Investor”)a reporting entity should disclose quantitative information about significant unobservable inputs used in conjunction with a private placement of convertible debt which funded the Company’s purchasefair value measurement that is categorized within Level 3 of the PTL business. These warrants were initially valuedfair value hierarchy. Additionally, this ASU expands the disclosures for fair value measurements categorized within Level 3 where a reporting entity is required to include a description of the valuation processes used and the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, if any. Additional disclosure is also required for any transfers between Level 1 and Level 2 of the fair value hierarchy of fair value measurements on a gross basis as well as additional disclosure of the level in the fair value hierarchy of assets and liabilities that are not recorded at $1,550,311, are carried as a liability andfair value. For many of the requirements, the FASB does not intend for this ASU to result in a discount fromchange in the faceapplication of the convertible debt. The Company paid the first installment of interest payable on the convertible debt with an issuance of an additional convertible noterequirements in the amount of $720,000. The Company financed certain insurance policiesFASB ASC Topic 820. This update became effective during the period through notes payable for $485,860.interim and annual periods beginning after December 15, 2011. 
 
During the year ended December 31, 2008, the Company financed certain insurance policies through notes payable for $635,243 and issued warrants to a term-note credit facility which are valued at $44,366, and which offset the carrying value of debt.
For the years ended December 31, 2010, 2009 and 2008, the Company paid interest of $534,177, $675,389 and $990,420, respectively. Income taxes paid in the years ended December 31, 2009, 2008 and 2007 were immaterial.

 

F - 16F-15

 


Accounting Standards Update
In January 2010, the FASB issued an update to ASC 820-10, Measuring Liabilities at Fair Values (“ASC Topic 820-10”). The update to ASC Topic 820-10 requires disclosure of significant transfers in and out of Level 1 and Level 2 measurements and the reasons for the transfers, and a gross presentation of activity within the Level 3 rollforward, presenting separately information about purchases, sales issuances and settlements. The update to ASC Topic 820-10was adopted by the Company in 2010, except for the gross presentation of the Level 3 rollforward which will be adopted by the Company in fiscal year 2011. The Company is currently evaluating the impact of the update to ASC Topic 820-10, but does not expect the adoption to have a material impact on its financial position, results of operations, and cash flows.
In June 2009, the FASB issued FASB ASC 105, Generally Accepted Accounting Principles ("ASC Topic 105"), In October 2009,2011, the FASB issued ASU 2009-13No. 2011-05, which supersedes certain guidanceamends FASB ASC Topic 220, Comprehensive Income. This ASU is intended to increase the prominence of items reported in ASC 605-25, "Revenue Recognition - Multiple Element Arrangements."other comprehensive income in the financial statements by presenting the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This topic amends current guidance forASU eliminates the allocationoption to present the components of arrangement consideration atother comprehensive income as part of the inceptionstatement of an arrangement to all of its deliverables, to allow an entity to use relative selling prices when vendor-specific objective evidence of fair value or third party evidencechanges in stockholders' equity. This ASU does not exist.change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This topic isupdate became effective forduring interim and annual reporting periods beginning after JuneDecember 15, 2010. 2011. 
Recently Issued Accounting Standards
In March 2013, the FASB issued Accounting Standards Update (ASU) 2013-5, "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 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.
The Company is currently evaluating the impact that this topicthe adoption of ASU 2013-5 would have on its consolidated financial statements, if any.
In February 2013, the Financial Accounting Standards Board ("FASB") updated issued Accounting Standard Update ("ASU") No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This ASU requires entities to provide information about significant amounts reclassified out of accumulated other comprehensive income. The standard is effective for interim and annual periods beginning after December 15, 2012 and is required to be applied prospectively. The adoption of the standard will not materially impact the Company's consolidated results of operations and financial condition.
In December 2011, the FASB issued ASU 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 will be effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods (fiscal year 2013 for the Company) and should be applied retrospectively to all comparative periods presented. The Company is currently evaluating the impact that the adoption of ASU 2011-11 will have on its consolidated financial statements.statements, if any.
 
Note 2
Reverse Acquisition:
 
Photo Therapeutics Transaction:
On February 27, 2009,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 completedhad 18,820,852 shares of common stock issued and outstanding, with the acquisitionPre-merged PhotoMedex, Inc. stockholders collectively owning approximately 20%, and the former Radiancy, Inc.

F-16


stockholders owning approximately 80%, of the subsidiariesoutstanding common stock of Photo Therapeutics Group Ltd.the Company. The subsidiaries are Photo Therapeutics Ltd. (based80%/20% ratio reflects the fact that warrants or options were not treated as equivalent outstanding common stock. Accordingly, the financial statements of Radiancy, Inc. were treated as the historical financial statements of the Company, with the results of the entities defined as Pre-merged PhotoMedex, Inc. being included only from December 14, 2011 and thereafter.
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 United Kingdom)merger document, a 75%/25% ownership ratio on a fully converted basis. Consistent with this formula all warrants and Photo Therapeutics, Inc. (basedoptions 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 California) and are collectively referredcash, which Pre-merged PhotoMedex, used to hereinliquidate 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 “Photo Therapeutics” or “PTL.” Photo Therapeutics is a developer and provider of non-laser light aesthetic devices for the treatment of a range of clinical and non-clinical dermatological conditions.December 13, 2011.
 
The Company paid an aggregate purchase price of $13 million in the Photo Therapeutics acquisition. The fair value of the assets acquired and liabilities assumed were based on management estimates and values derived from an outside independent appraisal. During the measurement period of the reverse acquisition, provisional amounts have been retroactively adjusted to reflect new information obtained about facts and circumstances that existed as of the acquisition date in connection with certain tax positions of the acquired entity and as a result of such data in connection with certain tax election decisions concerning the sale of Photo Therapeutics Ltd. to Radiancy Ltd., the foreign subsidiary within the group and to the related realignment of its intellectual property prior to the reverse acquisition. As a result of the aforementioned, the net allocations to deferred tax assets were increased by $1,467 and were increased to taxes payable by $121 during the current year. The Company has completed in the fourth quarter 2012, its analysis of the usability of the net operating loss carry-forwards of Pre-merged PhotoMedex. The analysis resulted in a change to goodwill of $3,241 due to the establishment of a valuation allowance on deferred tax assets related to the net operating loss carryforwards in the UK. Based on the final purchase price allocation, the following table summarizes the estimated fair value amounts of the assets acquired and liabilities assumed at the date of the acquisition:
 
Cash and cash equivalents $421,978  $1,271 
Accounts receivable  843,007   1,873 
Inventories  1,883,469   7,136 
Prepaid expenses and other current assets  187,232   639 
Property and equipment  80,462   4,543 
Patents and licensed technologies  7,400,000   13,500 
Other intangible assets  1,500,000   12,000 
Other assets  41 
Deferred tax assets  25,348 
Total assets acquired at fair value  12,316,148   66,351 
        
Accounts payable  (936,099)  (6,333)
Accrued compensation and related expenses  (35,906)  (1,554)
Other accrued liabilities  (419,186)  (2,592)
Deferred revenues  (576,349)  (556)
Total liabilities assumed  (1,967,540)  (11,035)
        
Net assets acquired $10,348,608  $55,316 
 
The purchase price exceeded the fair value of the net assets acquired by $2,651,392,$27,246, which was recorded as goodwill. Acquisition costs amounting to $1,532,798 and incurred through December 31, 2008 were expensed as of December 31, 2008; acquisition costs amounting to $432,353 and incurred in 2009 were expensed as of February 27, 2009. Acquisition costs accruing after February 27, 2009 were immaterial and expensed. Based on its analyses, as of June 30, 2009 the Company determined that no earn-out would be due to Photo Therapeutics Group Ltd., and that no working capital adjustment would be made to the aggregate purchase price of $13 million. The Company made no claims for indemnification out of the $1 million set aside in escrow on February 27, 2009. The escrow was released on September 8, 2010.
 

 

F - 17F-17

 

The accompanying consolidated financial statementsresults of operations do not include any revenues or expenses related to the PTLpre-merged PhotoMedex business on or prior to February 27, 2009,December 13, 2011, the closingconsummation date of the reverse acquisition. The Company’s unaudited pro-forma results for the years ended December 31, 20092011 and 2008 are summarized2010 summarize the combined results of the Radiancy and PhotoMedex in the following table, assuming the reverse acquisition had occurred on January 1, 2008:2010 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, 
  2009  2008 
       
Net revenues $33,515,493  $42,861,963 
Net loss $(11,233,919) $(13,270,587)
Basic and diluted loss per share $(6.85) $(8.84)
Shares used in calculating basic and diluted loss per share  1,640,006   1,500,767 
  Year Ended December 31, 
  2011  2010 
  (unaudited)  (unaudited) 
       
Net revenues $162,341  $104,872 
Net income (loss)  (13,077)  6,378 
Net income (loss) per share:        
Basic $(0.91) $0.50 
Diluted $(0.91) $0.45 
Shares used in calculating net income (loss) per share:        
Basic  14,445,184   13,845,883 
Diluted  14,445,184   14,314,292 

These unaudited pro-forma results 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, 2008,2010, nor to be indicative of future results of operations.
 
Discontinued Operations:
Surgical Services was a fee-based procedures business using mobile surgical laser equipment operated by Company technicians at hospitals and surgery centers in the United States. On August 1, 2008, the Company entered into a definitive agreement to sell specific assets of the business including accounts receivable, inventory and equipment, for $3,500,000, subject to certain closing adjustments. Such closing adjustments resulted in net proceeds to the Company of $3,149,737. The transaction closed on August 8, 2008. No income tax benefit was recognized by the Company from the loss on the sale of discontinued operations.
The accompanying consolidated financial statements reflect the operating results of the discontinued operations separately from continuing operations. The Company recognized a loss of $448,675 on the sale of the discontinued operations in the year ended December 31, 2008, representing the difference between the adjusted net purchase price and the carrying value of the assets being sold.
Revenues from Surgical Services, reported as discontinued operations, for the year ended December 31, 2008 were $4,398,047. Income from Surgical Services, reported as discontinued operations, for the year ended December 31, 2008 were $285,712. No income tax provision was recognized by the Company against income from Surgical Services over the comparable year.
Note 3
Inventories:
 
Set forth below is a detailed listing of inventories.
 December 31,  December 31, 
 
2010
  
2009
  
2012
  
2011
 
Raw materials and work-in-process $4,114,505  $4,082,593  $9,012  $7,105 
Finished goods  2,026,674   2,920,257   13,455   12,103 
Total inventories $6,141,179  $7,002,850  $22,467  $19,208 
 
Work-in-process is immaterial given the typically short manufacturing cycle, and therefore is disclosed in conjunction with raw materials. There are no finished goods as of December 31, 2010 and 2009 for laser systems shipped to distributors, but not recognized as revenue until all the Criteria of revenue recognition have been met. At times, units are shipped but revenue is not recognized until all of the Criteria are met, and until that time, the unit is carried on the books of the Company as inventory. The Company ships most of its products FOB shipping point, although from time to time certain customers, for example governmental customers, will insist on FOB destination. Among the factors the Company takes into account in 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 the distributors that do not fully satisfy the collection criterion are recognized when invoiced amounts are fully paid. As of December 31, 2010 and 2009, the Company carried reserves against its inventories of $1,734,161 and $2,388,262, respectively.


F - 18


 
Note 4
Property and Equipment:
 
Set forth below is a detailed listing of property and equipment.
 December 31,  December 31, 
 2010  2009  2012  2011 
Lasers-in-service $14,061,390  $16,436,529  $7,301  $4,187 
Computer hardware and software  376,393   368,668 
Equipment, computer hardware and software  4,015   3,576 
Furniture and fixtures  744,991   683,573   617   529 
Machinery and equipment  835,780   845,856 
Leasehold improvements  339,423   262,395   396   376 
  16,357,977   18,597,021   12,329   8,668 
Accumulated depreciation and amortization  (9,439,033)  (9,303,539)  (5,570)  (3,344)
Total property and equipment, net $6,918,944  $9,293,482  $6,759  $5,324 
 
Related depreciation and amortization expense was $3,080,413$2,367 in 2010, $3,204,4312012, $356 in 20092011 and $2,977,506$288 in 2008.2010. At December 31, 20102012 and 2009,2011, net property and equipment included $47,776$16 and $0,$38, respectively, of assets recorded under capitalized lease arrangements, of which $49,225$10 and $0$30 was included in long-term debt at December 31, 20102012 and 2009,2011, respectively (SeeSee Note 109), Long-Term Debt.

F-18


 
Note 5
Patents and Licensed Technologies:Technologies, net:
 
Set forth below is a detailed listing of patents and licensed technologies.
  December 31, 
  2010  2009 
Patents, owned and licensed, at gross costs of $8,033,409 and $8,019,351 net of accumulated amortization of $1,816,979 and $1,025,400, respectively $ 6,216,430  $ 6,993,951 
Other licensed and developed technologies, at gross costs of $2,337,326 and $2,332,364, net of accumulated amortization of $1,740,228 and $1,574,653  respectively    597,098     757,711 
Total patents and licensed technologies, net $6,813,528  $7,751,662 
  December 31, 
  2012  2011 
       
Gross Amount beginning of period $15,124  $15,124 
Additions  181   - 
Translation differences  106   - 
Gross Amount end of period  15,411   15,124 
         
Accumulated amortization  (2,738)  (689)
         
Net Book Value $12,673  $14,435 
 
Related amortization expense was $957,154, $830,833$2,049, $184 and $264,930$100 for the years ended December 31, 2012, 2011 and 2010, 2009 and 2008, respectively. IncludedAn amount of $13,500, included in Patents is $7,400,000 in patents, patents pendingrepresents product and related know-how acquired in the Photo Therapeutics transaction. Included in other licensed and developedcore technologies is $200,000 for cost of developed technologies acquired from ProCyte.
On March 31, 2006, the Mount Sinai School of Medicine of New York University granted the Company an exclusive license, effective April 1, 2006, to use Mount Sinai's patented methodology for utilization of ultraviolet laser light for the treatment of vitiligo. The licensed patent is US Patent No. 6,979,327, Treatment of Vitiligo. It was issued December 27, 2005, and the inventor is James M. Spencer, MD, a memberrecorded as part of the Company’s Scientific Advisory Board. The license is carried onpurchase price allocation done in connection with the Company’s books at $55,954 and $61,369, net at December 31, 2010 and 2009, respectively. Amortization of this intangible is on a straight-line basis over 10 years, which began in April 2006. The Company is also obligated to pay Mount Sinai a royalty on a combined base of domestic sales of XTRAC treatment codes used for psoriasis as well as for vitiligo. In the first four yearsreverse acquisition of the license, however, Mount Sinai may elect to be paid royalties on an alternate base, comprised simply of treatments for vitiligo, but at a higher royalty rate than the rate applicable to the combined base. The right to elect the alternate base for royalties has now expired. This technology is for the laser treatment of vitiligo and is included in other licensed and developed technologies.Pre-merged PhotoMedex.
 
Estimated amortization expense for amortizable intangiblepatents and licensed technologies assets for the next five years is $919,000 in 2011, $895,000 in 2012, $885,000 in 2013, $883,000 in 2014, $752,000 in 2015 and $2,479,000 thereafter.as follows:
 


2013 $2,040 
2014  2,040 
2015  2,034 
2016  1,997 
2017  918 
Thereafter  3,644 
Total $12,673 
 
F - 19


Note 6
Goodwill and Other Intangible Assets:
 
As part of the purchase price allocation for the reverse acquisition, as further discussed in Note 18,2, the Company reorganized its business into four operating units which resultedrecorded goodwill in the amount of $27,246 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. During the measurement period of the reverse acquisition, provisional amounts have been retroactively adjusted to reflect new information obtained about facts and circumstances that existed as of the acquisition date and as such, goodwill was decreased for a purchase price adjustment of $1,353 due to a change in reportable segments effective January 1, 2010.the valuation of unvested restricted stock and due to a net change in the allocation to deferred tax assets for $1,346. In addition, Goodwill was increased during the current period due to a net change in the allocation to deferred tax assets for $3,241 due to the establishment of a valuation allowance on deferred tax assets related to the net operating loss carryforwards in the UK. Goodwill has been reallocated amongan indefinite useful life and therefore is not amortized as an expense, but is reviewed annually for impairment of its fair value to the new reportable segments as of December 31, 2010 and consistedCompany. The purchase price intrinsically recognizes the benefits of the following: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.
 
  December 31, 2010 
    
Physician Domestic segment $12,793,455 
Physician International segment  4,037,934 
Other Channels segment  2,737,811 
Surgical Products segment  - 
Total goodwill $19,569,200 
Balance at January 1, 2012 $27,246 
Translation differences  606 
Balance at December 31, 2012 $27,852 

 
The Company has no accumulated impairment losses as of December 31, 20102012.

F-19




After the completion of the purchase price allocation, goodwill was allocated among the reportable segments as of December 31, 2012 in accordance with the provisions of ASC Topic 350-20 Intangibles-Goodwill and 2009.consisted of the following:
  December 31, 2012 
    
Consumer segment $23,772 
Physician Recurring segment  4,080 
Total goodwill $27,852 
 
Set forth below is a detailed listing of other definite-lived intangible assets, which were acquired from ProCyte and Photo Therapeutics and which were initially recorded at their appraised fair values:assets:
 
  December 31, 
  2010  2009 
Customer Relationships, at gross cost of $2,200,000 net of accumulated amortization of $1,791,667 and $1,669,398, respectively. $ 408,333  $ 530,602 
Tradename, at gross cost of $2,100,000 net of accumulated amortization of $819,981 and $609,977, respectively.    1,280,019     1,490,023 
  $1,688,352  $2,020,625 
  December 31, 2012  December 31, 2011 
  Trademarks  Customer Relationships  Total  Trademarks  Customer Relationships  Total 
Gross Amount beginning of period $5,700  $6,300  $12,000  $5,700  $6,300  $12,000 
Translation differences  44   72   116   -   -   - 
Gross Amount end of period  5,744   6,372   12,116   5,700   6,300   12,000 
                         
Accumulated amortization  (598)  (664)  (1,262)  (24)  (26)  (50)
                         
Net Book Value $5,146  $5,708  $10,854  $5,676  $6,274  $11,950 
 
Related amortization expense was $332,273, $575,000$1,212, $50 and $930,000$0 for the years ended December 31, 2010, 20092012, 2011 and 2008. Estimated amortization expense for amortizable intangible assets for the next five years is $260,000 in 2011, $260,000 in 2012, $260,000 in 2013, $260,000 in 2014, $173,000 in 2015 and $475,000 thereafter.2010. Customer Relationships embody the value to the Company of relationships that ProCyte and Photo TherapeuticsPre-merged PhotoMedex had formed with their customers, as well as the value of a non-compete covenant agreed to by Photo Therapeutics Group Ltd.its customers. Tradename includes the name of “ProCyte”names and various other trademarks associated with ProCytePre-merged PhotoMedex products (e.g. “XTRAC”, “Neova”). It also includes the various trademarks associated with Photo Therapeutics products (e.g. “Omnilux” and “Lumiere”).
Estimated amortization expense for the above amortizable intangible assets for the next five years is as follows:
2013 $1,200 
2014  1,200 
2015  1,200 
2016  1,200 
2017  1,200 
Thereafter  4,854 
Total $10,854 
 
Note 7
Accrued Compensation and related expenses:
 
Set forth below is a detailed listing of accrued compensation and related expenses:
  December 31, 
  2012  2011 
Accrued payroll and related taxes $1,010  $1,260 
Accrued vacation  262   251 
Accrued commissions and bonuses  1,222   2,289 
Total accrued compensation and related expense $2,494  $3,800 

  December 31, 
  2010  2009 
Accrued payroll and related taxes $392,994  $260,280 
Accrued vacation  146,495   129,026 
Accrued commissions and bonus  1,021,798   341,685 
Accrued severance  221,506   402,355 
Total accrued compensation and related expense $1,782,793  $1,133,346 
The Board of Directors elected to terminate, without cause, the employment of Jeffrey F. O’Donnell, the Company’s Chief Executive Officer, effective July 31, 2009. Under Mr. O’Donnell’s Employment Agreement, dated October 30, 2007, he was therefore entitled to: (i) severance equal to his base salary, including FICA taxes, from August 1, 2009 to July 31, 2010, amounting to $379,450; (ii) continuation of health benefits over the same twelve-month period, amounting to $11,579 and (iii) payment to him of an amount equal to the premiums necessary to maintain

 

F - 20F-20

 

his life and disability insurance over the same twelve-month period, amounting to $8,818. These amounts were recorded as accrued severance for the year ended December 31, 2009.
In addition, Mr. O’Donnell was also entitled to the immediate vesting of 16,097 options and 15,000 shares of restricted stock that had been awarded to him and that were unvested as of July 31, 2009, amounting to compensation of $588,126. This accelerated vesting was recorded as additional paid-in capital for the year ended December 31, 2009. The options that were so vested expired between March 1, 2010 and July 31, 2010.
 
Note 8
Other Accrued Liabilities:
 
Set forth below is a detailed listing of other accrued liabilities.
  December 31, 
  2012  2011 
Accrued warranty, current $1,274  $1,157 
Accrued  taxes, including liability for unrecognized tax benefit, see Note 12  5,119   5,222 
Accrued sales return (1)  11,901   6,143 
Other accrued liabilities  4,620   2,588 
Total other accrued liabilities $22,914  $15,110 
 
  December 31, 
  2010  2009 
Accrued professional and consulting fees $203,445  $552,990 
Accrued warranty  1,001,236   773,627 
Accrued excise taxes and other expenses  391,671   274,797 
Accrued sales return – CVS/pharmacy  169,171   - 
Total other accrued liabilities $1,765,523  $1,601,414 
(1)  The activity in the sales returns liability account was as follows:
 
CVS/pharmacy informed the Company that it intended to return, and be refunded for, its entire unsold inventory of products that it purchased from PTL in 2008. The revenues from the original sales were included deferred revenues in previous quarters and were not recognized into revenue by the Company. Most of the unsold inventory was returned to us in 2010, but is in unsaleable condition.
  December 31, 
  2012  2011 
       
Balance at beginning of year $6,143  $3,406 
Additions that reduce net sales  43,284   26,610 
Deductions from reserves  (37,526)  (23,873)
Balance at end of year $11,901  $6,143 
 
Note 9
Notes Payable:
Set forth below is a detailed listing of notes payable. The stated interest rate approximates the effective cost of funds from the notes.
  December 31, 
  
2010
  
2009
 
Note payable – unsecured creditor, interest at 5.43%, payable in monthly principal and interest installments of $49,803 through February 2010. $-  $98,934 
         
Note payable – unsecured creditor, interest at 6%, payable in monthly principal and interest installments of $2,880 through June 2012.  46,477   77,239 
         
Note payable – unsecured creditor, interest at 3.78%, payable in monthly principal and interest installments of $45,278 through January 2011.  45,136   - 
   91,613   176,173 
Less: current maturities  (77,796)  (129,696)
Notes payable, net of current maturities $13,817  $46,477 
Aggregate maturities of the notes payable as of December 31, 2010 are $77,796 in 2011 and $13,817 in 2012.


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Note 10
Long-term Debt:
 
In the following table is a summary of the Company’s long-term debt.debt, which the Company assumed in the reverse merger on December 13, 2011.
 
 December 31,  December 31, 
 2010  2009  2012  2011 
            
Term note, net of unamortized debt discount of $427,433 $2,072,567  $- 
Total borrowings on term note credit facility, net of unamortized debt discount of $3,482 and $33,744 respectively  775,861   3,940,252 
Term note, net of unamortized debt discount of $0 and $302, respectively $-  $1,698 
Capital lease obligations  49,225   -   10   30 
Sub-total  10   1,728 
Less: current portion  (2,867,720)  (3,179,469)  (10)  (1,720)
Total long-term debt $29,933  $760,783  $-  $8 
 
Term Note
On March 19, 2010, the CompanyPre-merged PhotoMedex entered a Term Loan and Security Agreement with Clutterbuck Funds. The Company received net proceeds of $2,373,000 in the transaction. The secured Term Note hasFunds for a principal amount of $2.5 million, which accrueswith interest accruing at a rate of 12% per annum. The Term Note requires the Company to make monthly payments of interest only. The principal matures on September 19, 2011 and may be prepaid without penalty at any time. The note is secured by XTRAC lasers that the Company has consigned to physician customers and that are not otherwise pledged to CIT Healthcare LLC and Life Sciences Capital LLC pursuant to the outstanding term notes with such lenders.
In connection with the issuance of the Term Note to Clutterbuck Funds, the Company issued Clutterbuck Funds a warrant to purchase 102,180 shares of the Company’s common stock for an initial exercise price of $7.34. The warrant is exercisable at any time on or prior to the fifth anniversary of its issue date. Pursuant to the terms of the warrant, the exercise price is subject to a one-time downward adjustment if the Company makes certain issuances of its equity securities at a price per share less than $7.34 during the 36-month period following the issuance of the warrant. As a result of the public offering on May 7, 2010, the number of shares which may be purchased under the warrant increased to 125,000 shares, and the exercise price of the warrant was reduced, in accordance with the one-time adjustment, to $6.00 per share. The warrants are treated as a discount to the debt and are accreted under the effective interest method over the repayment term of 18 months. The Company has accounted for these warrants as equity instruments since there is no option for cash or net-cash settlement when the warrants are exercised and since they are indexed to the Company’s common stock. The Company computed the value of the warrants using the Black-Scholes method. The key assumptions used to value the warrants are as follows:
  March 2010 
    
Number of shares underlying warrants  102,180 
Exercise price $7.34 
Fair value of warrants $769,754 
Volatility  87.68%
Risk-free interest rate  2.48%
Expected dividend yield  0%
Expected warrant life 5 years 
On March 28, 2011, Clutterbuck Funds agreed to extend the maturity date of itsthe secured term loan of to the Company, of which the principal of $2.5 million was to be paid at maturity. Previously, the loan matured on September 19, 2011; it will now mature on December 1, 2012. Starting in August 2011, the Company will beginPre-merged PhotoMedex began monthly installments of principal such that the final payment at maturity will be $75,000. To induce the modifications to the terms of its loan, the Company has issued to Clutterbuck Funds a second warrant which has been modeled after the first warrant issued on March 19, 2010 but which will be to purchase 109,650 shares of our common stock at an exercise price of $5.70 per share.$75. The collateral securing the first-position security interest of Clutterbuck Funds and the second-position security interest of the holder of our convertible notes will remainremained in place.


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Term-Note Credit Facility On June 11, 2012, the Company paid off this loan and was relieved of all related obligations.
 
In December 2007, the Company entered into a term-note facility with CIT Healthcare LLC and Life Sciences Capital LLC, as equal participants (collectively, “CIT”), for which CIT Healthcare acts as the agent. The facility originally had a maximum principal amount of $12 million and was for a term of one year. The stated interest rate for any draw under the credit facility was set as 675 basis points above the three-year Treasury rate. CIT levied no points on a draw. Each draw was secured by specific XTRAC laser systems consigned under usage agreements with physician-customers. On September 30, 2008, the Company and CIT amended the credit facility to increase the amount the Company could draw on the credit facility by $1,927,534. The interest rate for draws against this amount was set at 850 basis points above the LIBOR rate two days prior to the draw. Each draw was to be secured by certain XTRAC laser systems consigned under usage agreements with physician-customers and the stream of payments generated from such lasers. Each draw has a repayment period of three years.
In connection with the amendment to the CIT facility, the Company issued warrants to purchase an additional 192,753 shares to CIT Healthcare in September 2008 (which became 27,536 shares as adjusted to reflect the 1-for-7 reverse stock split effective January 26, 2009; and which now stands at 4,589 shares as further adjusted to reflect the 1-for-6 reverse stock split effective February 3, 2010). The warrants are treated as a discount to the debt and are accreted under the effective interest method over the repayment term of 36 months. The Company has accounted for these warrants as equity instruments since there is no option for cash or net-cash settlement when the warrants are exercised and there is no down-round price protection provision. The Company computed the value of the warrants using the Black-Scholes method.
Capital Leases
The obligation under the Company’s capital lease is at a fixed interest rate and is collateralized by the related property and equipment (see Note 4, Property and Equipment).
 

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The following table summarizes the future minimum payments that the Company expects to make for long-term debt and capital lease obligations:
 
2011 $3,576,455 
2012  24,575 
2013  8,192  $10 
Total minimum payments  3,609,222   10 
        
Less: interest  (280,654)  - 
Less: unamortized warrant discount  (430,915)
        
Present value of total minimum obligations $2,897,653  $10 
 
Note 11
Convertible Debt:
In the following table is a summary of the Company’s convertible debt.
  December 31, 2010  December 31, 2009 
       
Total borrowings, net of discounts and costs $19,344,136  $17,369,943 
Less: current portion  -   - 
Total convertible debt $19,344,136  $17,369,943 
The February 27, 2009 acquisition of Photo Therapeutics was funded simultaneously through a convertible debt investment of $18 million from the Investor. This convertible note transaction financed the $13 million purchase price of the acquisition, and a further $5 million in working capital at the closing of the acquisition. Under the terms of the investment, the Investor was obligated to invest up to an additional $7 million in convertible debt in the Company in the event that certain earn-out consideration would be payable under the terms of the Photo Therapeutics acquisition; however, based on its analyses, the Company determined that no earn-out payment was


F - 23


due. The intended use of the $5 million working capital provided was for payment of approximately $3 million in expenditures associated with the transaction, with the balance to be used for general corporate purposes.
At the closing of the convertible debt financing, and in exchange for the Investor’s payment to the Company of the $18 million purchase price, the Company: (i) issued to the Investor (A) a convertible note in the principal amount of $18 million (the “Original Convertible Note”), and (B) a warrant to purchase 174,367 shares of the Company’s common stock as adjusted to reflect the 1-for-6 reverse stock split effective February 3, 2010; and (ii) paid a transaction fee of $210,000 in cash. The conversion price of the Original Convertible Note and the exercise price of the warrant were each $30.96 per share as adjusted to reflect the 1-for-6 reverse stock split effective February 3, 2010.
The Original Convertible Note was due on February 27, 2014 with interest payments semi-annually at 8%, due on September 1 and March 1 of each year. The interest can be paid by the issuance of additional convertible notes. The effective interest rate on the Original Convertible Note is 11.64%, which takes into account paid interest as well as accreted interest under an effective interest method from the warrants and loan origination costs. The warrants that were issued give rise to a discount to the debt. This discount, as well as loan origination costs and the transaction fee paid to the Investor, are accreted as interest expense under the effective interest method over the repayment term of 60 months. On March 1, 2010 and September 1, 2009, the Company satisfied interest payments of $748,800 and $720,000, respectively, by issuance of additional convertible notes (the “Additional Convertible Notes” and collectively with the Original Convertible Notes, the “Convertible Notes”). These notes have the same interest rate, convertible price per share and maturity date as the Original Convertible Note. No warrant was issued with the Additional Convertible Notes.
The Convertible Notes, as well as the warrant to purchase common stock of the Company, contain down-round provisions such that the number of underlying shares, and the corresponding price per share, change if the Company issues stock below the stated conversion and exercise price of the notes and warrant. In conjunction with the October 2009 private placement of the Company’s common stock, the convertible notes and the warrant were adjusted by contract using a weighted-average formula to have a conversion price and an exercise price of $22.11 per share for 846,735 and 244,251 shares, respectively as adjusted to reflect the 1-for-6 reverse stock split effective February 3, 2010.
In order to consummate the bridge financing with a term note (see Note 10Term Note), it was necessary to secure the consent of the Investor. As of March 19, 2010, the outstanding principal and accrued interest under the Convertible Notes was $19,546,676. In order to obtain the Investor’s consent, the Company agreed to the following modifications to the Convertible Notes:
The Company combined the aggregate outstanding obligations under the Convertible Notes into two convertible notes. Each note matures on February 27, 2014 and is identical to the original form of convertible note except as noted below;
The larger note has a principal amount of $16,746,270. This note remains subject to the same down-round anti-dilution adjustment to the conversion price which was in the unmodified notes. The interest rate of this note was increased from 8% to 10%. The incremental 2% increase in the interest rate may be paid in cash, or, pursuant to the vote of our stockholders at the Annual Meeting of Stockholders on October 28, 2010, may be paid in convertible PIK notes;
The smaller note has a principal amount of $2,800,406. The conversion price of this note was reduced to $11.26 and the down-round anti-dilution adjustment to the conversion price was removed. The interest rate of this note was increased from 8% to 10%. The full amount of the accrued interest remains payable in cash or convertible PIK notes;



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The collateral securing the Convertible Note was expanded by adding a first-priority lien against all of the Company’s assets other than the assets pledged with first-priority liens to CIT Healthcare and to Clutterbuck Funds. When assets are released from the lien of CIT Healthcare, such assets will become subject to the first-priority lien of Clutterbuck Funds and a second-priority lien of the Holder. Finally, when assets are released from the lien of Clutterbuck Funds, such assets will become subject to the first-priority lien of the Holder; and
Three of the Company’s subsidiaries (ProCyte Corporation, Photo Therapeutics, Inc. and SLT Technology, Inc.) have guaranteed the Company’s obligations under the Convertible Notes.
In conjunction with this, the conversion price of the larger convertible note and the exercise price of the warrants were adjusted by contract using a weighted-average formula specified in the convertible note to have a conversion price and exercise price of $21.47 per share for 780,025 and 251,528, respectively.
In conjunction with the May 7, 2010 public offering of the Company’s common stock, the larger convertible note and the warrant were adjusted by contract using a weighted-average formula as specified in the convertible note to have conversion prices and exercise price of $18.39 per share for 910,533 and 293,611 shares, respectively. No change was made to the smaller note, as it has no down-round provision.
Interest at 10% due under the smaller, Series B-1 Convertible Note was paid on September 1, 2010 in the form of an additional convertible note in the amount of $126,018. Interest due at 10% interest under the larger, Series B-2 Convertible Note on September 1, 2010 was $753,582. The interest that accrued at 8% was paid in the form of an Additional Convertible Note in the amount of $602,866; the interest accruing at 2% (the incremental difference between 10% and 8%) was provisionally paid in restricted cash but has now been paid by an Additional Convertible Note effective September 1, 2010, in the amount of $150,716. This resulted from an extension granted by the Investor to allow for the stockholders to approve payment of such incremental interest in the form of convertible PIK notes. The stockholders approved such form of payment on October 28, 2010. Accordingly, the Investor authorized the return to the Company of cash which had been escrowed to secure the Investor for interest accruing in September and October and which had been recorded as restricted cash.
As of December 31, 2010, the total amount due under the convertible notes outstanding was $20,426,276 and the two notes are convertible into an aggregate of 1,211,437 shares of the Company's common stock.
Interest at 10% due under the Series B-1 Convertible Note and Series B-2 Convertible Note, and their related Additional Convertible Notes was paid on March 1, 2011 in the form of additional convertible notes of $146,321 and $874,993, respectively.
Note 12
Warrants:
Some of the Company’s warrants have provisions that protect holders from a decline in the issue price of its common stock (or “down-round” provisions) or that contain net settlement provisions. The Company accounts for these warrants as liabilities instead of equity. Down-round provisions reduce the exercise or conversion price of a warrant or convertible instrument if a company either issues equity shares for a price that is lower than the exercise or conversion price of those instruments or issues new warrants or convertible instruments that have a lower exercise or conversion price. Net settlement provisions allow the holder of the warrant to surrender shares underlying the warrant equal to the exercise price as payment of its exercise price, instead of physically exercising the warrant by paying cash. The Company evaluated whether warrants to acquire its common stock contain provisions that protect holders from declines in the stock price or otherwise could result in modification of the exercise price and/or shares to be issued under the respective warrant agreements based on a variable that is not an input to the fair value of a “fixed-for-fixed” option.
The warrants issued to the Investor, in conjunction with the $18 million Original Convertible Note (see Note 11, Convertible Debt), contain a down-round provision. The Company concluded that the triggering event of the down-round provision was not based on an input to the fair value of “fixed-for-fixed” option and therefore is not considered indexed to the Company’s stock. Since the warrant contains a net settlement provision, and it is not indexed to the Company’s stock, it is accounted for as a liability.


F - 25


The Company recognizes these warrants as a liability equal to their fair value on each reporting date. The Company measured the fair value of these warrants as of December 31, 2010, and recorded other expense of $197,098 resulting from the increase of the liability associated with the fair value of the warrants for the year. The Company measured the fair value of these warrants for the year ended December 31, 2009, and recorded other income of $808,786 resulting from the decrease of the liability associated with the fair value of the warrants for the year ended December 31, 2009, respectively. See Note 1, Fair Value Measurements. The Company computed the value of the warrants using the Black-Scholes method. The following are the key assumptions used to value the warrants as of the dates indicated (as adjusted to reflect the 1-for-6 reverse stock split effective February 3, 2010):
  December 31, 2010  December 31, 2009  February 27, 2009 
Number of shares underlying warrants  293,610   244,251   174,367 
Exercise price $18.39  $22.108  $30.96 
Fair value of warrants $938,623  $741,525  $1,550,311 
Volatility  83.04%  79.23%  87.89%
Risk-free interest rate  2.71%  3.39%  2.69%
Expected dividend yield  0%  0%  0%
Expected warrant life 6.17 years  7.17 years  8 years 
The Company’s recurring fair value measurements at December 31, 2010 related only to the warrants issued to the Investor, and had a fair value of $938,623. The inputs used in measuring the fair value of these warrants are of Level 3, significant unobservable inputs.
No other warrants issued by the Company contain both down-round provisions and net settlement provisions.
Recurring Level 3 Activity and Reconciliation
The table below provides a reconciliation of the beginning and ending balances for the liability measured at fair value using significant unobservable inputs (Level 3). The table reflects gains and losses for the twelve months for all financial liabilities categorized as Level 3 as of December 31, 2010 and 2009.
Fair Value Measurements Using Significant Unobservable Inputs (Level 3):
Warrant liability:   
Balance as of January 1, 2009 $0 
Initial measurement of warrants  1,550,311 
Decrease in fair value of warrants  (808,786)
Balance as of December 31, 2009  741,525 
Increase in fair value of warrants $197,098 
Balance as of December 31, 2010 $938,623 
Note 13
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 2012.2013. Rent expense was $656,296, $748,715$908, $458 and $601,947$438 for the years ended December 31, 2010, 20092012, 2011 and 2008,2010, respectively. The future annual minimum payments under these leases are as follows:
 


F - 26



Year Ending December 31,   
2013 $720 
2014  213 
2015  177 
Thereafter  55 
Total $1,165 
 
Year Ending December 31,   
2011 $363,311 
2012  92,933 
Thereafter  - 
Total $456,244 

Litigation
Ra Medical
The Company has been involved in a number of disputes with Ra Medical Systems, Inc. and Dean Irwin, one ofDuring the Company’s former employees and now an officer of Ra Medical Systems (collectively, here “Ra Medical”). In January 2004, the Company brought an action against Ra Medical for falsely advertising that it had clearance from the Food and Drug Administration, and for falsely claiming in March 2003 that its laser would be available for purchase in August 2003 and for falsely claiming that Irwin was the sole inventor of the XTRAC laser system. In November 2004, Ra Medical brought a malicious prosecution action against the Company, which was subsequently settled in May 2007. In June 2006, Ra Medical brought an action against the Company for unfair competition. In that action, the Company brought counterclaims under Federal and State law addressing such issues as misappropriation, unfair competition and unfair advertising. In October 2008, Ra Medical brought a second malicious prosecution action against the Company and its outside counsel, alleging that the action the Company brought in January 2004 against Ra Medical was initiated and maintained with malice. Ra Medical withdrew the complaint without prejudice in July 2010.
In the action which the Company brought against Ra Medical in January 2004, the Ninth Circuit Court of Appeals ruled, in April 2010, in the Company’s favor on two counts, and has reversed the summary judgments on those counts and remanded them back to the U.S. District Court for the Southern District of California. The Company is preparing for trial, which is scheduled for June 2011.
In the action brought by Ra Medical in June 2006 in the District Court for the Southern District Court of California, all of the Company’s counterclaims against Ra Medical which the trial court had dismissed were reinstated by the Ninth Circuit Court of Appeals and remanded to the trial court. Among such counterclaims are one for misappropriation of the Company’s XTRAC technology and another for interference in the contractsyear ended December 31, 2012, the Company has entered into a settlement agreement with its customers.TRIA Beauty, IncThe terms of the settlement agreement were reduced to a written agreement dated June 29, 2012; such terms are confidential to the parties. The Company has brought a motionsettlement was deemed to dismiss Ra Medical’s single claim against the Company for unfair competition under the California Business and Professions Codehave no material effect on the grounds that Ra Medical fails to meet the standing and evidentiary requirements of that Code. The parties await the decision of the Court. The Company expects that the case will soon move into active discovery phase. Trial has been targeted for first quarter 2012.
St. Paul Fire and Marine Insurance Company
In January 2009, the Company brought a second coverage action against St. Paul in the U.S. District Court for the Eastern District of Pennsylvania in which the Company argued that the policy provided coverage for the new malicious prosecution claim asserted by Ra Medical, and the court granted the Company’s motion for summary judgment on the issue of whether the policy covers malicious prosecution claims.  Accordingly, the only issue before the U.S. District Court for the Southern District of California, where St. Paul had brought a declaratory judgment action, is whether St. Paul has been released from any further coverage arising out of a claim by Ra Medical for malicious prosecution.  The parties have filed cross-motions for summary judgment on the issue of the effect of the release.
Dermatologist’s action against Ra Medical and PhotoMedex
On or about October 14, 2009, a dermatologist brought an action against Ra Medical in the Circuit Court of the Sixth Judicial Circuit, Macon County, Illinois, docket no. 09-L-175. The plaintiff has two principal grievances against Ra Medical: (i) that Ra Medical sold the dermatologist one of its Pharos lasers in September 2006, before Ra Medical had the right under FDA regulations to sell the laser in the United States, and (ii) that the laser failed to perform according to its specifications in that it repeatedly failed to deliver the dosage of light demanded by the


F - 27


laser operator for the patient’s treatment, with the result that some patients were under-dosed and showed negligible or no improvement while other patients were over-dosed and their skin blistered. The plaintiff seeks damages from Ra Medical.
The plaintiff joined the Company as co-defendants and seeks a declaratory judgment from the court that when PhotoMedex and the plaintiff had tested the performance of the laser from Ra Medical, they had not acted improperly – as alleged by an attorney for Ra Medical – but within their rights and. The Company has answered the complaint and also lodged against Ra Medical a claim for interference with prospective economic advantage from the plaintiff and from other similarly situated customers of the Company.
Ra Medical has moved that the Court should dismiss the Company’s claim against Ra Medical on various grounds. The Court heard the motion on March 24, 2011. The Court ruled that the Company must amend its counterclaim to exclude injury from any interference by Ra Medical with the Company’s contracts.
Otherconsolidated financial statements.
 
The Company is involved in certain other legal actions and claims arising in the ordinary course of business. It believes, based on discussions with legal counsel, that these other litigationslitigation matters and claims will likely be resolved without a material effect on the Company’s consolidated financial position, results of operations or liquidity.
 
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 $1,224,545$2,550 as of December 31, 2010,2012, based on 20102012 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, 20102012 was approximately $1,555,244,$2,299, based on 20102012 salary levels.
 
Restricted Securities
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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 Warrants
If an investorwith such designations, preferences and relative, participating, optional or special rights and qualifications, limitations or restrictions thereon as shall be set forth in the November 2006 private placement exercises a warrant received inresolution or resolutions adopted by the placement, then Cowen &Board of Directors providing for the issuance of such preferred shares. At December 31, 2012 and 2011, no shares of preferred stock were outstanding. The Company is entitledhas no present intention to a 6.5% commission on the gross proceeds to the Company from such exercise. If all such warrants are exercised, then the Company will receive $3,904,000 and will owe Cowen & Company $253,760 in commissions. To date, no such exercisesissue shares of these warrants have occurred.
Note 14
Stockholders’ Equity:preferred stock.
 
Common Stock
On December 8, 2010,August 18, 2012, the Board of Directors approved a stock repurchase program up to a maximum to $25 million. To date, the Company issued 49,048 unrestricted registeredhas repurchased 842,961 shares at an average price of stock in voluntary settlement$12.76 per share for a total of $343,333 of fees to the incumbent members of the Board, one former member and the Board’s special medical adviser, which were accrued but unpaid as of September 30, 2010. The shares were issued out of the 2005 Equity Plan.$10,756.
 
On December 30, 2010, the Company completed an exchange program of which it tendered unrestricted registered shares of its common stock to those holders of stock options in the Company who were active providing services to the Company and whose options had exercise prices greater than $10 per share. For 23,063 shares of stock, the Company cancelled underwater options to purchase 68,653 shares.
On February 3, 2010,12, 2011, the stockholders voted to increase the number of authorized shares of common stock from 3,571,42935,000,000 to 35,000,00050,000,000 shares.
 
On January 26, 2009,December 13, 2011, in conjunction with the stockholders voted to increasereverse acquisition, the number of authorizedCompany 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 vest ratably over a three-year period and expire 10 years from 2,380,952 to 3,571,429 shares.the date of the grant.
 
As of December 31, 2010, the Company had issued 14,044 sharesclosing of its restricted common stock in connection with the Asset Purchase agreement with Stern Laser Srl, or Stern.reverse acquisition, the Plan was discontinued and all outstanding option grants, not exercised, under the Plan were cancelled.
 

Post-Reverse Merger

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Common Stock Options
In May 2000,Following the Company also adoptedclosing of the reverse acquisition, the previous Non-Employee Director Stock Option Plan of PhotoMedex (the “Non-Employee Director Plan”). In 2010, nonqualified stock options were granted under thisacquired entity) was adopted by the group. This plan to the directors: 833 options were granted to directors in place as of January 1, 2010 and 625 to each of Messrs. Sight and Denby, who joined the Board ion May 26, 2010. Starting in 2011, the annual award is 1,000 shares of stock, vesting quarterly. As of December 31, 2010, the Plan washas authorized to issue 60,000120,000 shares; 22,730 shares were reserved for outstanding stock options.
In March 2005, the Company assumed four option plans from ProCyte: the 2004 Stock Option Plan, the 1996 Stock Option Plan, the 1991 Restated Stock Option Plan for Non-Employee Directors and the 1989 Restated Stock Option Plan. The plans became inactive on December 28, 2005, and had 0, 4,038, 0 and 0 options outstanding at December 31, 2010, respectively.
On December 28, 2005, the stockholders approved the 2005 Equity Compensation Plan (“2005 Equity Plan”), and as of December 31, 2010, was authorized to issue 650,000 shares, of which 53,4727,000 shares had been issued or were reserved for issuance as awards of shares of common stock, and 43,74118,951 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 877,226 shares were reserved for outstanding options.
 
In January 2010 and May 2010, the Company issued 4,165and 1,250 options, respectively, to purchase common stock to non-employee directors, in accordance with the terms of the Non-Employee Director Plan.
Also in 2010, the Company granted an aggregate of 10,835 options to purchase common stock to a number of consultants with a strike price equal to the quoted market value of our stock at the date of grant. The options vest immediately and expire ten years from the date of grant.
In January 2009, February 2009 and May 2009, the Company issued 5,000, 833 and 625 options, respectively, to purchase common stock to non-employee directors, in accordance with the terms of the Non-Employee Director Plan.
On June 15, 2009, the Company awarded 4,667 restricted shares of our common stock to two of the Company’s executive officers.
Also, during the course of 2009, the Company granted an aggregate of 34,432 options to purchase common stock to a number of employees and consultants with a strike price equal to the quoted market value of our stock at the date of grant. The options vest over five years and expire ten years from the date of grant.
In January 2008, the Company issued 5,000 options to purchase common stock to non-employee directors, in accordance with the terms of the Non-Employee Director Plan.
Also, during the course of 2008, the Company granted an aggregate of 25,243 options to purchase common stock to a number of employees and consultants with a strike price equal to the quoted market value of our stock at the date of grant. The options vest over five years and expire ten years from the date of grant.

 

F - 29F-23

 

A summary of option transactions for all of the Company’s stock options during the years ended December 31, 2010, 20092012, 2011 and 2008:2010:
 
 Number of Shares  Weighted Average Exercise Price  Number of Stock Options  Weighted Average Exercise Price 
Outstanding at January 1, 2008  145,945  $84.00 
Granted  30,243   35.70 
Exercised  -   - 
Expired/cancelled  (31,044)  78.96 
Outstanding at December 31, 2008  145,144   75.36 
Granted  41,224   7.44 
Exercised  -   - 
Expired/cancelled  (28,183)  76.62 
Outstanding at December 31, 2009  158,185   57.42 
Outstanding at January 1, 2010  1,966,965   0.73 
Granted  16,250   7.15   -   - 
Exercised  -   -   -   - 
Expired/cancelled  (103,774)  69.15   (16,029)  5.23 
Outstanding at December 31, 2010  70,661  $28.70   1,950,936   0.69 
Exercisable at December 31, 2010  45,751  $40.61 
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 and Exercisable at December 31, 2012  898,541  $16.65 
 
As ofThe outstanding and exercisable options at December 31, 2010, 45,751 options to purchase common stock were vested and exercisable at prices ranging from $5.70 to $236.46 per share. As2012, have a range of December 31, 2009, 101,076 options to purchase common stock were vested and exercisable at prices ranging from $8.88 to $399.00 per share. Options are issued with exercise prices equal to the market price on the date of issue, so the weighted-averageand associated weighted remaining contractual life and weighted average exercise price, equals the weighted-average fair value 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   535,956   9.04  $13.51   45,956  $8.27 
$15.01 - $30.00   345,400   9.12  $18.79   115,400  $16.37 
$30.01 - $45.00   2,169   5.02  $39.41   2,169  $39.41 
$45.01 - $60.00   3,563   3.97  $47.07   3,563  $47.07 
$60.01 - up   11,453   1.50  $85.78   11,453  $85.78 
Total   898,541   8.94  $16.65   178,541  $19.63 
The outstanding options will expire, as follows:
Year Ending 
Number of Shares
  
Weighted Average Exercise Price
  
 
Exercise Price
 
2013  4,238  $72.33  $64.26 - $97.44 
2014  2,499  $102.48  $102.48 
2015  2,499  $102.90  $102.90 
2016  2,634  $69.48  $48.72 - $93.66 
2017 and later  886,671  $15.89  $5.70 - $47.88 
   898,541  $16.65  $5.70 - $102.90 
 
The aggregate intrinsic value for options outstanding and exercisable at December 31, 20102012 was immaterial.
 
The weighted average grant date fair value of options was $5.74 and $6.12 for options granted during the years ended December 31, 2010 and 2009, respectively. The total intrinsic value of options exercised during the years ended December 31, 2010 and 2009 was $0.
F-24


 
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,  Year Ended December 31, 
 2010  2009  2008  2012  2011  2010 
Risk-free interest rate  3.67%  3.46%  3.75%  1.2%  1.76%  N/A 
Volatility  84.31%  88.67%  84.06%  85.53%  61.52%  N/A 
Expected dividend yield  0%  0%  0%  0%  0%  N/A 
Expected life 8.1 years  8.1 years  8.1 years  5 years  5 years   N/A 
Estimated forfeiture rate  13%  27%  10%  0%  0%  N/A 
 
ThePrior 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 during the period immediately preceding the grant that is equal in length to the expected term of the grant.stock. For estimating the expected term of share-based grants made in the years ended December 31, 20092012 and 2008,2011, 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 both grants of options, and awards of restricted stock, the risk-free rate of interest is based on the U.S. Treasuryzero-coupon US Government bond rates appropriate for the expected term of the grant or award.
 

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.
 
F - 30



On June 15, 2009,December 13, 2011, as part of the reverse merger, the Company awarded 4,667issued 380,000 shares of restricted common stock to its senior executives.two executives of pre-merged PhotoMedex. These restricted shares have a purchase price of $0.06$0.01 per share; the shares willshare and vest, and no longercease to be subject to the Company’s right of repurchase, if the Company achieves positive adjusted net income in the year ended December 31, 2010, where adjusted net income is defined as net income after taxes, excluding income and expense from stock options and warrants. Taking into account the conditions for vesting, theover 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 purchase pricevalue paid for the award.
As part of the award.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.

F-25


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 does not intendrecorded stock-based compensation expense of $27.1 million (including the cash bonus in an amount of $12.3 million) in respect to exercise its right of repurchase.
Compensation expensethis grant, for the year ended December 31, 2010 included $375,772 from2011.
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 240,956 shares of common stock (the remaining balance as of December 31, 2012) 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 and $206,128 from restricted stock awards. Compensation expensethemselves. The Company accounted for the year ended December 31, 2009 included $552,608 fromreplacement 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 options grants and $655,237 from restricted stock awards. Compensation expense forbased compensation of $504 will continue to be expensed over the year ended December 31, 2008 included $888,546 from stock options grants and $414,491 from restricted stock awards.original vesting period.
 
CompensationTotal compensation expense is presentedwas as part of the operating results in selling, general$6,197, $34,001 and administrative expenses. For stock options granted to consultants an additional selling, general, and administrative expense in the amount of $102,532, $54,181 and $92,501  was recognized during$392 for the years ended December 31, 2010, 20092012, 2011 and 2008, respectively.2010.
 
At December 31, 2010,2012, there was $220,183$10,639 of total unrecognized compensation cost related to non-vested option grants and stock awards that is expected to be recognized over a weighted-average period of 2.683.43 years.
The outstanding options, including options exercisable at December 31, 2010, 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      - $30.0049,7548.65$     6.9125,058$     7.38
$30.01 - $60.005,7326.37$   44.175,559$   44.21
$60.01 - $90.008,6102.91$   72.888,593$   72.90
$90.01 - up6,5652.97$ 122.326,541$ 122.41
Total70,6617.24$   28.7045,751$   40.61
The outstanding options will expire, as follows:
Year Ending
Number of Shares
Weighted Average Exercise Price
 
 
Exercise Price
20111,240$198,32$72.24 - $236.46
20121,54685.40$77.70 - $115.50
20134,67073.12$64.26 - $97.44
20143,00396.99$67.20 - $102.48
2015 and later60,20216.89$5.70 - $102.90
 70,661$28.70$5.70 - $236.46
 
Common Stock Warrants
In May 2010,Following the closing of the reverse merger, the Company had warrants outstanding, a majority of which were issued 25,000 warrants to purchase common stock to Landenberg Thalmann & Co. in connectionconjunction with the public offering in May 2010.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 anthe following principal terms: (i) a warrant exercise price of $7.50$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 five year term expiring May 7, 2015.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.
 
In March 2010, the Company issued 102,180 warrants to purchase common stock to Clutterbuck Funds related to the term note of March 19, 2010. The warrants had an initial exercise price of $7.34 per share and have an eight year term expiring March 19, 2018. The warrants have a one-time down-round provision and as of December 31, 2010, the outstanding warrants to Clutterbuck are 125,000, at an exercise price of $6.00.

 

F - 31F-26

 

In February 2009, the Company issued 174,367 warrants to purchase common stock to the Investor related to the convertible debt agreement dated February 27, 2009. The warrants had an initial exercise price of $30.96 per share and had an eight-year term, expiring in February 2017. The warrants have a down-round provision and as of December 31, 2010, the outstanding warrants to the Investor are 293,610 at an exercise price of $18.39.

A summary of warrant transactions for the years ended December 31, 2010, 20092012 and 20082011 is as follows:
 
  
 
Number of Warrants
  
Weighted Average
Exercise Price
 
Outstanding at January 1, 2008  98,800  $68.88 
      Issued  4,589   18.48 
      Exercised  -   - 
      Expired/cancelled  (23,680)  84.00 
Outstanding at December 31, 2008  79,709   61.74 
      Issued  244,251   22.08 
      Exercised  -   - 
      Expired/cancelled  -   - 
Outstanding at December 31, 2009  323,960   31.80 
      Issued (1)
  193,363   6.25 
      Exercised  -   - 
      Expired/cancelled  -   - 
Outstanding at December 31, 2010  523,323  $21.49 
(1)  Includes 49,363 additional warrants issued to the Investor related to the down-round provisions.
  
 
Number of Warrants
  
Weighted Average
Exercise Price
 
Outstanding at December 31, 2010  -  $- 
      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 
 
At December 31, 2010,2012, all outstanding warrants were exercisable at prices ranging from $6.00 to $67.20 per share.exercisable.
 
If not previously exercised, the outstanding warrants will expire as follows:
 
Year Ending December 31,
 
 
Number of Warrants
  
Weighted Average
Exercise Price
  
 
Number of Warrants
  
Weighted Average
Exercise Price
 
            
2011  63,907  $67.20 
2012  11,216   47.04 
2013  4,589   18.48   4,589  $18.48 
2014  -   -   -   - 
2015 and later  443,611   14.29 
2015  32,250   17.19 
2016  1,026,429   20.00 
  523,323  $21.49   1,063,268  $19.91 
The fair value of the warrants at the date of the consummation of the reverse acquisition 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 1512
Income Taxes:
 
The Company accounts for income taxes pursuant to FASB ASC Topic 740, Income Taxes (“ASC Topic 740”). ASC Topic 740 is an asset-and-liability approach that requires the recognition of deferred tax assets and liabilities for the expected tax consequences of events that have been recognized in the Company's financial statements or tax returns. For U.S. Federal and State income tax purposes, as well as U.K tax purposes, there is, unlike the treatment under U.S. generally accepted accounting principles, no step-up in the basis of assets of Pre-merged PhotoMedex as a result of the reverse merger on December 13, 2011. The historical basis of the assets under tax accounting rules carries over from Pre-merged PhotoMedex. As of December 27, 2012, the tax basis of many of those historical assets was increased through a taxable transfer of such assets to a non-consolidated subsidiary.
 
The Company recorded no provisions in 2009, 2008 and 2007 due to losses incurred. Any other provisions, including accrual adjustments for prior periods, were completely offset by changes in the deferred tax valuation allowance.

 

F - 32F-27

 


The Company recorded net income tax expense in 2012 and 2010 and a net tax benefit in 2011. Income tax expense (benefit) consists, net of valuation allowance, consisted of the following:
 
 
Year Ended December 31,
  
Year Ended December 31,
 
 2010  2009  2008  2012  2011  2010 
Federal, including AMT tax:         
Current
 $-  $-  $- 
Deferred
  (262,000)  (2,475,000)  (2,494,000)
State:            
United States - Federal tax:         
Current
  -   -   -  $2,752  $246  $3,232 
Deferred
  (199,000)  (5,118,000)  (228,000)  (1,572)  (5,495)  1,394 
  (461,000)  (7,593,000)  (2,722,000)            
United States - State tax:            
Current
  315   -   457 
Deferred
  (2,074)  (243)  61 
                        
Change in valuation allowance  461,000   7,593,000   2,722,000 
Income tax expense $-  $-  $- 
Israel:            
Current
  4,034   3,487   580 
Deferred
  (50)  (17)  563 
            
United Kingdom:            
Current
  1,371   -   - 
Deferred
  (338  -   - 
            
Income tax expense (benefit) $4,438  $(2,022) $6,287 
            
 
A reconciliation of the effective tax rate with thea hypothetical overall rate of 40.5% follows. The overall rate is comprised of a Federal statutory tax rate of 34% follows:and a blended State rate of 6.5%. The hypothetical rate of 40.5% is merely an expectational or notional rate, and not necessarily the rate that applies to the group in any given instance. There is no material effect from U.K. operations in 2011 through Photo Therapeutics Limited that were part of Pre-merged PhotoMedex.
  
Year Ended December 31,
 
  2012  2011  2010 
Net income before tax:         
U.S $3,152  $(16,309) $12,386 
Israel  20,414   13,980   5,502 
U.K.  3,365   -   - 
Total  26,931   (2,329)  17,888 
Tax rate  40.5%  40.5%  40.5%
             
             
Theoretical Federal and State expense (benefit) $10,907  $( 943) $7,244 
Decrease in taxes resulting from differences in tax rates, net  (5,539)  (4,249)  (869)
Increase in taxes from permanent
differences in stock-based compensation
  737   3,109   158 
Decrease in tax position from prior years  (2,325)  -   - 
Other*  658   61   (246)
             
Income tax expense (benefit) $4,438  $( 2,022) $6,287 
 
  
Year Ended December 31,
 
  2010  2009  2008 
          
Expected Federal tax benefit at statutory rate $2,966,000  $3,577,000  $3,839,000 
             
Gross change in valuation allowance  461,000   (7,593,000)  (2,722,000)
             
Adjustments of temporary differences and net operating loss expirations and limitations  (3,503,000)  3,651,000   (1,313,000)
             
State income taxes  (199,000)  286,000   228,000 
             
Other, including credit carryforwards  275,000   79,000   (32,000)
             
Income tax expense $-  $-  $- 
* Resulting mainly in 2011 and 2010 from the changes in the exchange rate of Israeli currency relative to the US dollar. Resulting in 2012, substantially from the use of loss carryforwards.
 

F-28


As of December 31, 2010,2012, the Company had approximately $127,800,000$48 million of Federal net operating loss carryforwards in the United States which expire through 2030. IncludedStates. Approximately $19.3 million of the loss carryforward has been recognized in the aggregate Federal net operatingdeferred tax account without a valuation allowance. Such recognized carryforward has sufficient expected income and sufficient Section 382 limitation to be used in the 5-year period ending 2017. The balance of the loss carryforward are approximately $28,663,000 of losses sustained by businesses prior to tax-free acquisistions. As of December 31, 2010, the Company has estimated that only $21,486,000 of such net operating losses, can be realized, based on Federal limitations on the useabililty of such expiring losses. There have been no other changes of ownership identified by management in 2010 that materially limit the Company’s utilization of loss carryforwards. If the Company undergoesplaced under a change or ownership in the future, the utilization of the Company’s loss carryforwards may be materially limited. valuation allowance.
After conversion to U.S. dollars, Photo Therapeutics Ltd.Limited had approximately $16,019,000$12 million of net operating loss carryforwards,carryforwards. The Company has put the entire carryforward under a valuation allowance, effective December 13, 2011 and thus the allowance effects an increase of which $14,950,000 were incurred beforebasis to the acquisition on February 27, 2009.goodwill of Photo Therapeutics, Limited. These losses have no expiration under British rules have no expiration. rules. Management is continuing to evaluate the position of using the UK net operating losses in the future. Until such time, the Company has applied a 100% valuation allowance.
As of December 31, 2010,2012, the Company had approximately $60 million ofCompany’s gross deferred tax asset pertaining to State net operating loss carryforwards whichapproximated $974 and expire generally through 2017 to 2030,2032, depending on the particular State’s rules The Company did not make a Section 338 election to treat the purchaserules. A portion of the common stock of Photo Therapeutics, Inc. and Photo Therapeutics, Ltd. as an asset purchase.State loss carryforwards have been placed under a valuation allowance, approximating $120.
 
In addition, the Company hadhas approximately $1,351,000$1.5 million of FederalAMT credits. The Company also has foreign tax credit carryforwards and alternative minimumapproximating $446. None of the Federal research tax credits of $112,000 as of December 31, 2010. The credit carryforwards have begun, and continue, to expire over the ensuing 20 years. Primarilyfrom Pre-merged PhotoMedex are deemed utilizable due to Federal rules applicable to the acquisitionconstraints of SLT, approximately $310,000 of the credit carryforward is subject to severe utilization constraints and accordingly have been ascribed no value in the deferred tax asset.
Net deductible, or favorable, temporary differences were approximately $27,260,000 at December 31, 2010. Of that amount, $26,023,000 were usable for federal tax purposes in the U.S. and the remaining $1,237,000 were usable for tax purposes in the U.K.


Section 382.
 
F - 33


The changes in the deferred tax asset are as follows.
  December 31, 
  2010  2009 
       
Beginning balance, gross $59,431,000  $51,838,000 
         
Net changes due to:        
Operating loss carryforwards
  2,595,000   5,778,000 
         
Temporary Differences  (3,332,000)  1,736,000 
         
Other, including credit carryforwards
  275,000   79,000 
         
Ending balance, gross  58,969,000   59,431,000 
         
Less: valuation allowance  (58,969,000)  (59,431,000)
         
Ending balance, net $-  $- 
         
The ending balancesbalance of the deferred tax asset have been fully reserved, reflectingat December 31, 2012 has a valuation allowance of $13,170, which offsets the uncertainties as to realizability evidenced by the Company’s historical resultsgross valuation of Federal, UK and restrictions on the usage of the net operating lossState NOL carryforwards.
 
Deferred tax assets (liabilities) are comprised of the following.following:
 
 December 31,  December 31, 
 2010  2009  2012  2011 
            
Loss carryforwards $47,582,000  $44,986,000  $20,680  $28,167 
Carryforward and AMT credits  1,153,000   878,000 
AMT credits:  1,495   203 
Foreign tax credits:  446   - 
Temporary differences        
Accrued employment expenses  551,000   1,452,000   718   597 
Amortization and write-offs  325,000   2,872,000   10,557   (5,744)
Bad debts  99,000   141,000 
Deferred R&D costs  3,864,000   3,763,000   3,670   3,786 
Deferred revenues  189,000   233,000   301   211 
Depreciation  3,674,000   3,560,000   5,537   3,760 
Inventory reserves  659,000   908,000 
Doubtful accounts  2,121   1,086 
Other accruals and reserves  527,000   292,000   617   2,050 
U.K. capital and research allowances, etc.  346,000   346,000 
Return allowances  4,118   2,181 
        
Gross deferred tax asset  58,969,000   59,431,000   50,260   36,297 
                
Less: valuation allowance  (58,969,000)  (59,431,000)  (13,170)  (3,241)
                
Net deferred tax asset $-  $-  $37,090  $33,056 
        
Among current assets $18,633  $10,079 
Among other non-current assets  18,457   22,977 
 
Benefits that may be realized from components
PhotoMedex files corporate income tax returns in the deferredUnited States, both in the Federal jurisdiction and in various State jurisdictions. The Company is subject to Federal income tax assetexamination for calendar tax years 2009 through 2012 and is also generally subject to various State income tax examinations for calendar years 2005 through 2012. Photo Therapeutics Limited files in the United Kingdom. Radiancy (Israel) Limited files in Israel.

F-29


With the exception of the Israeli subsidiary, the Company has not received final tax assessments since inception. The Israeli subsidiary has received final tax assessments for the year ended December 31, 2006. In respect of this assessment, the Israeli subsidiary recorded in 2008 an accumulated tax provision in an amount of $500,000 and made a payment of the Israeli tax authority during 2009.
Under Israeli law, the Israeli subsidiary is entitled to various tax benefits by virtue of the “approved enterprise” status that were contributedwas granted by acquired companiesthe Investment Center to a number of its production facilities. The two principal benefits to which the Israeli subsidiary is entitled, are as follows:
Reduced tax rates: The Israeli subsidiary is entitled to reduced tax rates during a benefits period of from seven to ten years (depending on the classification of the Company as a foreign-invested company) and from the year in which the enterprise first earns taxable income. Since the Israeli subsidiary had taxable income in 2001, the benefits period attributable to the approved enterprise commenced in that year.
Income deriving from the approved enterprise will be recognized directlytax-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 will be 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 25% tax in respect of the mount distributed. The Israeli subsidiary intends to reinvest the amount of such tax-exempt income and not to distribute it as dividends.
On January 2, 2003, the Israeli subsidiary received its second letter of approval from the Investment Center to expand its facilities. The benefits regarding the second letter were granted in respect of the Israeli subsidiary’s income that derives from revenues included in the Company’s Statementletter of Operations. Withinapproval, subject to the net operating loss carryforwardfulfillment of the terms contained in the letter of approval. The benefits period attributed to this letter of approval commenced in 2003.
On January 25, 2005, the Israeli subsidiary received its third letter of approval from the Investment Center to expand its facilities. The benefits regarding the third letter were granted in respect of the Israeli subsidiary’s income that derives from revenues included in the letter of approval, subject to the fulfillment of the terms contained in the letter of approval. The benefits period attributed to this letter of approval commenced in 2005.
Accelerated depreciation. The Company is entitled to accelerate depreciation in respect of equipment used by the approved enterprise during the first five tax years of the operation of each asset.
Conditions for entitlement to the benefits. 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. Failure to comply with the conditions may result in the cancellation of the benefit, in whole or in part, and the Company may have to refund the amounts received, plus linkage differentials and interest. Management of the Israeli subsidiary believes that as of December 31, 2010 are approximately $6,651,000 of benefit from tax deductions from2009 the exercise of Company stock options. The preponderance of these options were made to employees and therefore no book expensesubsidiary was recognized on their grant. Such benefits, if recognized upon a reductionin compliance with the above-mentioned conditions.
On July 23, 2009, as part of the valuation allowance,Economic Efficiency Law (Legislative Amendment for the Implementation of the Economic Plan for the years 2009 and 2010) – 2009 (the “Arrangements Law”), Article 126 of the Income Tax Ordinance (New Version) – 1961 was amended, whereby the corporate tax rate would be gradually reduced commencing in the 2011 tax year and thereafter as follows: 2011 – 24%; 2012 – 23%; 2013 – 22%; 2014 – 21%; 2015 – 20% and 2016 and thereafter - 18%. On December 6, 2011, the Law for the Change in the Tax Burden (Legislative Amendments) – 2011 was publicized. As part of the law, among others, the Income Tax Ordinance (New Version) – 1961 were amended whereby, commencing in 2012, the reduction in the corporate tax rates will be creditedcancelled and the Israeli corporate tax rate will be 25%.
Change in U.K. rates.  In addition, effective for tax periods beginning on or after March 31, 2012, the United Kingdom tax rate was reduced from 26% to 24%. This change in rate will affect the tax provision with regard to the paid in capital accounttax attributes of Photo Therapeutics Limited, the Company.United Kingdom subsidiary.
 
F-30



Uncertainty in income taxes.The Company adoptedapplies ASC Topic 740 which clarifies the accounting for uncertainty in income taxes recognized in the financial statement in accordance.statements. This interpretationstandard prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. There were no significant matters determinedThe Company policy is to be unrecognized tax benefits taken or expected to be


F - 34


takenrecord penalty and interest in a tax return that have been recorded on the Company's consolidated financial statements for the year ended December 31, 2010.general and administrative expenses.
 
Additionally, ASC Topic 740 provides guidance on the recognition of interest and penalties related to income taxes. There were no interest or penalties related to income taxes that have been accrued or recognized as of and for the years ended December 31, 2010, 2009 and 2008.
The Company files corporateand its subsidiaries file income tax returns in the United States, both inIsrael and the Federal jurisdictionUnited Kingdom.
Management has conducted an  analysis of the facts and in various state jurisdictions. The Company is subject to Federallaw surrounding the income tax examination for calendar tax years 2007 through 2010uncertainties, and has found that such liability as may have arisen was of a much lesser magnitude and is also generally subjectable to various state incomebe extinguished by loss carryforwards and carrybacks.
Reconciliation of the beginning and ending amount of unrecognized tax examinations for calendar years 2004 through 2010.benefits is as follows:
    
Balance at January 1, 2010 $2,700 
Additions / Reductions during 2010
  - 
Balance December 31, 2010  2,700 
Additions/ Reductions during 2011  - 
Balance at December 31, 2011  2,700 
Additions / Reductions during 2012  (2,325)
Balance at December 31, 2012 $375 
 
Note 1613
Significant Alliances/Agreements:Customer Concentration:
 
On March 31, 2005, the Company entered into a Sales and Marketing Agreement with GlobalMed (Asia) Technologies Co., Inc. (“GlobalMed”). Under this agreement, GlobalMed acted as master distributor in the Pacific Rim for the Company’s XTRAC excimer laser and for the Company’s LaserPro® diode surgical laser system. GlobalMed has withdrawn from representation of the diode laser but GlobalMed’s territory was substantially expanded in 2010 as it has also added the Company’s VTRAC lamp system and the Omnilux LED systems to its product suite. For the years ended December 31, 2010, 2009 and 2008, sales to GlobalMed were $4,258,826, $2,635,300 and $2,957,900, respectively.
  For the Year Ended December 31,
  2012 2011 2010
Ya-Man 9% 20% 42%
 
On March 31, 2006, the Mount Sinai SchoolNo other customer was more than 10% of Medicine of New York University granted the Company an exclusive license, effective April 1, 2006, to use Mount Sinai's patented methodology for utilization of ultraviolet laser light for the treatment of vitiligo. The licensed patent is US Patent No. 6,979,327, Treatment of Vitiligo. It was issued December 27, 2005, and the inventor is James M. Spencer, MD, a member of the Company’s Scientific Advisory Board. The Company is obligated to pay royalties, quarterly, over the life of the agreement.
Pursuant to the license agreement, the Company reimbursed $77,876 to Mount Sinai, over the first 18 months of the license term and at no interest, for patent prosecution costs incurred. The Company is also obligated to pay Mount Sinai a royalty on a combined base of domestic sales of XTRAC treatment codes used for psoriasis as well as for vitiligo. (See Note 5Patents and Licensed Technologies). The Company has paid and/or accrued Mount Sinai royalties of $167,213, $169,979 and $156,179total company revenues for the years ended December 31, 2010, 20092012, 2011 and 2008, respectively.2010.
 
Note 17
Significant Customer Concentration:
 
For the year ended December 31, 2010, revenues to the Company’s international master distributor (GlobalMed Technologies) were $4,258,826, or 12.2% of total revenues for the period. At December 31, 2010, the accounts receivable balance from GlobalMed Technologies was $470,997, or 14.4% of total net accounts receivable. No one customer represented 10% or more of total revenues for the year ended December 31, 2009 and 2008.
F-31


Note 1814
Business Segment and Geographic Data:
 
Effective January 1, 2010,December 13, 2011, the Company reorganized its business into fourthree operating unitssegments to better align its organization based upon the Company’s management structure, products and services offered, markets served and types of customers.customers, as follows: The Physician DomesticConsumer segment derives its primary 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 XTRAC laser sales, andskincare products, the sales of skincaresurgical disposables and LED products inaccessories to hospitals and surgery centers and on the United States.repair, maintenance and replacement parts on our various products. The Physician InternationalProfessional segment in comparison,  generates revenues from the sale of equipment, skincaresuch as lasers, medical and esthetic light and heat based products and LED products to dermatologists outside the United States through a network of distributors. The Other Channels segment derives revenues by selling skincare and LED products to indoor tanning and spa markets and on-line and television retail consumer markets for home use on both a domestic and an international basis. The Surgical Products segment generates revenues by selling laser products and disposables to hospitals and surgery centers on both a domestic and an international basis.products. Management reviews financial information presented on an operating segment basis for the purposes of making certain operating decisions and assessing financial performance.
 


F - 35


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. Goodwill of $12,793,455, $4,037,934 and $2,737,811 has been allocated to the Physician Domestic, Physician International and Other Channels segments, respectively, based upon the fair value of the reporting segments as of December 31, 2010.
 
The following tables reflect results of operations from our business segments for the periods indicated below:
 
Year ended December 31, 20102012
 
PHYSICIAN
DOMESTIC
  PHYSICIAN INTERN’L  
OTHER
CHANNELS
  
SURGICAL
PRODUCTS
  TOTAL  CONSUMER  PHYSICIAN RECURRING  PROFESSIONAL  TOTAL 
Revenues $20,196,688  $8,381,136  $2,551,429  $3,672,282  $34,801,535  $188,425  $21,284  $10,942  $220,651 
Costs of revenues  9,464,991   6,110,186   1,467,293   1,677,432   18,719,902   28,965   11,512   6,165   46,642 
Gross profit  10,731,697   2,270,950   1,084,136   1,994,850   16,081,633   159,460   9,772   4,777   174,009 
Gross profit %  53.1%  27.1%  42.5%  54.3%  46.2%  84.6%  45.9%  43.7%  78.9%
                                    
Allocated operating expenses:                                    
Selling, general and administrative  10,868,939   1,061,952   643,107   183,103   12,757,101 
Engineering and product development  470,400   375,633   373,597   123,726   1,343,356   876   1,201   837   2,914 
Selling and marketing expenses  102,736   10,203   3,548   116,487 
                                    
Unallocated operating expenses  -   -   -   -   7,238,362   -   -   -   27,330 
  11,339,339   1,437,585   1,016,704   306,828   21,338,819   103,612   11,404   4,385   146,731 
Income (loss) from operations  (607,642)  833,365   67,432   1,688,021   (5,257,186)  55,848   (1,632)  392   27,278 
                                    
Interest expense, net  -   -   -   -   (3,268,905)
Change in fair value of warrant  -   -   -   -   (197,098)
Interest and other financing income (expense), net  -   -   -   (351)
                                    
Net (loss) income $(607,642) $833,365  $67,432  $1,688,021  $(8,723,189)
Net income (loss) before taxes $55,848  $( 1,632) $392  $26,927 
                                    


 

F - 36F-32

 


 

Year ended December 31, 20092011
 
PHYSICIAN
DOMESTIC
  PHYSICIAN INTERN’L  
OTHER
CHANNELS
  
SURGICAL
PRODUCTS
  TOTAL  CONSUMER  PHYSICIAN RECURRING  PROFESSIONAL  TOTAL 
Revenues $18,844,995  $6,665,199  $3,555,310  $3,622,580  $32,688,084  $125,581  $829  $5,672  $132,082 
Costs of revenues  9,283,459   3,966,749   1,397,902   2,777,856   17,425,966   23,309   456   2,531   26,296 
Gross profit  9,561,536   2,698,450   2,157,408   844,724   15,262,118   102,272   373   3,141   105,786 
Gross profit %  50.7%  40.5%  60.7%  23.3%  46.7%  81.4%  45.0%  55.4%  80.1%
                                    
Allocated operating expenses:                                    
Selling, general and administrative  12,169,919   1,557,889   622,831   242,692   14,593,331 
Engineering and product development  310,508   184,729   173,163   469,325   1,137,725   837   27   193   1,057 
Selling and marketing expenses  59,424   319   2,442   62,185 
                                    
Unallocated operating expenses  -   -   -   -   8,489,947   -   -   -   45,192 
  12,480,427   1,742,618   795,994   712,023   24,221,003   60,261   346   2,635   108,434 
Income (loss) from operations  (2,918,891)  955,832   1,361,414   132,707   (8,958,885)  42,011   27   506   (2,648)
                                    
Interest expense, net  -   -   -   -   (2,370,676)
Change in fair value of warrants  -   -   -   -   808,786 
Interest and other financing income (expense), net  -   -   -   (68)
                                    
Net (loss) income $(2,918,891) $955,832  $1,361,414  $132,707  $(10,520,775)
Net income (loss) before taxes $42,011  $27  $506  $(2,716)
                                    
 

Year ended December 31, 20082010
                
  PHYSICIANDOMESTIC  PHYSICIAN INTERN’L  
OTHER
CHANNELS
  SURGICAL PRODUCTS  TOTAL 
Revenues $21,058,919  $6,005,170  $1,968,155  $5,738,048  $34,770,292 
Costs of revenues  9,663,486   2,657,928   696,388   3,977,515   16,995,317 
Gross profit  11,395,433   3,347,242   1,271,767   1,760,533   17,774,975 
Gross profit %  54.1%  55.7%  64.6%  30.7%  51.1%
                     
Allocated operating expenses:                    
Selling, general and administrative  14,139,011   830,304   312,491   377,489   15,659,295 
Engineering and product development  475,425   102,727   72,553   422,510   1,073,215 
                     
Unallocated operating expenses  -   -   -   -   11,137,812 
   14,614,436   933,031   385,044   799,999   27,870,322 
Income (loss) from operations  (3,219,003)  2,414,211   886,723   960,534   (10,095,347)
                     
Interest expense, net  -   -   -   -   (1,032,597)
Change in fair value of warrant  -   -   -   -   - 
Discontinued operations:  -   -   -   -     
Income from discontinued operations                  285,712 
Loss on sale of discontinued operations  -   -   -   -   (448,675)
                     
Net (loss) income $(3,219,003) $2,414,211  $886,723  $960,534  $(11,290,907)
  CONSUMER  PHYSICIAN RECURRING  PROFESSIONAL  TOTAL 
Revenues $66,655  $-  $3,416  $70,071 
Costs of revenues  15,039   -   1,426   16,465 
Gross profit  51,616   -   1,990   53,606 
Gross profit %  77.4%  -%  58.3%  76.5%
                 
Allocated operating expenses:                
Engineering and product development  585   -   254   839 
Selling and marketing expenses  27,470   -   1,480   28,950 
                 
Unallocated operating expenses  -   -   -   5,646 
   28,055   -   1,734   35,435 
Income from operations  23,561   -   256   18,171 
                 
Interest and other financing income (expense), net  -   -   -   (283)
                 
Net income before taxes $23,561  $-  $256  $17,888 
                 


 

F - 37F-33

 


  December 31, 
Assets: 2010  2009 
Total assets for reportable segments $44,986,796  $49,890,944 
Other unallocated assets  4,508,922   3,277,202 
     Consolidated total $49,495,718  $53,168,146 
 
For the years ended December 31, 2012, 2011 and 2010, 2009 and 2008, there were no material net revenues attributed to an individual foreign country. Net revenues by geographic area were as follows:
 
  Year Ended December 31, 
  2010  2009  2008 
Domestic $25,237,330  $25,624,725  $27,398,356 
Foreign  9,564,205   7,063,359   7,371,936 
  $34,801,535  $32,688,084  $34,770,292 
  Year Ended December 31, 
  2012  2011  2010 
North America 1
 $163,973  $91,821  $34,971 
Asia Pacific 2
  28,031   28,213   30,199 
Europe (including Israel)  25,521   9,994   3,604 
South America  3,126   2,054   1,297 
  $220,651  $132,082  $70,071 
             
1 United States
 $135,950  $75,341  $33,138 
2  Japan
 $21,134  $25,924  $29,530 
For the years ended December 31, 2012, 2011 and 2010, long-lived assets by geographic area were as follows:
  Year Ended December 31, 
  2012  2011  2010 
North America 1
 $5,772  $4,496  $4 
Asia Pacific 2
  -   -   - 
Europe (including Israel)  987   828   755 
South America  -   -   - 
  $6,759  $5,324  $759 


F-34


 
Note 1915
Quarterly Financial Data (Unaudited):
 
  For the Quarter Ended 
2010 Mar. 31  Jun. 30  Sep. 30  Dec. 31 
Revenues $6,687,000  $8,011,000  $9,585,000  $10,519,000 
Gross profit  3,093,000   3,926,000   3,955,000   5,108,000 
Net loss  (3,916,000)  (1,160,000)  (1,835,000)  (1,812,000)
Basic and diluted net loss per share $(1.75) $(0.45) $(0.66) $(0.65)
Shares used in computing basic and diluted net loss per share  2,238,456   2,555,516   2,772,637   2,784,899 
                 
2009 Mar. 31  Jun. 30  Sep. 30  Dec. 31 
Revenues $7,498,000  $8,313,000  $8,597,000  $8,279,000 
Gross profit  3,701,000   4,407,000   3,716,000   3,438,000 
Net loss  (3,512,000)  (2,709,000)  (2,011,000)  (2,288,000)
Basic and diluted net loss per share(1)(2) $(2.34) $(1.80) $(1.34) $(1.12)
Shares used in computing basic and diluted net loss per share(1)(2)  1,500,835   1,501,632   1,505,529   2,047,500 
                 
2008 Mar. 31  Jun. 30  Sep. 30  Dec. 31 
Revenues $8,330,000  $9,390,000  $8,797,000  $8,253,000 
Gross profit  4,213,000   5,355,000   4,727,000   3,480,000 
Net loss  (2,542,000)  (1,607,000)  (1,787,000)  (5,354,000)
Basic and diluted net loss per share(1)(2) $(1.69) $(1.07) $(1.19) $(3.57)
Shares used in computing basic and diluted net loss per share(1)(2)  1,500,767   1,500,767   1,500,767   1,500,767 
  For the Quarter Ended 
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 
                 
2010 Mar. 31  Jun. 30  Sep. 30  Dec. 31 
Revenues $6,575  $12,746  $27,861  $22,889 
Gross profit  4,224   8,839   21,133   19,410 
Net income  951   1,876   5,845   2,929 
Net income per share:                
Basic $0.09  $0.18  $0.57  $0.29 
Diluted $0.08  $0.16  $0.50  $0.25 
Shares used in computing net income per share:                
Basic  10,256,364   10,256,364   10,256,364   10,256,364 
Diluted  11,664,900   11,719,104   11,760,412   11,794,422 

(1)  Adjusted to reflect the reverse stock split of 1-for-7 effective January 26, 2009.
(2)  Adjusted to reflect the reverse stock split of 1-for-6 effective February 3, 2010.

 

F - 38F-35

 

 
Note 2016
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, 2010:
               
Reserve for Doubtful Accounts $400,276  $118,892  $-  $254,193  $264,975 
Reserve for Excess and Obsolete Inventories $ 2,388,262  $ 181,355  $ -  $ 835,455  $ 1,734,162 
 
For The Year Ended December 31, 2009:
                    
Reserve for Doubtful Accounts $486,162  $136,424  $629  $222,939  $400,276 
Reserve for Excess and Obsolete Inventories $ 1,836,441  $ 449,726  $ 180,968  $ 78,873  $ 2,388,262 
 
For The Year Ended December 31, 2008:
                    
Reserve for Doubtful Accounts $520,913  $144,750  $-  $179,501  $486,162 
Reserve for Excess and Obsolete Inventories $ 1,124,345  $ 769,323  $ -  $ 57,227  $ 1,836,441 
     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, 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 
 
For The Year Ended December 31, 2010:
                    
Reserve for Doubtful Accounts $327  $1,509  $-  $( 12) $1,824 
Reserve for Sales Returns $402  $3,723  $-  $( 719) $3,406 

(1)  Represents additions due to the acquisition of PTL in February 2009.reverse merger on December 13, 2011.
(2)  Represents write-offs of specific accounts receivable and inventories.returns.


F - 39





PHOTOMEDEX, INC.
a Nevada corporation

LIST OF SUBSIDIARIES
(as of December 31, 2010)


The active subsidiaries are:
Photo Therapeutics, Inc., a Delaware corporation
Photo Therapeutics Limited, a company organized under the laws of England and Wales
ProCyte Corporation, a Washington corporation
SLT Technology, Inc., a Delaware corporation



 
 
 
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F-36