UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10 - 10−Q

(Mark One)

 

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

 

For the quarterly period endedended: March 31, 2017

OR2018

 

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

 

For the transition period from _____________________ to ________________________

 

Commission File Number0-11365

Number: 000-11635

 

PHOTOMEDEX, INC.FC GLOBAL REALTY INCORPORATED

(Exact name of registrant as specified in its charter)

 

Nevada

Nevada

59-2058100

(State or other jurisdiction

of incorporation

or organization)

 

59-2058100

(I.R.S. Employer

Identification No.)

 

100 Lakeside Drive,40 Ramland Road South, Suite 100, Horsham, Pennsylvania 19044200 Orangeburg, NY 10962

(Address of principal executive offices, including zip code)Zip Code)

 

(215) 619-3600

(Registrant'sRegistrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant: (i)registrant (1) 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)(2) has been subject to such filing requirements for the past 90 days.

Yesx   No¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate webWeb 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).

Yesx   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, or an emerging growth company. See the definitions of “large accelerated filer," “accelerated filer”filer,” “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer¨Accelerated filer¨
Non-accelerated filer ☐   (Do not check if a smaller reporting company)Smaller reporting company ☒  
 
Non-accelerated filer¨Smaller reportingEmerging growth companyx

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for comply with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

Act).    Yes¨  Nox ☒  

 

The numberAs of May 21, 2018, there were 11,868,619 shares outstandingof common stock of the issuer's common stock as of May 16, 2017 was 4,361,094 shares.registrant issued and outstanding.

 

 

 

PHOTOMEDEX, INC.FC GLOBAL REALTY INCORPORATED

 

INDEX TO FORMQuarterly Report on Form 10-Q

Period Ended March 31, 2018

TABLE OF CONTENTS

 

 PAGEPART I
Part I. Financial Information:FINANCIAL INFORMATION 
   
ITEMItem 1.  Financial Statements:
a.Condensed Consolidated Balance Sheets as of March 31, 2017 (unaudited) and December 31, 2016Financial Statements3
b.Item 2.Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2017 and 2016 (unaudited)4
c.Condensed Consolidated Statement of Changes in Equity (Deficit) for the three months ended March 31, 2017 (unaudited)5
d.Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 (unaudited)6
e.Notes to Unaudited Condensed Consolidated Financial Statements8
ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations27
Item 3.Quantitative and Qualitative Disclosures About Market Risk37
Item 4.Controls and Procedures38
   
 ITEM 3.  Quantitative and Qualitative Disclosure about Market RiskPART II37
 
 ITEM 4.  Controls and Procedures37
Part II. Other Information:OTHER INFORMATION 
   
Item 1.ITEM 1.  Legal Proceedings38
Item 1A.ITEM 1A.  Risk Factors38
Item 2.ITEM 2.  Unregistered Sales of Equity Securities and Use of Proceeds3839
Item 3.ITEM 3.  Defaults Upon Senior Securities3839
Item 4.ITEM 4.  Mine Safety Disclosures3839
Item 5.ITEM 5.  Other Information38
ITEM 6.  Exhibits38
Signatures39
Item 6.Exhibits
Certifications39

2


PART I – Financial Information

FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS.

ITEM 1. Financial Statements

PHOTOMEDEX, INC.FC GLOBAL REALTY INCORPORATED

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Page
Condensed Consolidated Balance Sheets as of March 31, 2018 (unaudited) and December 31, 20174
Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2018 and 2017 (unaudited)5
Condensed Consolidated Statement of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Deficit for the Three Months Ended March 31, 2018 (unaudited)6
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017 (unaudited)7

Notes to Condensed Consolidated Financial Statements (unaudited)

8

FC GLOBAL REALTY INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In (In thousands, except share and per share amounts)

  

 March 31, 2017  December 31, 2016  March 31, 2018 December 31, 2017 
 (unaudited)    (unaudited)     
ASSETS                
Current assets:                
Cash and cash equivalents $3,022  $2,335  $

2,184

  $948 
Restricted cash  345   342 
Accounts receivable, net of allowance for doubtful accounts of $0 and $1,192, respectively  1,496   4,125 
Prepaid expenses and other current assets  3,338   3,253   

425

   646 
Receivable from acquirer  1,750   - 
Assets held for sale  -   8,362 
Total current assets  9,951   18,417   

2,609

   1,594 
        
Non-current assets:        
Investment properties  2,055   2,055 
Investment in other company, net  1,806   1,806 
Property and equipment, net  102   77   5   5 
Receivable from acquirer  4,000   - 
Other assets, net  6   7   

318

   334 
Total non-current assets  

4,184

   4,200 
Total assets $14,059  $18,501  $

6,793

  $5,794 
                
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)        
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT        
Current liabilities:                
Notes payable $577  $778 
Accounts payable  4,052   6,648   

514

   612 
Accrued compensation and related expenses  4,055   4,029   

573

   467 
Other accrued liabilities  5,275   8,091   

2,760

   2,450 
Current portion of deferred revenues  -   1,141 
Total current liabilities  13,382   19,909   

4,424

   4,307 
        
Non-current liabilities:        
Option to purchase Redeemable Convertible Preferred Stock (Note 5)  3,986   4,390 
Note payable, net of current portion  453   454 
Total non-current liabilities  4,439   4,844 
Total liabilities  13,382   19,909   

8,863

   9,151 
                
Commitment and contingencies (See Note 9)        
Commitment and contingencies (Note 4)        
Redeemable Convertible Preferred Stock Series B, $.01 par value; 15,000,000 shares authorized at March 31, 2018 (unaudited) and December 31, 2017; 3,725,000 and 1,500,000 issued and outstanding at March 31, 2018 (unaudited) and December 31, 2017, respectively, net of amount allocated to option to purchase additional shares; Aggregate liquidation preference $3,807 and $1,503 at March 31, 2018 (unaudited) and December 31, 2017, respectively (Note 5)  5,036   87 
                
Stockholders' equity (deficit):        
Preferred Stock, $.01 par value, 5,000,000 shares authorized; 0 shares issued and outstanding at March 31, 2017 and December 31, 2016  -   - 
Common Stock, $.01 par value, 50,000,000 shares authorized; 4,361,094 shares issued and outstanding at March 31, 2017 and December 31, 2016  221   221 
Stockholders’ deficit (Note 5):        
Common Stock, $.01 par value, 500,000,000 shares authorized at March 31, 2018 (unaudited) and December 31, 2017; 11,868,619 shares issued and outstanding at March 31, 2018 (unaudited) and December 31, 2017  119   119 
Preferred A Stock $.01 par value, 3,000,000 shares authorized at March 31, 2018 (unaudited) and December 31, 2017; 123,668 issued and outstanding at March 31, 2018 (unaudited) and December 31, 2017;  1   1 
Additional paid-in capital  119,396   118,585   132,460   132,446 
Accumulated deficit  (117,484)  (115,635)  

(138,718

)  (135,022)
Accumulated other comprehensive loss  (1,456)  (4,579)  

(1,141

)  (1,162)
Total stockholders' equity (deficit)  677   (1,408)
Total liabilities and stockholders’ equity (deficit) $14,059  $18,501 
Total stockholders’ deficit attributable to FC Global Realty Incorporated  

(7,279

)  (3,618)
Noncontrolling interest  173   174 
Total stockholders’ deficit  

(7,106

)  (3,444)
Total liabilities, redeemable convertible preferred stock and stockholders’ deficit $

6,793

  $5,794 

 

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

3


PHOTOMEDEX, INC.FC GLOABAL REALTY INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In  (In thousands, except share and per share amounts)

(unaudited)

 

  For the Three Months Ended March 31, 
  2017  2016 
Revenues $3,539  $11,233 
Cost of revenues  100   2,754 
         
Gross profit  3,439   8,479 
         
Operating expenses:        
Engineering and product development  143   314 
Selling and marketing  620   7,803 
General and administrative  2,342   3,965 
Loss on disposal of assets   2,085   843 
   5,190   12,925 
         
Loss before interest and other financing expense, net  (1,751)  (4,446)
         
Interest and other financing expense, net  (77)  (333)
         
Loss before income taxes  (1,828)  (4,779)
         
Income tax expense  (21)  (93)
         
Net loss $(1,849) $(4,872)
         
Basic net loss per share: $(0.44) $(1.18)
  $(0.44) $(1.18)
Shares used in computing net loss per share:        
Basic and diluted  4,237,517   4,155,464 
Other comprehensive income (loss)        
Reclassification of cumulative translation adjustment to statement operations $3,021   - 
Foreign currency translation adjustments $102  $(88)
Total comprehensive income (loss) $3,123  $(88)
         
Comprehensive income (loss) $1,274  $(4,960)
  For the Three Months Ended March 31, 
  2018  2017 
       
Operating expenses:        
General and administrative $

1,210

  $ 
 Operating loss  

(1,210

)   

Revaluation of option to purchase redeemable convertible preferred stock (Note 5) 

  273    
Interest and other financing expense, net  34    
Loss from continuing operations, before income taxes  

(1,517

)   

Income tax provision 

  212    
Loss from continuing operations  

(1,729

)   
Discontinued operations:        

Gain (loss) from discontinued operations (Note 2) 

  79  (1,849)
         
Net loss including portion attributable to noncontrolling interest  

(1,650

)   

Loss attributable to noncontrolling interest 

  1    
Net loss  

(1,649

)   

Dividend on redeemable convertible preferred stock 

  (79)   

Accretion of redeemable convertible preferred stock to redemption value 

  (1,968)   

Net loss attributable to common stockholders 

 $

(3,696

) $(1,849)
         
Basic and diluted net loss per share (Note 3):        
Continuing operations $

(0.29

) $ 
Discontinued operations  0.01   (0.44)
  $

(0.28

) $(0.44)
         
Shares used in computing basic and diluted net loss per share  11,868,619   4,237,517 
         
Other comprehensive loss:        
Reclassification of cumulative translation adjustment $  $3,021 
Foreign currency translation adjustments  21   102 
Total other comprehensive income  21   3,123 

Comprehensive income (loss) 

 $

(1,628

) $1,274 

 

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

4


PHOTOMEDEX, INC.FC GLOBAL REATLY INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (DEFICIT)REDEEMABLE CONVERTIBLE

PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT

FOR THE THREE MONTHS ENDED MARCH 31, 20172018

(In

  (In thousands, except share and per share amounts)amounts)

(Unaudited)(unaudited)

  Common Stock  Additional
Paid-In
  Accumulated  Accumulated
Other
Comprehensive
    
  Shares  Amount  Capital  Deficit  Loss  Total 
BALANCE, JANUARY 1, 2017  4,361,094  $221  $118,585  $(115,635) $(4,579) $(1,408)
Stock-based compensation related to stock options and restricted stock      -   811   -   -   811 
Other comprehensive income  -   -   -   -   3,123   3,123 
                         
Net loss for the three months ended March 31, 2017      -   -   (1,849)  -   (1,849)
                         
BALANCE, MARCH 31, 2017  4,361,094  $221  $119,396  $(117,484) $(1,456) $677 
                                   
  Redeemable
Convertible Preferred
Stock
Series B
 Stockholders’ deficit 
                     Accumulated Other Comprehensive
Loss
       
         Series A Preferred
Stock
 Additional Paid-In
Capital
           
   Common Stock   Accumulated
Deficit
  Noncontrolling
Interest
    
  Shares Amount Shares Amount Shares Amount     Total 
BALANCE, JANUARY 1, 2018  1,500,000 $87  11,868,619 $119  123,668 $1 $132,446 $(135,022)$(1,162)$174 $(3,444)
Stock based compensation           —    14        14 
Issuance of Series B redeemable convertible preferred stock and embedded option  2,225,000  2,225                   
Exercise of series B redeemable convertible preferred stock written call option (Note 5)    677                   
Dividend on Series B redeemable convertible preferred stock (Note 5)    79            (79)     (79)
Accretion of Series B redeemable convertible preferred stock to redemption value (Note 5)    1,968            (1,968)     (1,968)
Foreign currency translation adjustment                  21   21
Net Loss                

(1,649

)   (1) 

(1,650

)
BALANCE, MARCH 31, 2018  3,725,000 $5,036  11,868,619 $119  123,668 $1 $132,460 $(138,718) $(1,141)$173 $(7,106)

 

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

5


PHOTOMEDEX, INC.FC GLOBAL REALTY INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands,unaudited) (In thousands)

(Unaudited)

 

  For the Three Months Ended
March 31,
 
  2017  2016 
Cash Flows From Operating Activities:        
Net Loss $(1,849) $(4,872)
Adjustments to reconcile net loss to net used in operating activities:        
Depreciation and amortization  (4)  151 
Provision for doubtful accounts  19   102 
Deferred income taxes  -   (45)
Stock-based compensation  811   433 
Loss on disposal of assets  2,085   843 
Changes in operating assets and liabilities:        
Accounts receivable  2,620   3,141 
Inventories  -   (57)
Prepaid expenses and other assets  193   (1,142)
Accounts payable  (2,596)  512 
Accrued compensation and related expenses  25   386 
Other accrued liabilities (see Note 7)  (2,831)  (365)
Deferred revenues  (1,146)  (413)
Adjustments related to operations  (824)  3,546 
Net cash provided by (used in) operating activities  (2,673)  (1,326)
         
Cash Flows From Investing Activities:        
Increase in restricted cash  (3)  (784)
Purchases of property and equipment  15   (94)
Proceeds from sale of assets (see Note 1)  3,250   - 
Net cash provided by (used in) investing activities  3,262   (878)
  For the Three Months Ended March 31, 
  2018  2017 
Cash Flows From Operating Activities:        
Net loss $

(1,728

) $ 
Adjustments to reconcile loss to net cash provided by (used in) operating activities related to continuing operations:        
Stock-based compensation  14    
Revaluation of option to purchase redeemable convertible preferred stock (Note 5)  273    
   Other assets, net  16   
Changes in operating assets and liabilities:        
Prepaid expenses and other current assets  220    
Accounts payable  (98)   
Accrued compensation and related expenses  106   
Other accrued liabilities  310    
Adjustments related to continuing operations  (887)   

Adjustments related to discontinued operations 

  79   (2,673)
Net cash used in operating activities  (808)  (2,673)
Cash Flows From Investing Activities:        
Purchases of property and equipment      
Net cash used in investing activities – continuing operation     
Net cash provided by investing activities – discontinued operations     3,262 

Net cash (used in) provided by investing activities

  

  3,262 
Cash Flows From Financing Activities:        

Proceeds from issuance of redeemable convertible preferred stock and embedded option (Note 5) 

  2,225    

Payment of notes payable 

  

(202

)   

Net cash provided by financing activities –continuing operation 

  2,023    
Net cash provided by (used in) financing activities  

2,023

    
Effect of exchange rate changes on cash and cash equivalents  21  98 
Change in cash and cash equivalents  

1,236

   687 
Cash and cash equivalents at the beginning of period  948   2,335 
Cash and cash equivalents at the end of period $

2,184

  $3,022 
Supplemental disclosure of non-cash activities:        
Cash paid for income taxes $  $12 
Cash paid for interest $34  $ 
Receivable from acquirer of group of assets $  $5,750 

Partial exercise of written call option on redeemable convertible preferred stock (Note 5) 

 $677  $ 

Dividend on redeemable convertible preferred stock (Note 5) 

 $79  $ 

Accretion of redeemable convertible preferred stock to redemption value (Note 5) 

 $1,968  $ 

 

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

6


FC GLOBAL REALTY INCORPORATED

PHOTOMEDEX, INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)except share and per share amounts)

(unaudited)

 

  For the Three Months Ended 
March 31,
 
  2017  2016 
       
Cash Flows From Financing Activities:        
Proceeds from notes payable  -   3,960 
Payments on notes payable  -   (1,998)
Net cash provided by financing activities  -   1,962 
         
Effect of exchange rate changes on cash  98   55 
Net decrease in cash and cash equivalents  687   (187)
Cash and cash equivalents, beginning of period  2,335   3,302 
Cash and cash equivalents, end of period $3,022  $3,115 
         
Supplemental information:        
         
Cash paid for income taxes $12  $150 
Cash paid for interest $0  $306 
Receivable from acquirer of group of assets $5,750   - 

Note 1

Background:

 

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

7

Note 1

The Company:

Background

PhotoMedex, Inc.FC Global Realty Incorporated (and its subsidiaries) (the “Company”), re-incorporated in Nevada on December 30, 2010, originally formed in Delaware in 1980, is, since earlier in the process of transitioning from a skin health company providing medical and cosmetic solutions for dermatological conditions to2017, a real estate investmentdevelopment and asset management company holdingconcentrated primarily on investments in a variety of currenthigh quality income producing assets, hotel and future projects, includingresort developments, residential developments and other opportunistic commercial properties such as gas station sites, and hotels and resort communities, as described further in this report.properties.

 

The Company was originally, untilUntil the recent sale of the Company’s last significant business unit (its consumer products division which was sold to ICTV Brands, Inc. on January 23, 2017), as described below and in other sections of this report,the Company was a Global Skin Health company providing integrated disease management and aesthetic solutions to dermatologists, professional aestheticians and consumers. The Company provided proprietary products and services that addressaddressed skin diseases and conditions including psoriasis, acne, actinic keratosis (a precursor to certain types of skin cancer), photo damage and unwanted hair. Starting in August 2014, the Company began to restructure its operations and redirect its efforts in a manner that management expected would result in improved results of operations and address certain defaults in its commercial bank loan covenants. As part of such redirected efforts, management maintained comprehensive efforts to minimize the Company’s operational costs and capital expenditures. During this time the Company also sold off certain business units and product lines to support this restructuring and on January 31, 2017, sold the last remaining major product line, its consumer products division. The Company did not present the consumer products segment as a discontinued operation, since the consumer products represent the entire remaining major operations of the Company and accordingly, following such transaction, the Company will have only minimal operations and assets, with no continuing operations. On September 7, 2016 the Company’s Board of Directors approved a reverse split in a ratio of one-for-five.  The 2016 reverse split was implemented on September 23, 2016 (the “2016 Reverse Split”).  The amount of authorized Common Stock as well as the par value for the Common Stock were not effected.  Any fractional shares resulting from the 2016 Reverse Split were rounded up to the nearest whole share. . As a result, all share and per share information previously presented for periods prior to September 7, 2016 has been retroactively adjusted for the impact of the 2016 Reverse Split.

 

On March 31, 2017, the Company and its newly-formed subsidiary FC Global Realty Operating Partnership, LLC, a Delaware limited liability company (“Acquiror”) entered into an Interest Contribution Agreement (the “Agreement”) with First Capital Real Estate Operating Partnership, L.P., a Delaware limited partnership (“Contributor” (the “Contributor”), and First Capital Real Estate Trust Incorporated a Maryland corporation, (the “Contributor Parent”), and together with Contributor,FC Global Realty Operating Partnership, LLC, the “Contributor Parties”Company’s wholly-owned subsidiary (the “Acquiror”). The parties entered into amendments to the Interest Contribution Agreement on August 3, 2017, October 11, 2017 and December 22, 2017. Pursuant to the Interest Contribution Agreement, as amended (collectively, the “Contribution Agreement”), under which the Contributor will contributecontributed certain real estate assets (the “Contributed Properties”) to the Company’s subsidiary in a series of three installments which will conclude no later than December 31, 2017.Acquiror. In exchange, the Contributor will receivereceived shares of the Company’s Common Stockcommon stock and newly designated Series A Convertible Preferred Stock as described below.

Stock. This transaction closed on May 17, 2017. As a result of this transaction,the Contribution Agreement, the Company willhas primarily become a real estate investmentasset management and development company for the purpose of investing in a diversified portfolio of quality commercial and residential real estate properties and other real estate investments located both throughout the United States and in various international locales. That transition is anticipated to begin shortly, as the first installment of contributed assets (the “First Contribution”) has an anticipated closing date of May 17, 2017 (the “Initial Closing”).

First Contribution

In the Initial Closing, the Contributor will transfer approximately $10 million of assets comprising the Contributed Properties to the Company in up to three stages.  On the Initial Closing date, the Contributor will transfer to the Acquiror four vacant land sites set for development into gas stations, which are located in Atwater and Merced, northern California, and which have an appraised value of approximately $2.6 million.  Within thirty (30) days following the Initial Closing date, the Contributor will transfer to the Acquiror its interest in a single family residential development located in Los Lunas, New Mexico (the “Avalon Property”). The Contributor Parent currently has a 6% interest in the entity which owns the Avalon Property, and expects to acquire an additional 11.9% interest in such entity within the thirty (30) day period following the Initial Closing date.  This residential development in New Mexico consists of 251, non-contiguous, single family residential lots and a 10,000 square foot club house. 37 of the lots have been finished, and the remaining 214 are platted and engineered lots. The Contributor’s appraised value of its share of this property is approximately $7.4 million.  The Contributor has agreed to transfer its 6% interest as soon as is practicable after the Initial Closing date, and the remaining 11.9% interest no later than thirty (30) days after the Initial Closing date.

In return for the Contributed Properties, the Company will issue to the Contributor a number of duly authorized, fully paid and non-assessable shares of the Company’s Common Stock, up to a maximum of 19.9% of the number of issued and outstanding shares of Common Stock of the Company immediately prior to the Initial Closing, in compliance with Nasdaq rules requiring a shareholder vote for the issuance of shares of Common Stock totaling more than the 19.9% limit, determined by dividing the value of the property contributed in the Initial Closing, the $10 million agreed upon value of the Contributed Properties comprising the First Contribution, by a specified per share value, which will be calculated at a 7.5% premium above the volume-weighted average price (“VWAP”) of all on-exchange transactions in the Company’s Common Stock executed on the Nasdaq Stock Market (“Nasdaq”) during the forty-three (43) Nasdaq trading days prior to the Nasdaq trading day immediately prior to the public announcement of the transaction by the Company and the Contributor Parent, as reported by Bloomberg L.P. (the “Per Share Value”). Because the issuance of 19.9% of the Company’s Common Stock to the Contributor at the Per Share Value will not total the $10 million valuation of the Contributed Properties, the balance of the shares required to reach the $10 million value of the Contributed Properties will be paid to the Contributor in shares of the Company’s newly designated non-voting Series A Convertible Preferred Stock.

8

The value of such Series A Preferred Stock to be issued to the Contributor in the Initial Closing will be equal to the difference between the value of the Contributed Properties and the value of the Common Stock issued to the Contributor, with the amount of Common Stock to be issued not exceeding the 19.9% cap, in conformance with Nasdaq rules. The Series A Convertible Preferred Stock will be convertible into Common Stock, subject to the approval of the shareholders of the Company of the transactions contemplated by the Contribution Agreement, at any time and from time to time from and after the Original Issue Date at the option of the Holder thereof, into shares of Common Stock, subject to certain limitations to be set forth in the Certificate of Designations of the Series A Convertible Preferred Stock, determined by dividing the stated value of the Preferred Stock by the conversion price set at the time of issuance. Initially, the conversion price will result in the issuance of twenty-five (25) shares of Common Stock for each share of Series A Preferred Stock.

The Series A Convertible Preferred Stock does not have voting rights; however, PhotoMedex may not (a) alter or change adversely the powers, preferences or rights of that stock, (b) amend or change its certificate of incorporation in a manner that adversely affects that stock, (c) increase the number of shares of preferred stock, or (d) otherwise enter into an agreement that accomplishes any of the foregoing, without the affirmative vote of a majority of the holders of the outstanding Series A Convertible Preferred Stock prior to any such change.

In addition, we will issue to the Contributor a five (5) year warrant to purchase up to 25,000,000 shares of our Common Stock at an exercise price of $3.00 per share that vests with respect to the number of underlying shares upon the achievement of specified milestones. 

At the Initial Closing, the Company will assume the liabilities associated with the Contributed Properties, except that it will not assume any liabilities with respect to the Avalon Property until those assets are actually delivered to the Company. The obligations that the Acquiror will assume at the Initial Closing include the following: Obligations of the Contributor and its affiliates under certain agreements covering the contributed properties, including an Operating Agreement of Central Valley Gas Station Development, LLC, a Delaware limited liability company, dated January 28, 2013, and all amendments thereto; and a Construction Contract dated November 19, 2014 between Central Valley Gas Stations Development, LLC, as owner and First Capital Builders, LLC, as Contractor, with respect to the project known commonly as Green Sands and Buhach Rd., Atwater, CA.  Once the full interest in the Avalon Property is contributed to the Company, the Company will also assume the Operating Agreement of Avalon Jubilee, LLC, a New Mexico limited liability company dated as of May 16, 2012, and all amendments thereto; and a Development Services Agreement dated September 15, 2015 by and between UR-FC Contributed Assets, LLC, a Delaware limited liability company, as Owner, and Land Strategies, LLC, a Nevada limited liability company, as Developer, with respect to real property owned by Avalon Jubilee, LLC.  As of the Initial Closing, the Company will also assume an installment note dated April 7, 2015 made by First Capital Real Estate Investments, LLC (“FCREI”) in favor of George Zambelli (“Zambelli”) in the original principal amount of $470,292.00 (the “Note”) and a Long Form Deed of Trust and Assignment of Rents dated April 7, 2015 between FCREI, as Trustor, Fidelity National Title Company, as Trustee (“Trustee”), and Zambelli, as Beneficiary (the “Deed of Trust”), which secures the Note.

The Acquiror is expected to enter into amended agreements with respect some or all of these agreements.

Finally, the Company will assume all ancillary agreements, commitments and obligations with respect to these properties.

Second Contribution

Contributor Parent is also required to contribute two additional property interests valued at $20 million if certain conditions as set forth in the Agreement are satisfied by December 31, 2017. This second installment is mandatory. Contributor Parent must contribute to the Acquirer its 100% ownership interest in a private hotel that is currently undergoing renovations to convert to a Wyndham Garden Hotel. This 265 room full service hotel is located in Amarillo, Texas and has an appraised value of approximately $16 million. Before contributing the property to the Acquiror, Contributor Parent must resolve a lawsuit concerning ownership of the property. Only when Contributor Parent has confirmed that it is the full and undisputed owner of the property may it contribute that interest to the Acquiror.

In addition, Contributor Parent must contribute to the Acquiror its interest in Dutchman’s Bay and Serenity Bay (referred to as the “Antigua Resort Developments”), two planned full service resort hotel developments located in Antigua and Barbuda in which Contributor Parent owns a 75% interest in coordination with the Antigua government. Serenity Bay is a planned five star resort comprised of five contiguous parcels (28.33 acres) zoned for hotel and residential use that are planned for 246 units and 80 one, two and three bedroom condo units. Dutchman’s Bay, is a planned four star condo hotel with 180 guestrooms, 102 two bedroom condos, and 14 three bedroom villas. For the property in Antigua, Contributor Parent must obtain an amendment to its agreement with the government to extend the time for development of these properties and confirm that all development conditions in the original agreement with the government have been either satisfied or waived.

In exchange for each of these properties, the Company will issue to Contributor a number of duly authorized, fully paid and non-assessable shares of the Company’s Common Stock or Series A Convertible Preferred Stock, determined by dividing the $20 million value of that contribution by the Per Share Value. The shares shall be comprised entirely of shares of Common Stock if the issuance has been approved by the Company’s stockholders prior to the issuance thereof and shall be comprised entirely of shares of Series A Convertible Preferred Stock if such approval has not yet been obtained.

Optional Contribution

Contributor Parent has the option to contribute either or both of two additional property interests valued at $66.5 million if certain conditions as set forth in the Agreement are satisfied by December 31, 2017. This third installment is optional in Contributor Parent’s sole discretion.

The Contributor Parent may contribute to the Acquiror its interest in a resort development project on an island just south of Hilton Head, South Carolina (“Melrose”). Contributor Parent currently has the property under a Letter of Intent and expects to close on the property by December 31, 2017. Melrose is valued by Contributor Parent at $22.5 million, based upon a senior lending position that Contributor Parent holds under the Letter of Intent on this property.

Contributor Parent also may contribute to the Acquiror a golf and surf club development project on the Baja Peninsula in Mexico (“Punta Brava”). Contributor Parent also has this property under a Letter of Intent and expects to close by December 31, 2017. Punta Brava is valued by Contributor Parent at $44 million based on Contributor Parent’s commitment of $5 million upon closing on this property, plus a commitment for an additional $5 million and a second commitment of $34 million for construction of the project.

9

In exchange for each of these properties, the Company will issue to Contributor a number of duly authorized, fully paid and non-assessable shares of the Company’s Common Stock or Series A Convertible Preferred Stock, determined by dividing $86,450,000 (130% of the value of that contribution) by the Per Share Value. The shares shall be comprised entirely of shares of Common Stock if the issuance has been approved by the Company’s stockholders prior to the issuance thereof and shall be comprised entirely of shares of Series A Convertible Preferred Stock if such approval has not yet been obtained. In addition, the Company will issued to Contributor a five (5) year warrant (the “Warrant”) to purchase up to 25,000,000 shares of the Company’s Common Stock at an exercise price of $3.00 per share that shall vest with respect to the number of underlying shares upon the achievement of the milestone specified in the Agreement. The number of warrant shares and the exercise price will be equitably adjusted in the event of a stock split, stock combination, recapitalization or similar transaction.

Resignation and Appointment of Officers and Directors

On or before the First Contribution on May 17, 2017, there will be changes to the Company’s named executive officers and its board of directors.

Named Executive Officers

Dr. Dolev Rafaeli and Dennis McGrath will resign from their positions as officers of the Company and its subsidiaries, and Dr. Yoav Ben-Dror will resign from his position as director of the Company and its subsidiaries.  Dr. Rafaeli will resign as Chief Executive Officer, and Mr. McGrath will resign as President and Chief Operating Officer, of the Company; both will assume other positions within the Company itself.

Suneet Singal will be appointed as Chief Executive Officer of the Company, and Stephen Johnson as the Company’s Chief Financial Officer, with compensation to be set at a meeting of the board of directors within thirty (30) days after the closing of the First Contribution.

Dr. Ben-Dror will resign as a director of the Company’s foreign subsidiaries, including Radiancy (Israel) Ltd. and Photo Therapeutics Limited in the United Kingdom.  He will not continue his affiliation with those companies.States.

Board of Directors

The size of the Company’s Board of Directors is currently set at five, and the Board currently consists of five directors elected at the annual meeting of stockholders on January 19, 2017.

At the closing for the First Contribution, certain members of the Company’s board of directors will resign, and the board will be expanded, so that the board will ultimately consist of seven (7) persons, of whom (i) three (3) shall be designated by the Company, (ii) three (3) shall be designated by Contributor Parent; and (iii) one (1) (the “Nonaffiliated Director”) shall be selected by the other six (6) directors; provided, however, that at least four (4) of the members of the Board of Directors as so designated shall be independent directors as provided by the rules of NASDAQ (each an “Independent Director”).

Of the board designees of the parties, one (1) of the Company’s designees shall be an Independent Director, two (2) of the Contributor Parent’s designees shall be Independent Directors and the Nonaffiliated Director shall be an Independent Director. The compensation committee, nominations and corporate governance committee and audit committee of the Company shall each consist of the Company’s designee who is an Independent Director, one of Contributor Parent’s designees who is an Independent Director and the Nonaffiliated Director.

On May 5, 2017, the Company filed a Schedule 14F-1, Notice Of Proposed Change In The Majority Of The Board Of Directors, providing further details on the individuals who will be named to the Company’s board of directors.

It is currently anticipated that as of the Closing, Lewis C. Pell, Dr. Yoav Ben-Dror and Stephen P. Connelly will resign from the Board,

Dr. Rafaeli and Mr. McGrath will remain on the Board as the Company’s designees, Michael R. Stewart will be appointed as the Company’s Independent Director designee.

Suneet Singal, Richard J. Leider and Dr. Bob Froehlich will be appointed as the Contributor Parent’s designees (with Richard J. Leider and Dr. Bob Froehlich serving as Independent Directors).

The new Board as so constituted will appoint the Nonaffiliated Director.

10

Compensation for members of the board of directors will be set at current levels as further described in the Schedule 14F-1, Notice Of Proposed Change In The Majority Of The Board Of Directors and in the Company’s Form 10-K for the period ending December 31, 2016.

General Conditions

In each case, the Company’s board of directors will determine whether or not the pre-contribution conditions have been satisfied before accepting the property interests and issuing shares of the Company’s stock to Contributor Parent.

The Agreement is subject to the usual pre- and post-closing representations, warranties and covenants, and restricts the Company’s conduct to the conduct to that in the ordinary course of business between the signing and December 31, 2017.

Under the Agreement, amounts due to Dr. Dolev Rafaeli and Dennis McGrath under their employment agreements, as well as amounts due to Dr. Yoav Ben-Dror for his services as a board member of the Company’s foreign subsidiaries, will be converted to convertible secured notes (the “Payout Notes”) after approval from the Company’s stockholders. The Payout Notes will be due one year after the stockholder approval and carry a ten percent (10%) interest rate. The principal will convert to shares of the Company’s Common Stock at the lower of (i) the Per Share Value or (ii) the VWAP with respect to on-exchange transactions in the Company’s Common Stock executed on the NASDAQ during the thirty (30) trading days prior to the maturity date as reported by Bloomberg L.P.; provided, however, that the value of the Company’s Common Stock shall in no event be less than $1.75 per share. The Payout Notes will be secured by a security interest in all assets of the Company; provided, however, that such security interest will be subordinated to any (i) claims or liens to the holders of any debt (including mortgage debt) being assumed by the Company as a result of the transaction contemplated by the Agreement, and (ii) all post-closing indebtedness incurred by the Company or its subsidiaries. The holders of the Payout Notes will have demand registration rights which will require the filing of a resale registration statement on appropriate form that registers for re-sale the shares of Common Stock underlying the Payout Notes within thirty (30) days of issuance with best efforts to cause the same to become effective within one-hundred twenty (120) days of issuance.

Special Meeting of Stockholders

As promptly as possible following the initial closing, the Company is required file a proxy statement and hold a special meeting of its stockholders to authorize and approve the following matters:

• an increase in the number of authorized shares of common stock, $.01 par value per share, of the Company from fifty million (50,000,00) shares to five hundred million (500,000,000) shares and increase the number of authorized shares of preferred stock, $.01 par value per share, of the Company from five million (5,000,000) shares to fifty million (50,000,000) shares;

• the issuance to the Contributor or its designee or designees of the Company’s common and/or preferred shares in exchange for the contributed assets, and the issuance of the Warrant and, upon exercise of the Warrant, the underlying shares of the Company’s Common Stock in exchange for the contribution of the optional property interests, if any are made;

• the amendment and restatement of the Articles of Incorporation of the Company;

• the amendment and restatement of the Bylaws of the Company;

• the approval of the issuance of the Payout Notes and the issuance of the Company’s Common Stock upon conversion thereof; and

• the election of a new Board of Directors as set forth above in Resignation and Appointment of Officers and Directors in this report.

Board members, officers and certain insiders of the Company are subject to a voting agreement under which they are obligated to vote in favor of the proposals at the stockholder meeting.

Registration Rights

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Promptly following the execution of the Agreement, the Company is required prepare and file with the Securities and Exchange Commission two registration statements on Form S-3 (or such other form available for this purpose) (the “Registration Statements”) to register (a) the primary offering by the Company (i) to the holders of the Payout Notes the Common Stock underlying the Payout Notes, and (ii) to the unaffiliated shareholders of Contributor Parent the Common Stock distributed to such unaffiliated shareholders as a dividend by Contributor Parent and (b) the secondary offering (i) by the Contributor Parties of all the shares of the Company’s Common Stock (including, without limitation, the shares of Common Stock underlying the Warrant) retained by the Contributor Parties, (ii) by Maxim Group LLC of the shares received by it as compensation for services rendered to Contributor Parent, and (ii) by certain affiliates of the Contributor Parent who receive shares from Contributor Parent.

Termination Fee

Finally, the transaction is subject to a termination provision under which, in the event of a material breach of the terms of the transaction, the breaching company must pay all out-of-pocket expenses of the non-breaching company incurred up to the date of termination of the transaction.

The Company will conduct most of its building, construction financing and site management activities through various subsidiaries affiliated with the Contributor Parties. The Company will maintain only a small staff of employees to handle its accounting, legal and compliance activities, including a new Chief Executive Officer and a new Chief Financial Officer, who will assume their duties following the close of the First Contribution.

 

Liquidity and Going ConcernConcern:

As of March 31, 2017,2018, the Company had an accumulated deficit of $115,699$138.7 million and shareholders’ equity deficitthe Company incurred a net loss attributable to common stockholders (including deemed dividend as accretion to redemption value of $136. To date, and subsequentSeries B Preferred Stock) for the three months ended March 31, 2018 of $3.7 million. Subsequent to the recent sale of the Company’s last significant business unit, the consumer products division as described above, and to date, the Company has dedicated most of its financial resources to sales and marketing, general and administrative expenses associated with its ongoing business of real estate development and research and development.asset management.

  

Cash

As of March 31, 2018, the Company’s cash and cash equivalents asamounted to $2,184. While the Company is a party to a Securities Purchase Agreement (the “OFI Purchase Agreement”) with Opportunity Fund I-SS, LLC (“OFI”), and has raised certain funds under that agreement in both 2017 and in 2018 through the date of March 31, 2017 were $3,367, including restricted cashthe financial statements (see also Note 5), OFI has no obligation to continue to invest in the Company, and there are restrictions placed by OFI on the use of $345.these funds. The Company has historically financed its activities with cash from operations, the private placement of equity and debt securities, borrowings under lines of credit and, in the most recent periods with sales of certain assets and business units. The Company will be required to obtain additional liquidity resources in order to support its ongoing operations. The Company is addressing its liquidity needs by selling certain of its product lines to a third party (see Acquisitions and Dispositions below).

On January 23, 2017,24, 2018, the Company sold its consumer products divisionand OFI completed a second closing under the OFI Purchase Agreement, pursuant to ITCTV Brands, Inc., for a total selling price of $9.5 million.  The Company has collected $5 million of that purchase price; the remaining $4.5 million is payable through a contingent royalty on the sale of consumer products by ICTV Brands.  There are no assurances, however, that the Company will be ablewhich OFI provided $2,225 to collect all, or a portion, of the remaining royalty amounts due from sale of these assets and product lines.  On March 31, 2017, the Company entered into an Interest Contribution Agreement with First Capital Real Estate Operating Partnership, L.P., and its parent, First Capital Real Estate Trust Incorporated, under which certain real estate investment properties will be contributed to the Companyus in exchange for the issuance of Company stock equal to the value of those properties. The closing on the First Contribution under2,225,000 additional Series B Shares (see also Note 5).

At this pending transaction is due to occur on or before May 17, 2017.  However,time, there is no guarantee that the closing on the First Contribution under the pending transaction with First Capital will close, or will close on time; that weCompany will be able to obtain an adequate level of financial resources required for the short and long-term support of its operations if the remaining amounts due from the sale of assets and product lines remain uncollected or not paid when due; or that wethe Company will be able to obtain additional financing as needed, , or meet the conditions of such financing, or that the costs of such financing may not be prohibitive. In light of the Company’s recent operating losses and negative cash flows and the uncertainty of collecting amounts due from the sales of its product lines, there is no assurance that the Company will be able to continue as a going concern.

 

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


FC GLOBAL REALTY INCORPORATED

As of March 31,NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

Note 2

Discontinued Operations:

On January 23, 2017, the restricted cash account includes $250 from the Neova Escrow Agreement (see Acquisitions and Dispositions below). Restricted cash also includes $95 reflecting certain commitments connectedCompany sold its last significant business unit (its consumer products division) to our leased office facilities in Israel.

Acquisitions and Dispositions

On August 30, 2016,ICTV Brands, Inc. This business was a substantial business unit of the Company entered into an Asset Purchase Agreement forand the sale brought a strategic shift in focus of its Neova product line.management. The Company accordingly classified this former business as held for sale was completed on September 15, 2016 resultingand discontinued operations in immediate cash proceeds toaccordance with ASC 360 “Impairment or disposal of long-lived assets” during the Companyfourth quarter of $1.5 million and the Company recorded a loss of $1,731 from the transaction during the year ended December 31, 2016.

 

12

On October 4, 2016,The accompanying consolidated financial statements as of and for the three months ended March 31, 2017 have been retrospectively adjusted to reflect the operating results of the consumer business as discontinued operations separately from continuing operations. The Company entered into an Asset Purchase Agreement forrecognized a net loss from discontinued operations of $1,849, including the loss on the sale of its Consumer Division for $9.5 million, including $5 millionthe discontinued operations in cash plus a $4.5 million royalty agreement. On January 23,the three months ended March 31, 2017, which represents the Company entered into a First Amendment (the “First APA Amendment”) todifference between the Asset Purchase Agreement which revisedadjusted net purchase price and the definition of Business Assets and Assumed Liabilities, provided for the establishment of employee benefit plans by the Purchaser and substituted a new Disclosure Letter for the one delivered concurrently with the signingcarrying value of the original Asset Purchase Agreement. The amendment also extended the term of the Letter of Credit issued in connection with the Asset Purchase Agreement to 100 days after the Closing Date.   The Company also entered into a First Amendment (the “First TSA Amendment”) to the Transition Services Agreement between the Company and its subsidiaries and the Purchaser of the Consumer Products division, pursuant to which the Company and its subsidiaries will provide the Purchaser with certain accounting, benefit, payroll, regulatory, IT support and other services for periods ranging from approximately three months to up to one year following the Closing Date, during which time the Purchaser will arrange to transition the services it receives to its own personnel.  The First TSA Amendment revised references in the Transition Services Agreement from “Effective Date” to “Closing Date”, and clarified specifications regarding the lease for certain premises in Israel by and between Radiancy Israel and the landlord for those premises.  This transaction was completed on January 23, 2017. See background paragraph above.disposal group.

 

The Company had classifiedrecognized a gain of $79 related to the assets ofdiscontinued operations during the Consumer Divisionthree months ended March 31, 2018, as assets held for sale as of December 31, 2016.

As parta result of the sale of the consumer product line which transaction was determinedresidual inventory to represent a complete liquidation of a foreign subsidiary the cumulative translation adjustment related to that foreign entity was reclassified from accumulated other comprehensive income (loss) and reported as part of gain or loss from the sale.third parties.

 

The Company accountedfollowing is a summary of loss from discontinued operations for the contingent consideration component (the amount that will be received as royalties, based on the performance of the consumer division in future periods) based on the ‘loss recovery approach’. Accordingly, anticipated royalties were recognized at the lesser of the amount of (1) the proceeds for which the likelihood of receipt is probable or (2) the total loss recognized in the sale transaction, without considering the contingent consideration component. Such accounting resulted recognition of $4,000 as long term royalties receivable. Royalties proceeds in excess of the amount recognized are subject to the gain contingency guidance in ASC Topic 450-30,three months ended March 31, 2018 and as such, they will not be recognized until all contingencies related to their receipt are resolved.2017:

 

  For the Three Months Ended March 31, 
  2018  2017 
       
Revenues: $  $3,539 
Cost of revenues     100 
Gross profit     3,439 
Operating expenses:        
Engineering and product development     143 
Selling and marketing     620 
General and administrative     2,342 

Income (loss) from discontinued operations before interest and other financing expense, net 

     

334

Interest and other financing expense, net     (77)

Income (loss) from discontinued operations before income taxes

     257

Income tax benefit allocated to discontinued operations

     (21)

Income (loss) from discontinued operations

     236 

Gain (loss) from disposal of discontinued operations, net of taxes

  79   

(2,085

)

Net Gain (loss) from discontinued operations 

 $79  $(1,849)

On March 31, 2017, the Company entered into an Interest Contribution Agreement (the “Agreement”) with First Capital Real Estate Operating Partnership, L.P., a Delaware limited partnership (“Contributor”), and First Capital Real Estate Trust Incorporated, a Maryland corporation, the “Contributor Parent” and, together with Contributor, the “Contributor Parties”), under which the Contributor will contribute certain real estate assets to the Company’s subsidiary in a series of three installments which will conclude no later than December 31, 2017. FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In exchange, the Contributor will receive shares of the Company’s Common Stock and newly designated Series A Convertible Preferred Stock. Further details on this transaction and the Company’s transition to a real estate investment company are contained in this report and in the Current Report on Form 8-K filed on April 3, 2017.

TERMINATION OF PROPOSED TRANSACTION

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

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

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

13

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

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

Reverse Split and Number of Shares Adjustment

On October 29, 2015 the Company held its Annual Meeting of Stockholders in which, among other matters, Company stockholders authorized the board of directors to amend the Company’s Certificate of Incorporation with respect to a reverse split of the Company’s issued and outstanding Common Stock in a ratio to be determined by the Company’s Board of Directors not to exceed a 1 for 5 ratio.

On September 7, 2016 the Company’s Board of Directors approved a reverse split in a ratio of 1-for-five.  The 2016 reverse split was implemented on September 23, 2016 (the “2016 Reverse Split”).  The amount of authorized Common Stock as well as the par value for the Common Stock were not effected.  Any fractional shares resulting from the 2016 Reverse Split were rounded up to the nearest whole share.

All Common Stock, warrants, optionsthousands, except share and per share amounts set forth herein are presented to give retroactive effect to the 2016 Reverse Split for all periods presented.amounts)

(unaudited)

 

On September 23, 2016, the Company’s Common stock and warrants were approved for listing on the NASDAQ Capital Market under the symbol PHMD.  Shares were previously listed on the NASDAQ Global Market under the same symbol.Note 3

Summary of Significant Accounting Policies:

 

Basis of Presentation:

Accounting Principles

The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with our consolidated financial statements and related notes contained in Amendment No. 1 to our Annual Report on Form 10-K10-K/A for the fiscal year ended December 31, 2016 (“fiscal 2016”).2017. The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) related to interim financial statements. As permitted under those rules, certain information and footnote disclosures normally required or included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”)GAAP have been condensed or omitted. The financial information contained herein is unaudited; however, management believes all adjustments have been made that are considered necessary to present fairly the results of the Company’s financial position and operating results for the interim periods. All such adjustments are of a normal recurring nature. The accompanying condensed consolidated balance sheet as of December 31, 2017 has been derived from the consolidated financial statements contained in Amendment No. 1 to our Annual Report on Form 10-K/A.

  

The results for the three months ended March 31, 20172018 are not necessarily indicative of the results to be expected for the year ending December 31, 20172018 or for any other interim period or for any future period.in the future.

14

Principles of Consolidation

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

 

Held for Sale Classification

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

Assets and liabilities related to a disposal group classified as held for sale are segregated in the consolidated balance sheet in the periodEntities in which the disposal groupCompany directly or indirectly owns more than 50% of the outstanding voting securities, and for which other interest holders do not possess the right to affect significant management decisions, are generally accounted for under the voting interest consolidation method of accounting. Participation of other interest holders in the net assets and in the earnings or losses of a consolidated subsidiary is classified as held for sale.reflected in the line items “Noncontrolling Interest” in the Company’s consolidated balance sheets and “net income (loss) attributable to the noncontrolling interest” in the Company consolidated statements of comprehensive loss. Noncontrolling interest adjusts the Company’s consolidated results of operations to reflect only the Company’s share of the earnings or losses of the consolidated subsidiary.

 

Until December 31, 2014,Any changes in accordancethe Company’s ownership interest in a consolidated subsidiary, through additional equity issuances by the consolidated subsidiary or from the Company acquiring the shares from existing shareholders, in which the Company maintains control is recognized as an equity transaction, with previousappropriate adjustments to both the Company’s additional paid-in capital and the corresponding noncontrolling interest.

Use of Estimates

The preparation of the consolidated financial statements in conformity with US GAAP operationsrequires management to make estimates and assumptions that affect amounts reported of a disposal group were reported as discontinued operations if the disposal group is classified as held for sale, the operations and cash flows of the business have been or will be eliminated from the ongoing operations as a result of a disposal transaction and when the Company will not have any significant continuing involvement in the operations of the disposal group after the disposal transaction. See below regarding change to the criteria for reporting discontinued operations.

Commencing January 1, 2015 (the effective date of the ASU 2014-08), only disposal of a component of an entity or a group of components of an entity that represents a strategic shift that has or will have a major effect on an entity's operations and financial results shall be reported as discontinued operations. The revised guidance did not change the criteria required to qualify for held for sale presentation. The revised guidance includes several new disclosures and among others, required to reclassify the assets and liabilities of discontinued operations to separate line items in the balance sheets for all periods presented (including comparatives).

In connection with the sale of the Consumer Division to ICTV Brands, Inc., announced on October 4, 2016 and subsequently completed on January 23, 2017, the assets related to this transaction were classified as of December 31, 2016 as Assets Held for Sale, as follows:

Inventory $7,336 
Property and equipment  911 
Other assets  115 
Assets held for sale as of  December 31, 2016 $8,362 

Revenue Recognition

The Company recognizes revenues from product sales when the following four criteria have been met: (i) the product has been delivered and the Company has no significant remaining obligations; (ii) persuasive evidence of an arrangement exists; (iii) the price to the buyer is fixed or determinable; and (iv) collection is reasonably assured. Revenues from product sales are recorded net of provisions for estimated chargebacks, rebates, expected returns and cash discounts.

15

The Company ships most of its products FOB shipping point, although from time to time certain customers, for example governmental customers, will be granted FOB destination terms. Among the factors the Company takes into account when determining the proper time at which to recognize revenue are (i) when title to the goods transfers and (ii) when the risk of loss transfers. Shipments to distributors or physicians that do not fully satisfy the collection criteria are recognized when invoiced amounts are fully paid or fully assured and included in deferred revenues until that time.

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

With respect to sales arrangements under which the buyer has a right to return the related product, revenue is recognized only if all the following conditions are met: the price is fixed or determinable at the date of sale; the buyer has paid, or is obligated to payfinancial statements 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 thereported amount of future returns canrevenues and expenses during the reporting periods. Actual results could differ from those estimates and be reasonably estimated.based on events different from those assumptions. As part of these financial statements, the more significant estimates include (1) stock-based compensation; (2) identification of and measurement of instruments in equity and mezzanine transactions; (3) impairment of investment properties and investment in other company; (4) evaluation of going concern; and (5) contingencies.

 

Loss per Share

The Company provides a provision for product returns based on the experience with historical sales returns,computes net loss per share in accordance with ASC Topic 605-15 with respect to sales260, “Earnings per share”. Basic loss per share is computed by dividing net loss by the weighted-average number of product when a right of return exists. Reported revenues are showncommon shares outstanding during the period, net of the returns provision. Such allowance for sales returns isweighted average number of treasury shares (if any). Securities that may participate in dividends with the common stock (such as the convertible Series A Preferred Stock and Series B Preferred Stock) are considered in the computation of basic income per share using the two-class method. However, in periods of net loss, participating securities are included inOther Accrued Liabilities. (SeeNote 7). Dueonly if the holders of such securities have a contractual obligation to share the salelosses of the remainder ofCompany. Accordingly, the consumer products division in January 2017, there is no remaining allowance for product returns as of March 31, 2017.

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

Functional Currency

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

Balances denominated in, or linked to, foreign currencies are stated on the basis of the exchange rates prevailing at the balance sheet date. For foreign currency transactionsoutstanding Series A preferred shares were included in the statementcomputation, while the Series B preferred shares were not.


FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

Note 3 (Cont.)

Summary of comprehensive income (loss), the exchange rates applicable to the relevant transaction dates are used. Transaction gains or losses arising from changes in the exchange rates used in the translation of such balances are carried to financing income or expenses.Significant Accounting Policies:

 

AssetsDiluted loss per common share is computed similar to basic earnings per share, except that the denominator is increased to include the number of additional potential common shares that would have been outstanding if the potential common shares had been issued and liabilities of foreign subsidiaries, whose functional currency is their local currency,if the additional common shares were dilutive. Potential common shares are translated from their respective functional currency to U.S. dollars at the balance sheet date exchange rates. Income and expense items are translated at the average rates of exchange prevailing during the year.Translation adjustments are reflected in the consolidated balance sheets as a component of accumulated other comprehensive income (loss). Deferred taxes are not provided on translation adjustments as the earnings of the subsidiaries are considered to be permanently reinvested.

Upon sale of a foreign subsidiary or upon sale of group of asset within a consolidated foreign subsidiary, in a transaction that was determined to represent a complete liquidation of that foreign subsidiary, the cumulative translation adjustment related to that foreign entity is reclassified from accumulated other comprehensive income (loss) and reported as part of gain or lossexcluded from the sale.

16

Fair Value Measurements

computation for a period in which a net loss is reported or if their effect is anti-dilutive. The Company measuresCompany’s potential common shares consist of stock options, stock warrants and discloses fair value in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 820,Fair Value Measurementsrestricted stock awards issued under the Company’s stock incentive plans and Disclosures(“ASC Topic 820”). ASC Topic 820 defines fair value, establishes a frameworktheir potential dilutive effect is considered using the treasury method and gives guidance regardingof convertible Series A Preferred Stock and Series B Preferred Stock which their potential dilutive effect is considered using the methods used for measuring fair value, and expands disclosures about fair value measurements. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions there exists a three-tier fair-value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

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

Level 2 – pricing inputs are other than quoted prices in active markets that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.

Level 3 – pricing inputs are unobservable for the non-financial asset or liability and only used when there is little, if any, market activity for the non-financial asset or liability at the measurement date. The inputs into the determination of fair value require significant management judgment or estimation. Fair value is determined using comparable market transactions and other valuation methodologies, adjusted as appropriate for liquidity, credit, market and/or other risk factors

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.“if-converted method”.

 

The fair value of cash and cash equivalents and restricted cash are based on its demand value, which is equal to its carrying value. The estimated fair values of notes payable which are based on borrowing rates that are available to the Company for loans with similar terms, collateral and maturity approximate the carrying values. Additionally, the carrying value of all other monetary assets and liabilities is estimated to be equal to their fair value due to the short-term nature of these instruments.

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

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

Derivatives

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

From time to time the Company carries out transactions involving foreign exchange derivative financial instruments (mainly forward exchange contracts) which are expected to be paid with respect to forecasted expenses of the Israeli subsidiary (Radiancy) denominated in Israeli local currency (NIS) which is different than its functional currency. No foreign exchange derivative instruments were outstanding as of March 31, 2017.

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

17

Accrued Warranty Costs

The Company offers a standard warranty on product sales generally for a one to two-year period. The Company provides for the estimated cost of the future warranty claims on the date the product is sold. Total accrued warranty is included inOther Accrued Liabilities on the condensed consolidated balance sheet. The activity in the warranty accrual during the three months ended March 31, 2017 and 2016 is summarized as follows:

  March 31, 
  2017  2016 
  (unaudited)  (unaudited) 
Accrual at beginning of year $241  $330 
Additions charged to warranty expense  -   10 
Expiring warranties  -   (54)
Claims satisfied  -   (45)
Sale of consumer segment  (241)    
Total  -   241 
Less: current portion  -   (241)
Accrued extended warranty $0  $0 

For extended warranty on the consumer products, seeRevenue Recognition above.

Net Loss Per Share

Basiccomputing basic and diluted net loss per common share were calculated using the following weighted-average shares outstanding:

  For the Three Months Ended March 31, 
  2017  2016 
Weighted-average number of common and common equivalent shares outstanding:        
Basic number of common shares outstanding  4,237,517   4,155,464 
Dilutive effect of stock options and warrants  -   - 
Diluted number of common and common stock equivalent shares outstanding  4,237,517   4,155,464 

Diluted loss per sharefrom continuing operations for the three months ended March 31, 2018 and 2017, excludedis as follows:

  Three Months Ended March 31, 
  2018  2017 
       
Numerator:        

Net loss

 $

1,650

  $

1,849

 
Net gain (loss) from discontinued operations attributable to common stockholders  79   

(1,849

)
Accretion of Series B Preferred Stock to redemption value (*)  1,968    
Preferred dividend on Series B Preferred Stock (**)  79    
Participation of stockholders of Series A Preferred Stock in the net loss from continuing operations  

(357

)   
         
Net loss from continuing operations attributable to common stockholders $

3,419

  $ 
         
Denominator:        
Shares of common stock used in computing basic and diluted net loss per share  11,868,619   4,237,517 
         
Net loss per share of common stock from continuing operations, basic and diluted $

0.29

  $ 

(*)Based on the rights and privileges of Series B Preferred Stock, since the Company did not obtain shareholder approval at March 31, 2018, the then outstanding Series B Preferred Stock became redeemable at the option of OFI.

(**)The net loss used for the computation of basic and diluted net loss per share for three months ended March 31, 2018, includes the preferred dividend requirement of 8% per share per annum for the Series B Preferred Stock, compounded annually which shall be distributed to stockholders in case of distributable assets determined in the Company’s certificate of designation under the liquidation preference right (see also Note 5).

For the three month period ended March 31, 2018, diluted loss per share excludes the impact of stock options, Series A Preferred Stock, Series B Preferred Stock and common stock options and warrants,to be issued upon written call option totaling 175,3659,149,221 shares, as the effect of their inclusion would be anti-dilutive, due to the net loss for the period. Diluted earnings per share for the three months ended March 31, 2016, excluded the impact of common stock options and warrants, totaling 211,218 shares, as the effect of their inclusion would be anti-dilutive, due to the net loss for the period.

18

Recently Issued Accounting Standards

In recent years the FASB issued certain important Accounting Standards Updates, some of which could have a significant impact on the accounting treatment and disclosures of previous activities of the Company.

Such Accounting Standards Updates includes the following:

·Accounting Standard Update No. 2014-09, Revenue from Contracts with Customers (Topic 606)
·Accounting Standards Update No. 2015-11, Simplifying the Measurement of Inventory (Topic 330)
·Accounting Standards Update No. 2015-17,Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
·Accounting Standards Update No. 2016-02,Leases (Topic 842)
·Accounting Standards Update No. 2016-09,Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
·Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
·Accounting Standards Update No. 2016-15,Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force )

However, following the recent sales of substantially all of the Company's assets product lines and business units, and as the remaining ongoing operations of the Company are limited, , the impact of such pronouncements that became effective during the interim period did not impact the accompanying condensed consolidated financial statements and as for pronouncements that will become effective in future periods, management will consider their effect if any, based on the operations and activities of the Company following the closing of the Interest Contribution Agreement described in Note 1 above. 

Note 2

Inventories:

  March 31, 2017  December 31, 2016 
  (unaudited)    
Raw materials and work in progress $-  $1,968 
Finished goods  -   5,368 
Total inventories $-  $7,336 
Less assets held for sale  -   (7,336)
Total Inventory $-  $- 

Work-in-process is immaterial, given the Company’s typically short manufacturing cycle, and therefore is disclosed in conjunction with raw materials. See Acquisitions and Dispositions regarding inventory balance classified as part of the assets held for sale as of December 31, 2016. During January 2017, all consumer inventory was sold to ICTV. See Acquisitions and Dispositions in Note 1.

19

Note 3

Property and Equipment:

  March 31, 2017  December 31, 2016 
  (unaudited)    
Equipment, computer hardware and software  314   5,005 
Furniture and fixtures  350   433 
Leasehold improvements  112   438 
   776   5,876 
Accumulated depreciation and amortization  (674)  (4,888)
Total property and equipment  102  $988 
Less assets held for sale  -   (911)
Total property and equipment, net $102  $77 

Depreciation and related amortization expense was $4 and $79 for the three months ended March 31, 2017 and 2016, respectively.

Note 4

Patents and Licensed Technologies, net:

  March 31, 2017  December 31, 2016 
  (unaudited)    
Gross Amount beginning of period $-  $3,376 
Additions (disposals)  -   (177)
Translation differences  -   36 
Gross Amount end of period  -   3,235 
         
Accumulated amortization  -   (1,974)
Impairment (See Note 5 below)  -   (1,261)
         
Patents and licensed technologies, net $-  $- 

Related amortization expense was $0 and $72 for the three months ended March 31, 2017 and 2016, respectively.

Note 5

Goodwill and Other Intangible Assets:

As part of the purchase price allocation for the reverse acquisition, the Company recorded goodwill in the amount of $24,005 and definite-lived intangibles in the amount of $12,000. Goodwill reflects the value or premium of the acquisition price in excess of the fair values assigned to specific tangible and intangible assets. Goodwill has an indefinite useful life and therefore is not amortized as an expense, but is reviewed annually for impairment of its fair value to the Company. Activity in goodwill during the year ended December 31, 2016 follows:

Balance at January 1, 2016 $3,581 
Disposal on sale of assets  (1,039)
Impairment of goodwill  (2,257)
Translation differences  (285)
Balance at December 31, 2016 $0 

During the fourth quarter of 2015, we recorded goodwill and other intangible asset impairment charges of $21,481, as we determined that a portion of the value of our goodwill and other intangible assets was impaired in connection with our annual impairment test. A number of factors contributed to decreased earnings projection including, competition from consumer device companies claiming similar product functionality, our inability to attract sufficient financial resources to quickly increase our advertisement to overcome the market confusion created by competitors, the inability to effectively expand operations into foreign markets and quickly ramp new and innovative product launches in the second half of the year after satisfying the bank covenant defaults of our senior credit facility on June 23, 2015, and a continuing challenging media environment to purchase cost effective advertisement in the USA, our largest product distribution market. The fair value of Goodwill associated with the operating and reporting units were estimated using a combination of Income and Market Approach methodologies to valuation. The Income method of valuation explicitly recognizes the current value of future economic benefits developed by discounting future net cash flows to their present value at a rate the reflects both the current return requirements of the market and the risks inherent in the market. The Market approach measures the value of an asset through the analysis of recent sales or offerings of comparable property.

20

Our business was organized into three operating and reporting units which are defined as Consumer, Physician Recurring, and Professional Equipment. Upon completion of our annual goodwill impairment analysis as of December 31, 2015 the Company recorded an impairment of Consumer segment goodwill in the amount of $15,654 and an impairment of Physician Recurring segment goodwill of $876.

During the third quarter of 2016, we recorded goodwill and other intangible asset impairment charges of $3,518, as we determined that a portion of the value of our goodwill and other intangible assets was impaired in connection with the pending transaction with ICTV Brands, Inc. See Note 18, Subsequent Event in the Company’s Form 10-K for the year ending December 31, 2016, for more information. The Company recorded an impairment of the entire remaining balance of Consumer segment goodwill in the amount of $2,257 and recorded the impairment of the Consumer segment of the intangibles for its licensed technology in the amount of $1,261. The Company derecognized an amount of $1,039 of goodwill related to the Physician Recurring segment in connection with the asset sale of the Neova product line. 

In addition, pursuant to ASC 360 the Company tested the long-lived assets and determined that changes in circumstances indicated that its carrying value may not be recoverable. The carrying amount of the assets is considered recoverable if it exceeds the sum of undiscounted cash flows expected from the use or eventual disposition of the asset. As of December 2015 and in connection with its annual budgeting process, the Company determined its acquired intangible assets indicated that the cash flows related to the acquired assets were substantially riskier and subject to shortfalls in revenues and profits relative to original expectations. The Company’s internal operating forecast has been revised downward in terms of revenue growth and profitability for the foreseeable future. The analysis entailed comparing the carrying amount of the long-lived assets as of December 31, 2015 with the sum of their respective projected undiscounted cash flows. The Company recognized and recorded an impairment of Physician Recurring segment intangibles for its trademark, tradename, and customer relationships in the amount of $3,527 and licensed technology in the amount of $1,424. Also in connection with the then pending transaction with ICTV Brands, as of December 31, 2016, and based on the expected price of such transaction which management believed represents market approach fair value estimate, the Company recorded an impairment of the Consumer segment intangibles for its Licensed Technology in the amount of $1,261.

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

  March 31, 2017  December 31, 2016 
  (unaudited)          
  Trademarks  Customer
Relationships
  Total  Trademarks  Customer
Relationships
  Total 
Gross Amount beginning of period $0  $-  $-  $405  $-  $405 
Translation differences  -   -   -   -   -   - 
Gross Amount end of period  -   -   -   405   -   405 
                         
Disposal  -   -   -   (221)  -   (221)
Accumulated amortization  -   -   -   (184)  -   (184)
                         
Net Book Value $-  $-  $-  $-  $0  $- 

Related amortization expense was $0 and $10 for the periods ended March 31, 2017 and 2016, respectively. Customer Relationships embodied the value to the Company of relationships that Pre-merged PhotoMedex had formed with its customers. Trademarks included the tradenames and various trademarks associated with Pre-merged PhotoMedex products.

21

Note 6

Accrued Compensation and related expenses:

  March 31, 2017  December 31, 2016 
  (unaudited)    
Accrued payroll and related taxes $537  $262 
Accrued vacation  77   66 
Accrued commissions and bonuses  3,441   3,701 
Total accrued compensation and related expense $4,055  $4,029 

Note 7

Other Accrued Liabilities:

  March 31, 2017  December 31, 2016 
  (unaudited)    
Accrued warranty, current, see Note 1 $-  $93 
Accrued taxes, net  1,674   1,606 
Accrued sales returns (1)  -   1,975 
Other accrued liabilities  3,601   4,417 
Total other accrued liabilities $5,275  $8,091 

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

  Three Months Ended March 31, 
  2017  2016 
  (unaudited)  (unaudited) 
Balance at beginning of year $1,975  $4,179 
Additions that reduce net sales  -   2,160 
Deductions from reserves  (1,975)  (4,154)
Balance at end of period $-  $2,185 

Note 8

Income Taxes:

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

The difference between the Company's effective tax rates foranti-dilutive. For the three month period ended March 31, 2017, diluted loss per share excludes the impact of stock options totaling 175,365 shares.


FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

Note 4

Commitments and Contingencies:

Leases

The Company has entered into a non-cancelable operating lease agreement for real property, which expires on December 31, 2018. Rent expense was $18 and $17 for the three months ended March 31, 2018 and 2017, respectively. For the year ended 31, 2018, the future annual minimum payment under this lease, relating to the Company’s continuing operations are as follows:

Year Ending December 31,   
     
2018 $52 

Litigation

JFURTI

The Company is a party to JFURTI, LLC, et al v. Suneet Singal, et al, filed in the United States District Court for the Southern District of New York. The suit names as defendants Suneet Singal, an officer of various First Capital companies as well as the Company’s former Chief Executive Officer and former member of the Company’s Board of Directors, Frank Grant and Richard Leider, board members of First Capital Real Estate Investments, LLC, First Capital Real Estate Advisors, LP, Presidential Realty Corporation, Presidential Realty Operating Partnership, Downey Brand LLP and now the Company (under its previous name, PhotoMedex Inc.), as well as nominal derivative defendants First Capital Real Estate Trust Incorporated and First Capital Real Estate Operating Partnership, L.P. Mr. Leider is also on the Board of Directors of the Company.

The suit is the ninth filed by Jacob Frydman and/or JFURTI, LLC in a dispute between the plaintiffs and the U.S. Federal statutoryFirst Capital group of companies, which entered into a series of agreements with Mr. Frydman beginning in September 2015. Mr. Frydman had founded, sponsored, and taken public United Realty Trust Incorporated, a Real Estate Investment Trust (“REIT”). Mr. Frydman was the CEO and Chairman of the REIT as well as the owner of various other United Realty branded companies affiliated with the REIT business. In September 2015, Mr. Frydman and Mr. Singal negotiated and agreed to a transaction between various First Capital branded companies, on the one hand, and the United Realty branded companies affiliated with the REIT business, on the other hand, as a result of which the REIT was rebranded as the Contributor Parent.

After the September 2015 transaction was concluded, several disputes arose between the parties. The first action, titled JFURTI, LLC and Jacob Frydman v. Forum Partners Investment Management LLC et al., No. 16 Civ. 8633 (the “Prior Action”), commenced on November 7, 2016 and asserted, inter alia, derivative RICO and securities fraud claims. The court dismissed the action in a decision and order dated April 27, 2017.

Following dismissal of the Prior Action, Mr. Frydman sent letters to each member of the Contributor Parent’s Board of Directors (the “Demand Letter”), demanding that the Board investigate and remediate the dissipation of assets as alleged by plaintiffs. In particular, the Demand Letter questioned (i) a letter of intent with Presidential Realty Corporation (“Presidential”) announced in an 8-K filed by the Contributor Parent on or about July 18, 2016; (ii) the Contributor Parent’s use of funds raised between September 15, 2015 and February 28, 2016; (iii) an interest contribution agreement with Presidential entered into on or about December 16, 2016; (iv) the Contributor Parent’s failure to file quarterly and annual reports; (iv) the Contribution Agreement entered into on March 31, 2017 with the Company; and (v) other purportedly fraudulent acts such as publishing an artificially inflated net asset value, defaulting on certain mortgage loans, misrepresentations by Mr. Singal with respect to certain properties contributed to the Contributor Parent through the Master Agreement executed on September 15, 2015, and various loan agreements with Forum Partners Investment Management LLC (“Forum”). The Demand Letter also demanded inspection of certain corporate documents pursuant to Md. Code § 2-512.


FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

Note 4 (Cont.)

Commitments and Contingencies:

JFURTI (Cont.)

The Contributor Parent commenced such an investigation, and offered such an inspection, but Mr. Frydman and JFURTI failed to wait for the results of the investigation or make any inspection, and instead brought suit in the same court as the Prior Action. The suit alleges, among other claims, violations of § 10(b) of the Exchange Act of 1934, as amended, and Rule 10b-5 (1) against Mr. Singal and First Capital Real Estate Investments LLC for misrepresentations in connection with the Master Agreement entered into on September 15, 2015 and related agreements; (2) against Downey Brand for failure to file certain deeds; (3) against First Capital defendants (except Grant and Leider), Forum defendants, and Presidential defendants for a fraudulent scheme to sell Contributor Parent assets to Presidential; and (4) against First Capital defendants, Forum defendants, and our company for the transfer of the Contributor Parent and Contributor assets to us in exchange for allegedly worthless shares. There are also claims under state law for common law fraud, conversion, fraudulent conveyance, waste and mismanagement, accounting, injunctive relief, and violation of Cal. Bus. & Prof. Code § 17-200. Many of the claims asserted in the complaint, including the securities fraud claims, were never raised in the Demand Letter, as required by law. The suit seeks damages against all defendants for the failure of the Contributor Parent to respond to the Demand Letter, and an injunction against the sale of the assets to the Presidential defendants.

The parties submitted a motion for an order (i) staying all proceedings in this action for 60 days, or until the end of 2017, and (ii) extending the defendants time to respond to the complaint, or to make a motion with respect to the complaint, until 45 days after the Contributor Parent’s response to the Demand Letter. The court granted that motion on October 31, 2017. Upon completion of their investigation, the Contributor Parent provided a response to the Demand Letter, denying all claims made in the letter. A Motion to Dismiss this action was filed with the court on behalf of all plaintiffs. On April 12, 2018, plaintiffs filed an Amended Complaint in this matter.

The Company intends to defend itself vigorously against this suit. At this time, the amount of any loss, or range of loss, cannot be reasonably estimated as the case has only been initiated and no discovery has been conducted to determine the validity of any claim or claims made by plaintiffs. Therefore, the Company has not recorded any reserve or contingent liability related to these particular legal matters. However, in the future, as the cases progress, the Company may be required to record a contingent liability or reserve for these matters

Avalon

On January 12, 2018, the Company received a copy of a complaint, dated November 17, 2017, that was filed by Alpha Alpha, LLC in the Thirteenth Judicial District Court in the County of Valencia in the State of New Mexico against Avalon Jubilee, LLC, the holding company that owns the property in Los Lunas, New Mexico, HiTex, LLC, MCBB, LLC, Land Strategies, LLC, Ronald R. Cobb and John Does 1–5. The suit asked the court to, among other things, determine whether there have been unauthorized transfers of interest in Avalon Jubilee LLC; and declare who are the holders of interests in Avalon Jubilee LLC. Although the complaint did not name the Company or any of its subsidiaries or specifically question the Company’s interest in Avalon Jubilee LLC, it raised questions about whether the transfers of interest leading to the Company’s acquisition of its interest in Avalon Jubilee LLC were properly made in accordance with the Avalon Jubilee operating agreement.

On April 27, 2018, the Company, and certain of its subsidiaries, entered into an agreement with Alpha Alpha LLC and Presidential Realty Corporation and certain of its subsidiaries, under which the Company’s subsidiary, First Capital Avalon Jubilee LLC, was recognized as a 17.9133% member in Avalon Jubilee, LLC, and the operating agreement and other documents were so amended to reflect that acknowledgement. In 2017, the Company recognized an impairment expense of $1,439 to account for our estimate of the impact that the described litigation may have on the operations and fair value of the underlying asset.  The settlement and recognition of the Company’s ownership interest was viewed as a favorable outcome.


FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

Note 4 (Cont.)

Commitments and Contingencies:

Other litigation

The Company and certain subsidiaries are, and have been, involved in other miscellaneous litigation and legal actions, including product liability, consumer, commercial, tax and governmental matters, which can arise from time to time in the ordinary course of our business. The Company believes that these other litigations and claims will likely be resolved without a material effect on our consolidated financial position, results of operations or liquidity. However, litigation and legal actions are inherently unpredictable, and excessive verdicts can result in such situations. Although the Company believes it has or will have substantial defenses in these matters, it may, in the future, incur judgments or enter into settlements of claims that could have a material adverse effect on results of operations in a particular period.

Registration Rights Agreement with OFI

As a condition to the first closing under the OFI Purchase Agreement, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with OFI, pursuant to which the Company agreed to register all shares of common stock that may be issued upon conversion of the Series B Preferred Stock (the “Registrable Securities”) under the Securities Act of 1933, as amended (the “Securities Act”). The Company agreed to file a registration statement covering the resale of such Registrable Securities within 30 days of the first closing and cause such registration statement to be declared effective under the Securities Act as soon as possible but, in any event, no later than 120 days following the filing date if such registration statement is filed on Form S-3 or 150 days if such registration statement is filed on Form S-1. If such registration statement is not filed or declared effective by the SEC on or prior to such dates, or if after such registration statement is declared effective, without regard for the reason thereunder or efforts therefor, such registration statement ceases for any reason to be effective for more than an aggregate of 30 trading days during any 12-month period, which need not be consecutive, then in addition to any other rights the holders of Series B Preferred Stock may have under the Registration Rights Agreement or under applicable law, the Company shall pay to each holder an amount in cash, as partial liquidated damages and not as a penalty, equal to 1% of the product obtained by multiplying (x) $1.00 by (y) the number of shares of Registrable Securities held by the holder (such product being the “OFI Investment Amount”); provided that, in no event will the Company be liable for liquidated damages in excess of 1% of the OFI Investment Amount in any single month and that the maximum aggregate liquidated damages payable to the holders under the Registration Rights Agreement shall be 10% of the OFI Investment Amount. On January 23, 2018, the Company filed a registration statement on Form S-3 to register the shares issued to OFI in the first closing. OFI waived its right to liquidated damages in connection with the late filing of such registration statement.

Registration Rights Agreements with Payout Note Holders

On October 12, 2017, the Company issued secured convertible promissory notes (the “Payout Notes”) to Dr. Dolev Rafaeli, the Company’s former Chief Executive Officer, Dennis M. McGrath, the Company’s former President and Chief Financial Officer, and Dr. Yoav Ben-Dror, the former director of the Company’s foreign subsidiaries (collectively, the “Note Holders”) in the principal amounts of $3,134, $978 and $1,515, respectively. The Payout Notes were due on October 12, 2018, carried a 10% interest rate, (34%payable monthly in arrears commencing on December 1, 2017, and were convertible into shares of the Company’s Common Stock at maturity. The Company agreed to register the shares underlying the Payout Notes within 30 days of issuance with best efforts to cause the registration statement covering such shares to become effective within 120 days of issuance. On November 14, 2017, the Company filed a registration statement on Form S-3 (the “First Registration Statement”) resulted primarily fromto register all shares that may be issued upon conversion of the Payout Notes. On December 22, 2017, the Company and the Note Holders entered into a stock grant agreement (the “Stock Grant Agreement”) to, among other things, cause the early conversion of the Payout Notes into an aggregate of 5,628,291 shares of the Company’s Common Stock (the “Payout Shares”) and provide for the issuance of an aggregate of 1,857,336 additional shares of Common Stock to the Note Holders as consideration for the various agreements of the Note Holders contained in the Stock Grant Agreement (the “Additional Shares”), subject to stockholder approval. On January 23, 2018, the First Registration Statement was amended to include the Payout Shares issued under the Stock Grant Agreement.


FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

Note 4 (Cont.)

Commitments and Contingencies:

Registration Rights Agreements with Payout Note Holders (Cont.)

In connection with the Stock Grant Agreement, the Company entered into a registration rights agreement (the “Payout Registration Rights Agreement”) with the Note Holders, pursuant to which the Company agreed to register the shares of common stock under the Additional Shares under the Securities Act. The Company agreed to file a registration statement covering the resale of the Additional Shares within 30 days of the Stock Grant Agreement and cause such registration statement to be declared effective under the Securities Act as soon as possible but, in any event, no later than 120 days following the filing date if such registration statement is filed on Form S-3 or 150 days if such registration statement is filed on Form S-1. If such registration statement is not filed or declared effective by the SEC on or prior to such dates, or if after such registration statement is declared effective, without regard for the reason thereunder or efforts therefor, such registration statement ceases for any reason to be effective for more than an aggregate of 30 trading days during any 12-month period, which need not be consecutive, then in addition to any other rights the Note Holders may have under the Payout Registration Rights Agreement or under applicable law, the Company shall pay to each Note Holder an amount in cash, as partial liquidated damages and not as a penalty, equal to 1% of the product obtained by multiplying (x) $1.00 by (y) the number of shares of common stock held by the Note Holder included in the registration statement (such product being the “Payout Investment Amount”); provided that, in no event will the Company be liable for liquidated damages in excess of 1% of the Payout Investment Amount in any single month and that the maximum aggregate liquidated damages payable to the Note Holders under the Payout Registration Rights Agreement shall be 10% of the Payout Investment Amount. The registration rights provision contained in the Payout Notes was incorporated by reference into the Payout Registration Rights Agreement, except that the Note Holders waived the breach by the Company for failure to timely file the First Registration Statement and agreed that they are not entitled to liquidated damages as a result of such failure. Under the Payout Registration Rights Agreement, the Note Holders are entitled to liquidated damages if the First Registration Statement is not declared effective within 120 days following the date of the Payout Notes, but the Note Holders subsequently agreed to waive their rights to such liquidated damages until May 31, 2018.

On January 23, 2018, the Company filed a registration statement on Form S-3 for the Additional Shares. The Note Holders waived their rights to liquidated damages in connection with the late filing of such registration statement and in connection with the effectiveness deadline for such registration statement until May 31, 2018.

Amended and Restated Separation Agreement

On February 12, 2018, the Company entered into an Amended and Restated Separation Agreement with Mr. Stephen Johnson, its former Chief Financial officer, pursuant to which the Company has agreed to pay Mr. Johnson an amount of $123 in 11 installments as follows: the first six installments of $10 each, and the following five installments of $12.5 each. The first payment was made on February 15, 2018, and subsequent payments are to be made on or before the 15th day of each succeeding month, with the final installment to be paid on or before December 15, 2018.

The Company will also provide a health (medical, dental and/or vision) insurance reimbursement payment for Mr. Johnson and his family, for a period of 11 months, in the agreed upon amount of $3 per month.

In addition, the Company has agreed to issue to Mr. Johnson 271,000 shares of the Company���s common stock, subject to appropriate adjustment for any stock splits, stock or business combinations, recapitalizations or similar events occurring after the date of the agreement. Those shares will be issued on any business day during the period commencing on the date that is six months after the date of the agreement and ending on the date that is three business days after such six-month anniversary. As of March 31, 2018, the aforesaid shares were not issued to Mr. Johnson. As of March 31, 2018, the balance payable, included in accrued compensation and related expenses, is $382, inclusive of an additional expense of $3 incurred in the current federal and state losses for which no tax benefit is providedquarter due to the 100% valuation allowance for those jurisdictions. amendment of the agreement.


FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In addition,thousands, except share and per share amounts)

(unaudited)

Note 5

Redeemable Convertible Preferred Stock and Stockholders’ Deficit:

Common Stock

The Company’s common stock confer upon their holders the Israelifollowing rights:

The right to participate and vote in the Company’s stockholder meetings, whether annual or special. Each share will entitle its holder, when attending and participating in the voting in person or via agent or letter, to one vote;

The right to a share in the distribution of dividends, whether in cash or in the form of bonus shares, the distribution of assets or any other distribution pro rata to the par value of the shares held by them; and

The right to a share in the distribution of the Company’s excess assets upon liquidation pro rata to the par value of the shares held by them.

Convertible Series A Preferred Stock

The terms of the Convertible Series A Preferred Stock are governed by a certificate of designation (the “Series A Certificate of Designation”) filed by the Company with the Nevada Secretary of State on May 15, 2017. Pursuant to the Series A Certificate of Designation, the Company designated 3,000,000 shares of the Company’s preferred stock as “Series A Convertible Preferred Stock.” The Company issued 123,668 shares of Convertible Series A Preferred Stock in connection with the Contribution Agreement. Following is a summary of the material terms of the Series A Convertible Preferred Stock:

Dividends. Except for stock dividends or distributions for which adjustments are to be made, holders shall be entitled to receive, and the Company shall pay, dividends on shares of Convertible Series A Preferred Stock equal (on an as-if-converted-to-common-stock basis) to and in the same form as dividends actually paid on shares of the common stock when, as and if such dividends are paid on shares of the common stock. No other dividends shall be paid on shares of Convertible Series A Preferred Stock.

Liquidation. Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders shall be entitled to receive out of the assets, whether capital or surplus, of the Company, after the Redeemable Convertible Series B Preferred Stockholder’s liquidation preference, the same amount that a holder of common stock would receive if the Convertible Series A Preferred Stock were fully converted (disregarding for such purposes any conversion limitations) to common stock which amounts shall be paidpari passu with all holders of common stock.

Voting. Except as otherwise provided in the Series A Certificate of Designation or as otherwise required by law, the Convertible Series A Preferred Stock shall have no voting rights. However, as long as any shares of Convertible Series A Preferred Stock are outstanding, the Company shall not, without the affirmative vote of the holders of a majority of the then outstanding shares of the Convertible Series A Preferred Stock, (a) alter or change adversely the powers, preferences or rights given to the Convertible Series A Preferred Stock or alter or amend the Series A Certificate of Designation, (b) amend the Company’s articles of incorporation or other charter documents in any manner that adversely affects any rights of the holders, (c) increase the number of authorized shares of Convertible Series A Preferred Stock, or (d) enter into any agreement with respect to any of the foregoing.

Conversion. Each share of Convertible Series A Preferred Stock shall be convertible, at any time and from time to time from at the option of the holder thereof, into that number of shares of common stock determined by dividing $62.9575 by the Conversion Price. The Conversion Price for the Series A Convertible Preferred Stock is equal to $2.5183, subject to adjustment as described in the Series A Certificate of Designation.


FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and UK subsidiaries’ earningsper share amounts)

(unaudited)

Note 5 (Cont.)

Stockholders’ Equity (Cont.):

Redeemable Convertible Series B Preferred Stock

The terms of the Redeemable Convertible Series B Preferred Stock are taxed at rates lower thangoverned by a certificate of designation (the “Series B Certificate of Designation”) filed by the U.S. federal statutory rate (Israel 25% standard corporation tax rateCompany with the Nevada Secretary of State on December 22, 2017. Pursuant to the Series B Certificate of Designation, the Company designated 15,000,000 shares of the Company’s preferred stock as “Series B Preferred Stock”. As more fully described below, the Company has issued a total of 3,725,000 shares of Redeemable Convertible Series B Preferred Stock in connection with the OFI Purchase Agreement during 2017 and 2018. Following is a summary of the material terms of the Redeemable Convertible Series B Preferred Stock: 

Dividends. Holders of shares of Redeemable Convertible Series B Preferred Stock shall receive cumulative dividends, pro rata among such holders, prior to and in preference to any dividend on our outstanding common stock at the per annum rate of 8% of the Series B Original Issue Price (as defined below). Dividends on each share of Series B Preferred Stock will accrue daily and be cumulative from December 22, 2017 (the “Series B Original Issue Date”) and shall be payable upon the occurrence of any voluntary or involuntary liquidation, dissolution or winding up of the Company (a “Liquidation Event”), a conversion or a redemption. The “Series B Original Issue Price” shall mean $1.00 per share, subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Redeemable Convertible Series B Preferred Stock. Holders shall also be entitled to receive dividends on shares of Redeemable Convertible Series B Preferred Stock equal (on an as-if-converted-to-common-stock basis regardless of whether the Redeemable Convertible Series B Preferred Stock is then convertible or otherwise subject to conversion limitations) to and in the same form as dividends actually paid on shares of our common stock when, as and if such dividends are paid on shares of the common stock.

Liquidation. In the event of (i) a Liquidation Event or (ii) a merger or consolidation (other than one in which our stockholders own a majority by voting power of the outstanding shares of the surviving or acquiring corporation) or a sale, lease, transfer, exclusive license or other disposition of all or substantially all of our assets (a “Deemed Liquidation Event”), the holders of shares of Redeemable Convertible Series B Preferred Stock then outstanding shall be entitled to be paid out of our assets available for distribution to stockholders before any payment shall be made to the holders of our common stock, Series A Convertible Preferred Stock or any other class of securities authorized that is specifically designated as junior to the Redeemable Convertible Series B Preferred Stock (the “Junior Securities”) by reason of their ownership thereof, butpari passu with the holders of shares of any class of securities authorized that is specifically designated aspari passu with the Redeemable Convertible Series B Preferred Stock (the “Parity Securities”) on a pro rata basis, an amount per share equal to the Series B Original Issue Price, plus any accrued dividends thereon. If upon any such Liquidation Event or Deemed Liquidation Event, our assets available for distribution to stockholders shall be insufficient to pay the holders of shares of Redeemable Convertible Series B Preferred Stock the full amount to which they shall be entitled and the holders of Parity Securities the full amount to which they shall be entitled, the holders of shares of Redeemable Convertible Series B Preferred Stock and the holders of shares of Parity Securities shall share ratably in any distribution of the assets available for distribution in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. Upon a Liquidation Event or a Deemed Liquidation Event, in the event that following the payment of such liquidation preference the Company shall have additional cash and other assets of available for distribution to stockholders, then the holders of shares of Redeemable Convertible Series B Preferred Stock shall participatepari passu with the holders of shares of Parity Securities and Junior Securities based on the then current conversion rate (disregarding for such purposes any conversion limitations) with respect to all remaining distributions, dividends or other payments of cash, shares or other assets and property of our company, if any.

As of March 31, 2018, the aggregate liquidation preference amounted to $3,807 (unaudited). The foregoing dollar amount does not include dividends, as the Company’s Board of Directors has not declared any dividends since inception.


FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts) 

(unaudited)

Note 5 (Cont.)

Stockholders’ Equity (Cont.):

Voting Rights. On any matter presented to our stockholders for their action or consideration, each holder of Redeemable Convertible Series B Preferred Stock shall be entitled to cast the number of votes equal to the number of whole shares of common stock into which the shares of Redeemable Convertible Series B Preferred Stock held by such holder are convertible as of the record date for determining stockholders entitled to vote on such matter (subject to the conversion limitations described below). Except as provided by law or by the other provisions of the Series B Certificate of Designation, the holders shall vote together with the holders of shares of common stock as a single class. However, as long as any shares of Redeemable Convertible Series B Preferred Stock are outstanding, the Company shall not, without the affirmative vote of the holders of a majority of the outstanding shares of Redeemable Convertible Series B Preferred Stock (the “Requisite Holders”), (i) issue any class of equity securities that is senior in rights to the Redeemable Convertible Series B Preferred Stock, (ii) issue any Parity Securities, (iii) alter or change adversely the powers, preferences or rights given to the Redeemable Convertible Series B Preferred Stock or alter or amend the Series B Certificate of Designation, (iv) amend our articles of incorporation or other charter documents in any manner that adversely affects any rights of the holders of Redeemable Convertible Series B Preferred Stock, (v) except pursuant to the redemption provisions of Parity Securities, redeem any shares of our preferred stock or common stock (other than pursuant to employee or consultant agreements giving us the right to repurchase shares at the original cost thereof upon the termination of services and provided that such repurchase is approved by our Board of Directors), or (vi) enter into any agreement with respect to any of the foregoing.

Conversion. Each share of Redeemable Convertible Series B Preferred Stock plus accrued, but unpaid, dividends thereon (the “Aggregate Preference Amount”), shall be convertible, at any time and from time to time at the option of the holder thereof, into that number of shares of common stock determined by a formula (computed on the date of conversion), (i) the numerator of which is equal to the Aggregate Preference Amount and (ii) the denominator of which is equal to the quotient of the Conversion Price divided by $1.33. The “Conversion Price” for the Redeemable Convertible Series B Preferred Stock was adjusted to $0.8684 starting in February 2018, subject to adjustment as described in the Series B Certificate of Designation. In addition, upon the earlier to occur of: (i) a Deemed Liquidation Event or (ii) if there has not been a breach or default by us under the OFI Purchase Agreement that has occurred and is continuing, May 31, 2018, each share of Redeemable Convertible Series B Preferred Stock plus accrued, but unpaid, dividends thereon shall be automatically converted into that number of shares of common stock determined by dividing $1.33 by the Conversion Price. Notwithstanding the forgoing, if the Company has not obtained stockholder approval with respect to the issuance of shares upon conversion in excess of 19.99% of the issued and outstanding common stock on the applicable conversion date (the “Stockholder Approval”), then the Company may not issue, upon conversion of the Redeemable Convertible Series B Preferred Stock, a number of shares of common stock which, when aggregated with any shares of common stock issued on or after the Series B Original Issue Date and prior to such conversion date, would exceed 19.99% of the issued and outstanding shares of common stock (subject to adjustment for forward and reverse stock splits, recapitalizations and the like) (the “Issuable Maximum”). Each holder shall be entitled to a portion of the Issuable Maximum equal to the quotient obtained by dividing (i) the Series B Original Issue Price of such holder’s Redeemable Convertible Series B Preferred Stock by (ii) the aggregate Series B Original Issue Price of all Redeemable Convertible Series B Preferred Stock issued to all holders.


FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

Note 5 (Cont.)

Stockholders’ Equity (Cont.):

Redemption. If (i) there is a breach by us of any of our representations and warranties contained in Sections 3.1(a) (Subsidiaries), 3.1(b) (Organization and Qualification), 3.1(c) (Authorization; Enforcement), 3.1(d) (No Conflicts), 3.1(f) (Issuance of the Shares), 3.1(g) (Capitalization), or 3.1(n) (Taxes) of the OFI Purchase Agreement that has not been cured within 30 days after the date of such breach or (ii) Stockholder Approval has not been obtained by March 31, 2018 (each, a “Redemption Event”), then each holder of Redeemable Convertible Series B Preferred Stock may, at its option, require us to redeem any or all of the shares of Redeemable Convertible Series B Preferred Stock held by such holder at a price per share equal to $1.33, plus accrued, but unpaid, dividends through and including the date of such redemption. The Company must provide a notice (as “Event Notice”) to each holder of the occurrence of a Redemption Event of the kind described in (i) above (a “Breach Event”) as soon as practicable after becoming aware of such Breach Event, but in any event, not later than 15 days after such Breach Event and such notice shall provide a reasonable description of such Breach Event. A holder must send written notice of redemption (a “Redemption Notice”) to the Company within 90 days after (i) the Company provides such holder an Event Notice with respect to a Breach Event or (ii) the occurrence of a Redemption Event of the kind described in (ii) above. For the avoidance of doubt, if the Company does not timely provide an Event Notice, the holder shall nevertheless have the right to deliver a Redemption Notice in connection with any Redemption Event. If a holder fails to send a Redemption Notice on prior to the 90th day after the occurrence of any Redemption Event, then such holder will lose such holder’s right to redemption with respect to the particular Redemption Event, but not any other Redemption Event. As of March 31, 2018, the Company did not obtain shareholder approval and therefore, the then outstanding Series B Preferred Stock became redeemable at the option of OFI.

Securities Purchase Agreement

On December 22, 2017, the Company entered into the OFI Purchase Agreement with OFI, under which OFI may, but is not obligated to, invest up to $15,000 in the UK 20%Company in a series of closings over a period prior to December 31, 2018, in exchange for which OFI will receive shares of the Company’s Redeemable Convertible Series B Preferred Stock (“Series B Shares) at a purchase price of $1.00 per share (the “Option”).

 

On December 22, 2017 (the “Initial Date”), the Company and OFI completed the first closing under the OFI Purchase Agreement, pursuant to which OFI exercised a portion of the Option and provided $1,500 to the Company in exchange for 1,500,000 Series B Shares. On January 24, 2018 (the “Second Date”), the Company and OFI completed a second closing under the OFI Purchase Agreement, pursuant to which OFI provided $2,225 to us in exchange for 2,225,000 Series B Shares.

Under the OFI Purchase Agreement, the proceeds from the first closing were to be used for working capital and general corporate purposes, the proceeds from the second closing were to be used to perform due diligence and invest in Income Generating Properties (as defined in the OFI Purchase Agreement) that have been approved by our Board of Directors, and proceeds from subsequent closings were be used to invest in Income Generating Properties (as defined in the OFI Purchase Agreement) that have been approved by our Board of Directors or as otherwise agreed to between us and OFI in writing prior to such subsequent closings. On March 16, 2018, the Company and OFI entered into a letter agreement, pursuant to which OFI agreed that the Company may use all proceeds for the purposes and uses described in a budget agreed to between us and OFI at the time the letter agreement was signed. In connection with such letter agreement, the Company agreed to provide OFI, on a quarterly basis, on or prior to 15 days after the end of each quarter, a report that describes, in reasonable detail, the actual expenses incurred and payments made during such period compared to the expenses and payments specified in the budget for such period, certified by our Chief Financial Officer.

Under ASC 480, “Distinguishing Liabilities from Equity,” preferred stock that is not redeemable or is redeemable solely at the option of the issuer shall be included in stockholders’ equity. If the instrument meets any of the following criteria, mezzanine classification between liabilities and stockholders’ equity would be required: 

It is redeemable at a fixed or determinable price on a fixed or determinable date or dates;
It is redeemable at the option of the holder; or
It has conditions for redemption which are not solely within the control of the issuer, such as stocks which must be redeemed out of future earnings.


FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

Note 5 (Cont.)

Stockholders’ Equity:

In addition, per ASC 480, deemed liquidation events that require (or permit at the holders’ options) the redemption of only one or more of a particular class of equity instrument for cash or other assets cause those instruments to be considered contingently redeemable and therefore, subject to mezzanine classification.

Since the Series B Shares have conditional redemption provisions which are outside of the control of the Company and also contain a deemed liquidation preference, the Series B Shares were classified as mezzanine financing at the Initial Date at the residual amount, which is the difference between the total proceeds received and the fair value of the Option. Subsequent measurement is unnecessary if it is not probable that the instrument will become redeemable. If it is probable that the equity instrument will become redeemable the following measurement methods shall be applied in accordance with either of the following methods and shall be applied in a consistent manner:

Accrete changes in the redemption value over the period from the date of issuance (or from the date that it becomes probable that the instrument will become redeemable, if later) to the earliest redemption date of the instrument using an appropriate methodology, usually the interest method. Changes in the redemption value are considered to be changes in accounting estimates.

Recognize changes in the redemption value (for example, fair value) immediately as they occur and adjust the carrying amount of the instrument to equal the redemption value at the end of each reporting period. This method would view the end of the reporting period as if it were also the redemption date for the instrument.

Under ASC 480, the aforementioned written call Option is considered freestanding, as the Company believes it is legally detachable and separately exercisable. As the option is exercisable for shares subject to possible redemption at the option of the holder, as of the Initial Date, the Option was measured at fair value and recorded as a non-current financial liability on the consolidated balance sheet. Excess of the initial value of the option liability over the proceeds received was charged immediately into the consolidated statement of comprehensive loss as financing expenses in the fourth quarter of 2017. The Option is marked to market in each reporting period until it is exercised or expired, as earlier, when changes in the fair value of the Option are charged into statement of comprehensive loss. For the three month period ended March 31, 2018, the Company recorded expenses in total amount of $273 due to revaluation of Option to purchase redeemable convertible B preferred stock.

In addition, at the Initial Date, the Company incurred de minimis direct and incremental issuance costs which were charged immediately into the consolidated statement of comprehensive loss as finance expenses, as the Option was presented at fair value.

At the Initial Date, each Series B Share was convertible into 1.24789 shares of common stock valued at $1.00 per share. As a result, Beneficial Conversion Feature (the “BCF”) amounting to approximately $372 was measured assuming full conversion. However, the conversion of the Preferred Stock is subject to certain contingencies, which impact the timing and amount of the BCF. At the Initial Date which is also the commitment date, the Company should record a BCF for the Preferred Stock for any shares convertible at that time without requiring stockholder approval through the planned proxy statement. However, as no residual proceeds were allocable to the Series B Shares at the Initial Date, no BCF was recognized with respect to the first closing.

In conjunction with the Second Date, OFI partially exercised the written call option present in the OFI Purchase Agreement and therefore upon exercise, the pro-rata share of this liability amounting to $677 was reclassified in the condensed consolidated balance sheet from Option to purchase redeemable convertible preferred stock into redeemable convertible preferred stock Series B.

On the Second Date, each Series B Share (exclusive of dividends) was convertible into 1.24789 shares of common stock valued at $1.00 per share. As a result of the reclassification of the exercised written call option, there was no additional BCF measured.


FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

Note 5 (Cont.)

Stockholders’ Equity:

The fair value of the Option was based on management estimates and values derived from a calculation to provide an approximate indication of value. The fair value of Option is estimated at each reporting and exercise date, including, December 31, 2017, January 24, 2018 and March 31, 2018 by using hybrid method that includes scenario of conversion and scenario liquidation and the Black-Scholes option pricing model. In the first scenario, the Series B Preferred Stock price applied in the model was assumed based on the as-converted price on the date of estimation. Expected volatility was estimated by using a group of peers in the real estate development, homebuilding and income-producing properties sectors, and applying a 75% percentile ranking based on the total capitalization of the Company. In the second scenario, the Option was estimated based on the value of the Option in a proposed liquidation scenario. A probability weighting was applied to determine the expected value of the Option. The Company measured the fair value of the Option on a recurring basis in accordance with ASC 820, “Fair Value Measurement and Disclosures” (primary inputs classified at level 3).

The following are the key underlying assumptions that were used:

  December 31, 2017  January 24, 2018  March 31, 2018 
Dividend yield (%)  0   0   0 
Expected volatility (%)  36.9   37.9   39.4 
Risk free interest rate (%)  1.74   1.75   1.99 
Strike price  1.00   1.00   1.00 
Series B Preferred Stock price  1.13   1.10   1.18 
Probability of if-converted scenario (%)  90   90   90 
Probability assumed liquidation scenario (%)  10   10   10 
Expected term of Option (years)  1.0   0.9   0.8 
Option’s fair value $0.33  $0.30  $0.35 

The following tabular presentation reflects the activity in the Option to purchase Redeemable Convertible B Preferred Stock during the three months ended March 31, 2018 -

  Fair value of Option to
purchase Redeemable
Convertible B Preferred
Stock
 
  Unaudited 
     
Opening balance, December 31, 2017 $4,390 
Partial exercise of series B redeemable convertible preferred stock written call option  (677)
Revaluation of option to purchase redeemable convertible B preferred stock  273 
     

Closing balance, March 31, 2018

 $3,986 




FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

Note 5 (Cont.)

Stockholders’ Equity:

In the absence of voluntary conversion and assuming no breaches as described above under “Redemption”, the Series B Shares automatically convert on May 31, 2018. As such, accretion adjustments to the carrying amount of the Series B Shares to the automatic conversion date of May 31, 2018 are recorded as deemed dividends. However, at March 31, 2018, the Company did not obtain shareholder approval and therefore, the then outstanding Series B Preferred Stock became redeemable at the option of OFI. As such, as of March 31, 2018, the Company has adjusted the carrying value of the Convertible Series B Preferred Stock to the maximum redemption amount. Activity in the account redeemable convertible preferred stock Series B for the three months ended March 31, 2018, is outlined in the below table -

  March 31, 2018 
  Unaudited 
    
Opening balance, December 31, 2017 $87 
Proceeds from issuance of Series B Shares  2,225 
Accretion of Series B Preferred Stock to redemption value  1,968 
Partial exercise of Series B Preferred Stock written call option  677 

Dividend on Series B Preferred Stock 

  79 
     

Closing balance, March 31, 2018 

 $5,036 

In addition, pursuant to the OFI Purchase Agreement, the Company agreed that so long as the Series B Shares purchased by OFI are outstanding, the Company’s debt (as defined by U.S. generally accepted accounting principles) should not exceed 45% of its fixed assets without the prior written consent of the Requisite Holders. As of March 31, 2018, the Company has met the covenant.

Common Stock Options

The Company’s Amended and Restated 2000 Non-Employee Director Stock Option Plan authorized 1,250,000 shares. As of March 31, 2018, the number of shares available for future issuance pursuant to this plan is 240,018; all other shares had either been issued or reserved for issuance upon exercise of stock options.

The Company’s Amended and Restated 2005 Equity Compensation Plan authorized 3,500,000 shares. As of March 31, 2018, there are no further shares available for future issuance pursuant to this plan; all other shares had either been issued or reserved for issuance upon exercise of stock options.

On January 2, 2018, the Company granted an option to purchase 100,000 shares of stock to its new Chief Executive Officer and an option to purchase 47,088 shares of stock to its new Chief Financial Officer and Chief Investment Officer, each at an exercise price of $0.98 per share. The options become vested over a three-year period from the date of grant. The options shall vest 1/4 in each of the first two years from the grant date and the remaining 1/2 on the third year from the grant date. The Company used the Black-Scholes-Merton pricing model to estimate the fair value. The Black-Sholes-Merton pricing model assumptions used are as follows: expected dividend yield of 0%; risk-free interest rate of 2.5%; expected volatility of 36.9%, and expected term of 10 years. The fair value of the options at the grant date was $74. During the three-month period ended March 31, 2018, as result of such grant, the Company recognized compensation expense of $9, and there was $65 of unrecognized compensation expense related to non-vested option grants.


FC GLOBAL REALTY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)

(unaudited)

Note 5 (Cont.)

Stockholders’ Equity:

Common Stock Options

A summary of stock option transactions under these plans during the three months ended March 31, 2018 are as follows:

   Number of Stock
Options
  Weighted
Average
Exercise Price
  

Weighted

Average

Remaining

Term

(in years) 

  Aggregate
Intrinsic
Value (*)
 
Outstanding at January 1, 2018   79,890  $94.51   4.1  $

 
Granted/vested   147,088  $0.98   9.8  $

 
Exercised             
Expired/cancelled             
Outstanding at March 31, 2018   226,978  $33.90   7.8  $

 
Exercisable at March 31, 2018   79,890  $94.51   4.1  $

 

(*)The aggregate intrinsic value represents the total intrinsic value (the difference between the deemed fair value of the Company’s Ordinary Shares on the last day of first quarter of 2018 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on March 31, 2018. This amount is impacted by the changes in the fair value of the Company’s shares.

A summary of non-vested restricted stock during the three months ended March 31, 2018 are as follows:

   Shares of
Restricted Stock
  Weighted Average
Grant-Date Fair Value
 
Non-vested at January 1, 2018   11,500  $9.02 
Granted         

Forfeited/cancelled

   (9,250)  8.97 
Non-vested at March 31, 2018   2,250  $9.25 

The total equity-based compensation expense related to the Company’s equity-based awards, recognized during the three months ended March 31, 2018 and 2017, total the amounts of $14 (unaudited) and $811 (unaudited), respectively. The amount related to the three months ended March 31, 2017 is included in discontinued operations.

As of March 31, 2018, there was $86 (unaudited) of total unrecognized compensation cost related to non-vested stock awards that based on their original vesting terms was expected to be recognized.

23 

FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited) 

Note 6

Income Taxes:

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized; creating a new limitation on deductible interest expense; changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017; and changing limitations on the deductibility of certain executive compensation.

In December 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which addresses situations where the accounting is incomplete for the income tax effects of the Act. SAB 118 directs taxpayers to consider the impact of the act as “provisional” when the Company had no material changesdoes not have the necessary information available, prepared or analyzed (including computations) to finalize the accounting for the change in tax law. Companies are provided a measurement period of up to one year to obtain, prepare, and analyze information necessary to finalize the accounting for provisional amounts or amounts that cannot be estimated.

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for uncertainthe future tax positions. PhotoMedexconsequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.

A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which the related temporary difference becomes deductible. The benefit of tax positions taken or expected to be taken in the Company’s income tax returns are recognized in the consolidated financial statements if such positions are more likely than not of being sustained. Included in other accrued liabilities at March 31, 2018 is $1.5 million of net provisions related to corporate international unrecognized tax benefits.

Taxes, which may apply in the event of a disposal of investments in subsidiaries, have not been included in computing the deferred taxes, as the Company anticipates it would liquidate those subsidiaries that can be closed on a tax free basis.

The Company files corporate income tax returns in the United States, both in the Federal jurisdiction and in various State jurisdictions. The Company is subject to Federal income tax examination for calendar years 20122014 through 20162017 and is also generally subject to various State income tax examinations for calendar years 20122014 through 2016.2017. Photo Therapeutics Limited files in the United Kingdom. Radiancy (Israel) Limited files in Israel. The Israeli subsidiary is subject to tax examination for calendar years 20112013 through 2016.2017.

 

As a result of its anticipated transition into a real estate investment company, such transition to commence shortly afterIn the filing of this report with the anticipated closing of the First Contribution being scheduled for May 17, 2017,period ended March 31, 2018, the Company is expectedrecognized an income tax provision of $212 relating to re-examine itsadjustments of accruals and prepaid tax status and to re-evaluate the quantity and type of its tax reportings.assets.

 

22


FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited) 

 

Note 97

Commitments and contingencies:Subsequent Events:

 

See Note 11, Commitments and Contingencies, in

Notice of Delisting

On April 10, 2018, the Company received written notification (the “Notice”) from The NASDAQ Stock Market LLC (“NASDAQ”) that the Company’s stockholders’ equity reported on its Form 10-K for the yearperiod ended December 31, 20162017 had fallen below the minimum requirement of $2.5 million, and that as of April 9, 2018, the Company does not meet the alternatives of market value of listed securities or net income from continuing operations. The Company is therefore not in compliance with the requirements for further informationcontinued listing on pending legal actions involvingthe NASDAQ Capital Market under NASDAQ Marketplace Rule 5550(b)(1).

The Notice provides the Company with a period of 45 calendar days, or until May 25, 2018, to submit a plan to regain compliance with the listing rules. The Company will file that plan by May 25, 2018, but cannot assess the likelihood, or guarantee, that NASDAQ will grant an extension to the Company. If the Company’s plan is accepted, NASDAQ may grant an extension of up to 180 days from the date of the Notice in which to regain compliance. If the Company does not regain compliance, or if the plan is not accepted by NASDAQ, the Company expects that NASDAQ would provide notice that its securities are subject to delisting from the NASDAQ Capital Market.

Supplemental Agreement

On April 20, 2018, the Company and its subsidiaries. There have been no significant changesOFI entered into a supplemental agreement (the “Supplemental Agreement”) to clarify certain voting and conversion limitations with respect to the statusSeries B Preferred Stock in response to comments from the staff of NASDAQ.

Pursuant to the Series B Certificate of Designation, on any matter presented to stockholders for their action or consideration, each holder of Series B Preferred Convertible Stock was entitled to cast the number of votes equal to the number of whole shares of common stock into which the shares of Series B Preferred Stock held by such holder are convertible as of the items reportedrecord date for determining stockholders entitled to vote on such matter (subject to certain conversion limitations described below). Pursuant to the Supplemental Agreement, OFI agreed that the voting rights of the Series B Preferred Stock shall be limited to the number of votes that is equal to the quotient of the aggregate investment amount invested to purchase Series B Preferred Stock divided by $1.12, the market value of the Company’s common stock on December 21, 2017, or approximately 0.893 votes per share (subject to certain conversion limitations described below).

The Certificate of Designation also provided that, if the Company has not obtained approval from stockholders, then the Company may not issue, upon conversion of the Series B Preferred Stock, a number of shares of Common Stock which would exceed 19.99% of the issued and outstanding shares of common stock on the date of conversion. Pursuant to the Supplemental Agreement, OFI agreed that, until stockholder approval is obtained, such conversion limitation shall be equal to 2,372,536 shares, or 19.99% of the 11,868,619 outstanding shares of common stock as of December 22, 2017, the date of the initial closing under the OFI Purchase Agreement.

Cancellation and Exchange Agreement

On April 20, 2018, the Company and OFI entered into a Cancellation and Exchange Agreement (the “Exchange Agreement”), pursuant to which OFI agreed to provide an additional $2,000 to the Company in exchange for 2,000,000 shares of the Company’s Series B Preferred Stock, subject to certain conditions set forth in the above Form 10-K.Exchange Agreement, including, among other things, the cancellation of 95,770 shares of the Company’s Series A Preferred Stock held by OFI in exchange for 5,382,274 shares of the Company’s common stock (the “OFI Shares”). Under the Exchange Agreement, closing of this additional investment shall occur promptly following the filing of the Information Statement (as defined below) with the SEC and mailing of the Information Statement to the stockholders of the Company, and in any event within 3 days thereafter.


FC GLOBAL REALTY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited) 

 

Note 107 (Cont.)

EmployeeSubsequent Events:

In accordance with the Exchange Agreement, the Company has obtained the irrevocable written consent of at least a majority of the stockholders of the Company (excluding OFI) that is final and binding (the “Stockholder Consent”) approving the issuance of the OFI Shares and the issuance of Common Stock Benefit Plans:upon conversion of all of the Series B Preferred Stock held by OFI or issuable under the OFI Purchase Agreement. The Stockholder Consent shall become effective on the 20th day following the filing and mailing of a definitive information statement on Schedule 14C (the “Information Statement”), at which time stockholder approval of such issuances shall become effective (“Stockholder Approval”). Pursuant to the Exchange Agreement, the Company agreed to issue the OFI Shares as soon as practicable after obtaining Stockholder Approval and in any event within 3 business days of obtaining Stockholder Approval.

Pursuant to the Exchange Agreement, the Company agreed that the OFI Shares shall constitute “Registrable Securities” under the registration rights agreement between the Company and OFI, dated December 22, 2017, and the Company shall use commercially reasonable efforts to promptly amend the registration statement filed by the Company on January 23, 2018 to include the OFI Shares and any other shares of common stock of the Company that are issuable to OFI upon conversion of Series B Preferred Convertible Stock of OFI that are not already included in such registration statement.

 

The Company also agreed that, as soon as OFI identifies two director nominees to the Company, the Company’s nominating committee will commence its customary vetting process. On or prior to the closing of the additional investment, the Company agreed to appoint such director nominees to its board of directors.

Finally, the Exchange Agreement amends the OFI Purchase Agreement to remove Section 4.6, which required the Company to amend the conversion price of the Company’s Series A Preferred Stock. The parties agreed that the Company has no obligation to amend the conversion price.

Submission of Matters to a Non-Employee Director Stock OptionVote of Security Holders

On April 18, 2018, stockholders collectively holding 8,592,972 shares consented in writing to approve (i) an amendment to the Company’s amended and restated articles of incorporation to change the name of the Company to Kona International Group, Inc. and (ii) the FC Global Realty Incorporated 2018 Equity Incentive Plan. This plan has authorized 74,000 shares;Such shares represented approximately 60.34% of which 2,135the Company’s outstanding shares had been issued or were reserved foreligible to vote on this matter.

On April 18, 2018, stockholders collectively holding 6,220,436 shares consented in writing to approve the issuance as awards of shares of common stock and 12,079 shares were reserved for outstanding stock options. The number of shares available for future issuance pursuant to this plan is 71,374 as of March 31, 2017.

In addition,OFI upon the Company has a 2005 Equity Compensation Plan (“2005 Equity Plan”). The 2005 Equity Plan has authorized 1,200,000 shares, of which 519,078 shares had been issued or were reserved for issuance as awardsconversion of shares of common stock,Series B Preferred Stock issued and 133,649 shares were reserved for outstanding options as of March 31, 2017. The number of shares available for future issuance pursuantissuable to this plan is 547,273 as of March 31, 2017.

Stock option activity under all of the Company’s share-based compensation plans for the three months ended March 31, 2017 was as follows:

  Number of
Options
  Weighted
Average
Exercise Price
 
Outstanding, January 1, 2017  134,150  $85.22 
Granted  -   - 
Exercised  -   - 
Cancelled  (23,285)  71.73 
Outstanding, March 31, 2017  110,865  $88.05 
Options exercisable at March 31, 2017  107,112  $87.97 

At March 31, 2017, there was $152 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 1.64 years. Following the completion of the transaction describedOFI in Note 1, such compensation will be accelerated.

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

On February 26, 2015, the Company issued 299,000 restricted stock units to a number of employees. The restricted shares have a purchase price of $0.01 per share and vest, and cease to be subject to the Company’s right of repurchase, over a four-year period. The Company determined the fair value of the awards to be the quoted market price of the Company’s common stock units on the date of issuance less the value paid for the award. The aggregate fair value of these restricted stock issued was $2,766.

Restricted stock vests ratably over a three-to-five year period, depending uponaccordance with the terms of the grant. Employees must remain employed by the Company on each vesting date in order to have unrestricted ownership in these shares; employees who leave before a vesting date forfeit the shares in which they have not yet vestedOFI Purchase Agreement and the issuance of thosethe OFI Shares in accordance with the terms of the Exchange Agreement. Such shares is cancelled. Asrepresented approximately 52.41% of March 31, 2017, 96,861the Company’s outstanding shares had been cancelled dueeligible to forfeiture by employees.vote on this matter.

23

 

On October 29, 2015,April 20, 2018, a Preliminary Information Statement regarding these proposals was filed. The Company has received comments from the Company issued 1,000 sharesSEC and will file an amendment to the Preliminary Information Statement. Stockholder approval of common stock tothese actions shall become effective on the 20th day following the mailing of a non-employee director for an aggregate fair value of $3.Definitive Information Statement.

 

Total stock based compensation expense was $811, and $433, for the three months ended March 31, 2017 and 2016 respectively including amounts relating to consultants.Acquisition of Medical Office Building

Note 11

Business Segments and Geographic Data:

The Company is in the process of transitioning from a skin health company providing medical and cosmetic solutions for dermatological conditions, to a real estate investment company holding investments in a variety of current and future projects, including residential developments, commercial properties such as gas station sites, and hotels and resort communities, as described further in this report.

The Company had organized its original business into three operating segments to align its organization based uponOn April 26, 2018, the Company’s management structure, productssubsidiary, RETPROP I, LLC, completed the acquisition of a 7,738 square-foot medical office building in Dayton, Ohio for a $322 purchase price, paid in cash consideration. The building’s former owner, and services offered, markets served and types of customers, as follows: The Consumer segment derived its revenues from the design, development, manufacturing and selling of long-term hair reduction and acne consumer products; that segment was sold on January 23, 2017. The Physician Recurring segment derived its revenues mainly from the sales of skincare products; that segment was sold on September 15, 2016. The Professional segment generates revenues from the sale of equipment, such ascurrent tenant, a medical and esthetic light and heat based products; that segment remainspractice, has entered into a lease with the Company as ofto continue its occupancy through April 2022, with the current date.

The anticipated real estate investment propertiesoption to be transferred to the Company will be classified into one or morerenew that lease for two additional revenue segments.

Management reviews financial information presented on an operating segment basis for the purposes of making certain operating decisions and assessing financial performance. Unallocated operating expenses include costs that are not specific to a particular segment but are general to the group; included are expenses incurred for administrative and accounting staff, general liability and other insurance, professional fees and other similar corporate expenses. Interest and other financing income (expense), net is also not allocated to the operating segments. Unallocated assets include cash and cash equivalents, prepaid expenses and deposits.

The following tables reflect results of operations from our business segments for the periods indicated below. The consumer segment reflects operation from January 1, 2017 through January 23, 2017 the date of the sale of the consumer division to ICTV. See Note 1 Acquisitions and Dispositions for more information.

Three Months Ended March 31, 2017 (unaudited)

  CONSUMER  PHYSICIAN
RECURRING
  PROFESSIONAL  TOTAL 
Revenues $3,539  $-  $-  $3,539 
Cost of revenues  100   -   -   100 
Gross profit  3,439   -   -   3,439 
Gross profit %  97.1%  0%  0%  97.1%
                 
Allocated operating expenses:                
Engineering and product development  143   -   -   143 
Selling and marketing  620   -   -   620 
Loss on disposal of assets  2,057   28       2,085 
Unallocated operating expenses  -   -   -   2,342 
   2,820   28   -   5,190 
Income (loss) from continuing operations  619   (28)  -   (1,751)
                 
Interest  and other financing expense, net  -   -   -   (77)
                 
Income (loss) from continuing operations before income taxes $619  ($28) $-  ($1,828)

five-year terms. 

 

24

Three Months Ended March 31, 2016 (unaudited)

  CONSUMER  PHYSICIAN
RECURRING
  PROFESSIONAL  TOTAL 
Revenues $9,922  $1,208  $103  $11,233 
Cost of revenues  2,219   466   69   2,754 
Gross profit  7,703   742   34   8,479 
Gross profit %  77.6%  61.5%  33.0%  75.5%
                 
Allocated operating expenses:                
Engineering and product development  272   42   -   314 
Selling and marketing  6,961   829   13   7,803 
Loss on sale of assets          843   843 
                 
Unallocated operating expenses  -   -   -   3,965 
   7,233   871   856   12,925 
Income (loss) from continuing operations  470   (129)  (822)  (4,446)
                 
Interest and other financing expense, net  -   -   -   (333)
                 
Income (loss) from continuing operations before income taxes $470  $(129) $(822) $(4,779)

For the three months ended March 31, 2017 and 2016, net revenues by geographic area (determined by ship to location) were as follows:

  Three Months Ended
March 31,
 
  2017  2016 
  (unaudited)  (unaudited) 
North America1 $2,475  $7,313 
Asia Pacific  -   514 
Europe (including Israel)  1,064   3,391 
South America  -   15 
  $3,539  $11,233 
         
1 United States $2,475  $6,094 
1 Canada $-  $695 

25

As of March 31, 2017 and December 31, 2016, long-lived assets by geographic area were as follows:

  March 31, 2017  December 31, 2016 
  (unaudited)    
North America $40  $71 
Asia Pacific  -   17 
Europe (including Israel)  62   900 
  $102  $988 

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

Note 12

Significant Customer Concentration:

No single customer accounted for more than 10% of total company revenues for either of the three months ended March 31, 2017 or 2016.

26

ITEM 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussionUse of our financial conditionTerms

Except as otherwise indicated by the context and resultsfor the purposes of operations should be readthis report only, references in conjunctionthis report “we,” “us,” “our” and the “Company” refer to FC Global Realty Incorporated, a Nevada corporation, and its consolidated subsidiaries.

Special Note Regarding Forward Looking Statements

This report and the other materials we have filed or will file with the condensed consolidatedU.S. Securities and Exchange Commission, or the SEC, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including, but not limited to, statements regarding our business strategy, expectations and plans regarding our future operations and our future financial statements and notes to condensed consolidated financial statements included elsewhereposition. When used in this Quarterly Report on Form 10-Q. This discussion containsreport or in the other materials we have filed or will file with the SEC, the words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “indicate,” “seek,” “project,” “plan,” “could,” “should” or “would” and similar expressions are intended to identify forward-looking statements. Among the factors that could cause or contribute to material differences between our actual results and those indicated from the forward-looking statements that involveare risks and uncertainties. These forward-looking statementsuncertainties inherent in our business, including, but not limited to:

our ability to successfully integrate the acquired real estate assets;
our ability to retain key employees;
demand fluctuations in the real estate industry;
adverse changes in economic conditions in markets where our real estate investments may be made;
possible decreases in the market value of our future real estate investments;
our ability to obtain adequate financing to fund our future property acquisitions and project developments;
the possibility that we may not recover our advance costs in each real estate development project;
our reliance on subcontractors to construct each property, and on building supply companies to provide components for each property’s construction;
competition in the real estate industry;
the possibility that legal challenges or governmental regulations may delay the start or completion of construction on our projected real estate ventures, increase our expenses, or limit our construction activities;
the potential for increased costs or shortages of labor or components, or other circumstances beyond our control;
our ability to continue as a going-concern;
our ability to raise capital when needed;
economic, political or other developments in foreign countries in which we do business;
the international nature of our business; and
results of existing or future litigation.

Additional factors that could cause or contribute to such differences include, but are not limited to, statements about the plans, objectives, expectations and intentions of PhotoMedex, Inc., a Nevada corporation (referred to in this Report as “we,” “us,” “our,” “PhotoMedex,” or “registrant”) and other statements contained in this Report that are not historical facts. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that characterize our business. In particular, we encourage you to review the risks and uncertainties described inthose discussed under Item 1A1A. “Risk Factors” included elsewhere in thisAmendment No. 1 to our annual report and in our Annual Report on Form 10-K10-K/A for the year ended December 31, 2016. These risks and uncertainties could cause2017. Except as required by law, the Company does not intend to update these forward-looking statements publicly or to update the reasons actual results tocould differ materially from those projectedanticipated in these forward-looking statements, containedeven if new information becomes available in the future. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied by past results and trends. Forward-looking statementsin the forward-looking statements. Accordingly, readers are statements that attemptcautioned not to forecast or anticipate future developments in our business, financial condition or results of operations and statements — see “Cautionary Note Regarding Forward-Looking Statements” that appears at the end of this discussion. These statements, like all statements in this report, speak only as of their date (unless another date is indicated), and we undertake no obligation to update or revise these statements in light of future developments.

The following financial data, in this narrative, are expressed in thousands, except for the earnings per share.place undue reliance on such forward-looking statements.

 

Introduction, Outlook and Overview of Business OperationsOur Company

 

PhotoMedex, Inc. (and its subsidiaries) (the “Company”), re-incorporated in Nevada on December 30, 2010, originally formed in DelawareOur company, founded in 1980, is in the process of transitioning from its former business as a skin health company providing medical and cosmetic solutions for dermatological conditions to a company focused on real estate investment company holdingdevelopment and asset management, concentrating primarily on investments in a variety of currenthigh quality income producing assets, hotel and future projects, includingresort developments, residential developments and other opportunistic commercial properties such as gas station sites, and hotels and resort communities, as described further in this report.properties.

 


The Company was originally, untilUntil the recent sale of the Company’s last significant business unit (itsour consumer products division, which was sold to ICTV Brands, Inc. on January 23, 2017), as described below and in other sections of this report,we were a Global Skin Healthglobal skin health company providing proprietary productsintegrated disease management and services that address skin diseasesaesthetic solutions to dermatologists, professional aestheticians and conditions including acne clearance, photo damage, psoriasis and hair removal. The Company had expanded its product offerings throughout the physician and spa markets, as well as traditional retail, online and infomercial outlets for home-use products including a range of home-use devices under the no!no!® brand offered through the Company’s largest business segment, its consumer products division.

After a period of significant growth and profitability, the Companyconsumers. Starting in 2014, we began to face a number of factors that caused the operating profitability of its consumersell off certain business to suffer. These factors included competition from consumer device companies claiming similarunits and product functionality, the inability to purchase cost effective advertising to promote our consumer product portfolio,lines and the inability to effectively expand operations into foreign markets. Furthermore, after satisfying on June 23, 2015 the bank covenant defaults of our senior credit facility, we continued to face a challenging media environment to purchase cost effective advertisement in the USA, our largest product distribution market. Coupled with our inability to attract sufficient financial resources to quickly increase our advertisement to overcome the market confusion created by competitors and quickly ramp new and innovative product launches in the second half of the 2015, the company entertained a variety of inquiries to sell-off the remainder of its assets culminating in the February 2016 announcement of a proposed transaction with DSKX whereby PhotoMedex, thru multiple concurrent merger transactions will sell to DSKX substantially all of its remaining operations.See ITEM 1. Business – Our Company in the Company’s Form 10-K for the year ended December 31, 2016.However, that transaction failed to be consummated, and therefore the Company subsequently sold its remaining substantial business lines, including the sale of the consumer products group on January 23, 2017, we sold the last remaining major product line. Following this transaction, our assets consisted mostly of inventory relating to ICTV Brands, Inc.our LHE® brand and our operations were focused on the liquidation of the remaining legacy inventory and assets of this business line, the carrying amount of which is insignificant as of March 31, 2018.

 

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Following the Contribution Transaction described below, our focus is to build our company into a leading real estate, asset management and development company concentrating primarily on investments in high yield income producing assets and other opportunistic commercial properties via direct property ownership and asset management. Our objective is to generate long-term net asset value growth while adhering to institutional best practices and a deep research process for all investments.

 

For income producing properties, we intend to acquire assets that provide recurring income with the potential for income growth over the long-term. We believe there can be an attractive risk/reward profile to such properties based on the location and the underlying creditworthiness of the tenants. We intend to use such income generation to fund additional acquisitions and development opportunities and for general corporate purposes. In addition, we intend to invest in land assets that can be developed into income generating properties or properties for sale. We believe that our size and scale provide an opportunity to take advantage of smaller-tier assets that most traditional investors do not focus on due to size limitations, thus creating unique investment opportunities. In particular, we intend to target assets in secondary and tertiary markets that require minimal capital expenditures but generate initial unlevered cash flow yields that are higher than those in primary markets.

A second component of our investment strategy will revolve around sourcing asset management opportunities for which we would operate as an asset manager of real estate properties. We are not structured as a Real Estate Investment Trust, or REIT, thus we have the ability to retain earnings and to operate in real estate asset management, development and peripheral real estate activities, items that may be limited by REIT requirements. We will look to utilize our existing infrastructure to provide economies of scale to owners of real estate assets as we grow our portfolio over time.

Contribution Transaction

 

On March 31, 2017, the Company and its newly-formed subsidiary FC Global Realty Operating Partnership, LLC, a Delaware limited liability company (“Acquiror”)we entered into an Interest Contribution Agreement (the “Agreement”) with First Capital Real Estate Operating Partnership, L.P., a Delaware limited partnership (“Contributor”), andor the Contributor, First Capital Real Estate Trust Incorporated, a Maryland corporation, (the “Contributor Parent” and, together with Contributor, the “Contributor Parties”), under whichor the Contributor will contributeParent, and FC Global Realty Operating Partnership, LLC, our wholly-owned subsidiary, or the Acquiror. The parties entered into amendments to the Interest Contribution Agreement on August 3, 2017, October 11, 2017 and December 22, 2017. Pursuant to the Interest Contribution Agreement, as amended (which we collectively refer to as the Contribution Agreement), the Contributor contributed certain real estate assets (the “Contributed Properties”) to the Company’s subsidiary in a series of three installments which will conclude no later than December 31, 2017.Acquiror. In exchange, the Contributor will receivereceived shares of the Company’s Common Stockour common stock and newly designated Series A Convertible Preferred Stock as described below. This transaction, which we refer to as the Contribution Transaction, closed on May 17, 2017.

 

As a result of this transaction,On the Company will primarily become a real estate investment company for the purpose of investing in a diversified portfolio of quality commercial and residential real estate properties and other real estate investments located both throughout the United States and in various international locales. That transition is anticipated to begin shortly, as the first installment of contributed assets (the “First Contribution”) has an anticipated closing date, of May 17, 2017 (the “Initial Closing”).

First Contribution

In the Initial Closing, the Contributor will transfer approximatelytransferred $10 million of assets comprising the Contributed Properties to the Company in up to three stages.  On the Initial Closing date, the Contributor will transfer to the Acquiror, fourconsisting of the following:

three vacant land sites intended for development as gas stations located in northern California,

a 75% interest in a limited liability company that owns a vacant land site intended for development as a gas station, located in northern California; and

a 100% interest in a limited liability company which owns a 17.9133% interest in a limited liability company called Avalon Jubilee LLC that owns property located in Los Lunas, New Mexico being developed as a single family residential development.

On January 12, 2018, we received a copy of a complaint, dated November 17, 2017, that was filed by Alpha Alpha, LLC in the Thirteenth Judicial District Court in the County of Valencia in the State of New Mexico against Avalon Jubilee, LLC, the holding company that owns the property in Los Lunas, New Mexico, HiTex, LLC, MCBB, LLC, Land Strategies, LLC, Ronald R. Cobb and John Does 1 – 5. The suit asks the court to, among other things, determine whether there have been unauthorized transfers of interest in Avalon Jubilee LLC; and declare who are the holders of interests in Avalon Jubilee LLC. Although the complaint does not name our company or any of its subsidiaries or specifically question our interest in Avalon Jubilee LLC, it raises questions about whether the transfers of interest leading to our acquisition of our interest in Avalon Jubilee LLC were properly made in accordance with the Avalon Jubilee operating agreement. We have begun an internal investigation into this matter and will disclose the results of that investigation once it has been completed. Although neither our company nor any of its subsidiaries is a party to litigation regarding this matter, we recognized an impairment expense of $1,439 thousand during the year ended December 31, 2017 to account for our estimate of the impact that such litigation may have on the operations and fair value of the underlying asset.


On April 27, 2018, we, and certain of our subsidiaries, entered into an agreement with Alpha Alpha LLC, and Presidential Realty Corporation and certain of its subsidiaries, under which our subsidiary, First Capital Avalon Jubilee LLC, was recognized as a Member in Avalon Jubilee, LLC, and the operating agreement and other controlling documents were so amended to reflect that recognition. The agreement acknowledged our ownership interest of 17.9133%. In 2017, the Company recognized an impairment expense of $1,439 to account for our estimate of the impact that the described litigation may have on the operations and fair value of the underlying asset.  The settlement and recognition of the Company’s ownership interest was viewed as a favorable outcome.

The proposed gas station sites set for development into gas stations, which are located in Atwater and Merced, northern California and which havehad an appraisedagreed upon value of approximately $2.6 million. Within thirty (30) days followingWe intend to explore our options for the Initial Closing date,development of these properties. We may (i) lease a property to a developer who will handle all further development of the Contributorproperty, with our company receiving monthly lease payments from the developer; (ii) engage a contractor to develop a property to a certain level, then lease it to a developer which will transferhandle the final development and leasing of the property, with our company receiving monthly payments from the developer; or (iii) engage a contractor to completely develop a property, then lease it directly to a tenant who will remit monthly lease payments back to us. The option or options selected for these properties will depend upon the Acquiror its interesttypes of tenants interested in a single family residential development located in Los Lunas, New Mexico (the “Avalon Property”). The Contributor Parent currently has a 6% interest inoperating gas stations and/or related ventures on those properties, as well as our capitalization and available financial resources. In these arrangements, the entityconstruction and/or management of the properties are or will be handled by third-party firms which owns the Avalon Property, and expects to acquire an additional 11.9% interestspecialize in such entity withinwork. Therefore, we anticipate that we will not need to hire significant additional personnel to develop, maintain and manage these properties. As for funding for any costs associated with these properties’ development, although we cannot provide any assurance that we will be able to obtain funding, we will seek funding from one or more of the thirty (30) day period following potential sources funding from third-party investors, funding as a result of loans secured by the Initial Closing date.  Thisproperties, or joint-funding arrangements with developers and/or managers of these properties.

The residential development in New Mexico consists of 251,approximately 250, non-contiguous, single family residential lots and a 10,000 square footsquare-foot club house. 37 of the lots have been finished, and the remaining 214 are platted and engineered lots. The Contributor’s appraisedagreed upon value of its share of this property iswas approximately $7.4 million. The ContributorThis property already has agreed to transfer its 6% interest as soon as is practicable aftera management and construction arrangement in place. We are the Initial Closing date, and the remaining 11.9% interest no later than thirty (30) days after the Initial Closing date.minority holder in that property, holding a 17.9% interest.

 

In returnexchange for the Contributed Properties, the Company will issuethese assets, we issued to the Contributor a number of duly authorized, fully paid and non-assessable879,234 shares of the Company’s Common Stock, up to a maximum ofour common stock, which represented approximately 19.9% of the number ofour issued and outstanding shares of Common Stock of the Companycommon stock immediately prior to the Initial Closing Date, at a per share value of $2.5183, or $2,214,175 in compliance with Nasdaq rules requiring a shareholder vote for the issuanceaggregate. We issued the remaining $7,785,825 of the approximately $10 million agreed upon consideration to the Contributor in the form of 123,668 shares of our newly designated non-voting Series A Convertible Preferred Stock. Each share of the Series A Convertible Preferred Stock is convertible into 25 shares of our common stock, subject to the satisfaction of certain conditions, including stockholder approval of such conversion, which was obtained on October 12, 2017.

The number of shares of Commoncommon stock issued to the Contributor and to be issued upon conversion of the Series A Convertible Preferred Stock totaling more than the 19.9% limit,was determined by dividing the value of the property contributed in the Initial Closing, the $10 million agreed upon value of the Contributed Properties comprising the First Contribution,assets by $2.5183, a specified price per share value which will be calculated atrepresents a 7.5% premium above the volume-weighted average price (“VWAP”) of all on-exchange transactions in the Company’s Common Stockour common stock executed on theThe Nasdaq StockCapital Market, (“Nasdaq”) during the forty-three (43) Nasdaq trading days prior to the Nasdaq trading day immediately prior to the public announcement of the transaction by the Companyour company and the Contributor Parent on March 31, 2017, as reported by Bloomberg L.P. (the “Per Share Value”). BecauseWe believe that the issuancetrading price of 19.9% of the Company’s Common Stock to the Contributor at the Per Share Value will not total the $10 million valuation of the Contributed Properties, the balance of the shares required to reach the $10 million value of the Contributed Properties will be paid to the Contributor in shares of the Company’s newly designated non-voting Series A Convertible Preferred Stock.

The value of such Series A Preferred Stock to be issued to the Contributor in the Initial Closing will be equal to the difference between the value of the Contributed Properties and the value of the Common Stock issued to the Contributor, with the amount of Common Stock to be issued not exceeding the 19.9% cap, in conformance with Nasdaq rules. The Series A Convertible Preferred Stock will be convertible into Common Stock, subject to the approval of the shareholders of the Company of the transactions contemplated by the Contribution Agreement, at any time and from time to time from and after the Original Issue Date at the option of the Holder thereof, into shares of Common Stock, subject to certain limitations to be set forth in the Certificate of Designations of the Series A Convertible Preferred Stock, determined by dividing the stated value of the Preferred Stock by the conversion price setour common stock at the time of issuance. Initially, the conversion price will resultContribution Transaction represented the value of our prior medical device business and not our new real estate development business. The value of the contributed assets was arrived at by the mutual agreement of the parties after analyzing each of the assets in comparison to historical sales of similar land parcels. The final valuation attributed to the issuancecontributed assets included a significant premium (approximately $5 million) to the fair value of twenty-five (25) shares of Common Stock for each share of Series A Preferred Stock.those assets. The premium was paid in order to secure our ability to receive potential future contributions from the Contributor Parties. Those future contributions, however, were never made.

 

 The Series A Convertible Preferred Stock does not have voting rights; however, PhotoMedex may not (a) alter or change adverselyWe also assumed the powers, preferences or rights of that stock, (b) amend or change its certificate of incorporation in a manner that adversely affects that stock, (c) increase the number of shares of preferred stock, or (d) otherwise enter into an agreement that accomplishes any of the foregoing, without the affirmative vote of a majority of the holders of the outstanding Series A Convertible Preferred Stock prior to any such change.

In addition, we will issue to the Contributor a five (5) year warrant to purchase up to 25,000,000 shares of our Common Stock at an exercise price of $3.00 per share that vests with respect to the number of underlying shares upon the achievement of specified milestones. 

At the Initial Closing, the Company will assume the liabilities associated with the Contributed Properties, except that it will not assume any liabilities with respect to the Avalon Property until those assets are actually delivered to the Company. The obligations that the Acquiror will assume at the Initial Closing include the following: Obligations of the Contributor and its affiliates under certain agreements covering the contributed properties,delivered assets, including an Operating Agreement of Central Valley Gas Station Development, LLC, a Delaware limited liability company, dated January 28, 2013, and all amendments thereto; the Operating Agreement of Avalon Jubilee, LLC, a New Mexico limited liability company, dated as of May 16, 2012, and all amendments thereto; and a Construction Contract dated, November 19, 2014, between Central Valley Gas Stations Development, LLC, as owner, and First Capital Builders, LLC, as Contractor,contractor, with respect to the project known commonly as Green Sands and Buhach Rd., Atwater, CA. Once the full interest in the Avalon Property is contributed to the Company, the Company will also assume the Operating Agreement of Avalon Jubilee, LLC, a New Mexico limited liability company dated as of May 16, 2012, and all amendments thereto; and a Development Services Agreement dated September 15, 2015 by and between UR-FC Contributed Assets, LLC, a Delaware limited liability company, as Owner, and Land Strategies, LLC, a Nevada limited liability company, as Developer, with respect to real property owned by Avalon Jubilee, LLC.  As of the Initial Closing, the Company will also assume an installment note dated April 7, 2015 made by First Capital Real Estate Investments, LLC (“FCREI”) in favor of George Zambelli (“Zambelli”) in the original principal amount of $470,292.00 (the “Note”) and a Long Form Deed of Trust and Assignment of Rents dated April 7, 2015 between FCREI, as Trustor, Fidelity National Title Company, as Trustee (“Trustee”), and Zambelli, as Beneficiary (the “Deed of Trust”), which secures the Note.

The Acquiror is expectedWe expect to enter into amended operating agreements with respect to some or all of these agreements.

Finally, the Company will assume all ancillary agreements, commitments and obligations with respect to these properties.

Future installments in this transaction throughout calendar year 2017 will involve the mandatory contributionentities. As of additional properties with a stated value of $20 million, as well as possible additional voluntary contributions of properties with a stated value of up to $66.5 million. Further information on the expansion of the Company’s board, these additional installment contributions and other facets of this transaction are available in the Company’s Current Report on Form 8-K filed as of April 3, 2017,

Subject to the completion of the contributions of real estate investment properties to the Company, , the strategic focus for the Company will shift from skincare health to real estate investment, focusing investment activities on the management and acquisition of a diverse portfolio of commercial properties located in strategic areas of the United States and throughout the world. The primary property types in which we are anticipated to invest are as follows (in no order of priority):

resort properties — including upscale hotels and luxury resort complexes in key urban and vacation destinations;

retail properties — including neighborhood and community-based properties located in or nearby strategic areas that will offer the greatest potential to attract strong usage; and

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residential properties — including properties located in strategic urban areas offering high-value amenities.

All such real estate assets may be acquired directly by the Company, or by one or more of its future related entities owned and /or operated by First Capital, though the Company may be directed to invest in other properties based upon evaluation of the earnings potential of those properties. To date, the Company does not hold any such investments, although the First contribution of property to the Company is expected to close shortly after the filing of this report.report, the agreements have not been amended.


The Contribution Agreement contemplated that additional contributions would be made prior to December 31, 2017; however, the Contributor failed to satisfy the conditions precedent to those additional contributions before the December 31, 2017 deadline such that only the closing described above was completed.

 

Consumer

The global consumer marketWe elected to early adopt ASU 2017-01,Business Combinations (Topic 805) Clarifying the Definition of a Business.Accordingly, the determination of whether the transaction represents a business combination was our largest business unit dueevaluated by applying ASU 2017-01 guidance. We have determined that the group of assets assumed do not include (and also, none of them on a stand-alone basis) include, an input and a substantive process that together significantly contribute to our success at bringing professional technologies into the home-use arena. Cumulatively, we have sold more than 5 million no!no!® products to consumers, the majority of whom have been in North America, Japan and Europe.

Our consumer marketing platform was built upon a proprietary direct-to-consumer sales engine and creative marketing programs that drive brand awareness. It was highly dependent upon the ability to procure cost effective advertising mediacreate output and thus it was determined that the contribution represents an acquisition of assets rather than a business combination. Accordingly, the total sum of the fair value of consideration given (i.e. the fair value of the equity interests issued) together with the transaction costs, was allocated to reach our targeted customer, particularly short-form TV advertising.the individual assets acquired and liabilities assumed based on their relative fair values at the date of acquisition. Such allocation did not give rise to goodwill.

 

Sales and MarketingOur Prior Business Operations

 

AsUntil the recent sale of March 31, 2017, we had no in-house sales and marketing personnel.

Critical Accounting Policies and Estimates

There have been no changes to our critical accounting policies and estimates in the three months ended March 31, 2017. Critical accounting policies and thelast significant estimates made in accordance with them are regularly discussed with our Audit Committee. Those policies are discussed under “Critical Accounting Policies” in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016.

Results of Operations

The results of operations shown only reflect the revenue and expenses relating to the Company’s skincare operations, including thebusiness unit (its consumer products division which was sold to ICTV Brands, Inc., or ICTV, on January 23, 2017,2017), the Company was a Global Skin Health company providing integrated disease management and aesthetic solutions to dermatologists, professional aestheticians and consumers. The Company provided proprietary products and services that addressed skin diseases and conditions including psoriasis, acne, actinic keratosis (a precursor to certain types of skin cancer), photo damage and unwanted hair.

Before the Company commenced its LHE professional line, which is still operatedcurrent real estate business, it organized the business into three operating segments based upon the management structure, products and services offered, markets served and types of customers, as follows: The Consumer segment (sold to ICTV on January 23, 2017) derived its revenues from the design, development, manufacturing and selling of long-term hair reduction and acne consumer products. The Physician Recurring segment derived its revenues from the XTRAC (sold to MELA Sciences on June 22, 2015) procedures performed by dermatologists, the Company.sales of skincare products (sold to Pharma Cosmetics on September 15, 2016), the sales of surgical disposables and accessories to hospitals and surgery centers (sold to Dalian JiKang Medical Systems September 1, 2015) and on the repair, maintenance and replacement parts on various products. The LHEProfessional segment generated revenues from the sale of equipment, such as lasers, medical device line of professionaland esthetic light and heat based products is the technology upon which Radiancy, Inc. was founded. Ourand LED products.

The proprietary LHE® brand technology combines the benefits of direct heat and a full-spectrum light source for a variety of clinical applications, including psoriasis care, acne treatment, skin tightening, skin rejuvenation, wrinkle reduction, collagen renewal, vascular and pigmented lesion treatments and hair removal. This technology was originally used primarily in our professional products, including capital equipment sold to physicians and skin care specialists worldwide. The technology was then adapted to our hand-held consumer line of products like no!no! Skin, a medical device for acne. The hand-held product portfolioExcept for the liquidation of remaining inventory, the carrying amount of which is includedinsignificant as of March 31, 2018, this business segment effectively ceased operations with the assets being sold to ICTV. The professional line of products, however, is not part of the sale to ICTV and will remain with the Company. However, their value is relatively immaterial and it is uncertain if anything can be done to create shareholder value out of these remaining assets. These results do not include any of the Company’s future real estate investments; the initial contribution for those investments is not scheduled to occur until after the filing of this report.NEOVA on September 23, 2016.

  


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

RevenuesResults of Operations

 

The following table presents revenues fromsets forth key components of our results of operations during the three business segments for the periods indicated below:

  For the Three Months Ended
March 31,
 
  2017  2016 
Consumer $3,539  $9,922 
Physician Recurring  -   1,208 
Professional  -   103 
         
Total Revenues $3,539  $11,233 

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Consumer Segmentmonths ended March 31, 2018 and 2017.

 

The following table illustrates the key changes(All dollar amounts in the revenues of the Consumer segment, by sales channel, for the periods reflected below:thousands)

 

  For the Three Months Ended
March 31,
 
  2017  2016 
Direct-to-consumer $2,475  $6,046 
Distributors  -   101 
Retailers and home shopping channels  1,064   3,775 
         
Total Consumer Revenues $3,539  $9,922 
  Three Months Ended March 31, 
  2018  2017 
Operating expenses:        
General and administrative $

1,210

  $ 

Operating loss 

  

(1,210

)   
Revaluation of option to purchase redeemable convertible preferred stock  (273)   
Interest and other financing expense, net  (34)   

Income tax provision 

  (212)   
Loss from continuing operations  

(1,729

)   

Gain (loss) from discontinued operations 

  79   (1,849)

Net loss including portion attributable to noncontrolling interest 

  

(1,650

)  
Loss attributable to noncontrolling interest  1    
Net loss  

(1,649

)  (1,849)

Dividend on redeemable convertible preferred stock 

  (79)   

Accretion of redeemable convertible preferred stock to redemption value 

  (1,968)   

Net loss attributable to common stockholders 

 $

(3,696 

) $(1,849)

 

General and administrative expenses. For the three months ended March 31, 2017, consumer products revenues2018, general and administrative expenses were $3,539 compared to $9,922 in the three months ended March 31, 2016. The decreaseapproximately $1.2 million and are mainly comprised of 64.3% during the periods was mainly due to the following reasons:

Direct to Consumer. Revenues for the three months ended March 31, 2017 were $2,475 compared to $6,046 for the same period in 2016. The decrease of 59.1% was due to management’s decision to significantly reduce amounts spent on short-form TV advertising during the period due to highly irregular response rates from this format as well as limited availability of relevant media at attractive cost-effective pricing. The decrease in revenue also has an impact on the total amount of sales returns liability as reflected inNote 7 of the financial statement footnotes. The methodology used to determine both the expense and the accrued liability has been consistently applied across all periods presented.

Retailers and Home Shopping Channels. Revenues for the three months ended March 31, 2017 were $1,064 compared to $3,775 for the same period in 2016. The decrease of 71.8% was mainly due to the timing of specials on the various home shopping channel customers, mainly in the United States (“US”) and the United Kingdom (“UK”). Furthermore, reduced levels of advertising in the Direct to Consumer channel negatively impacts sales at the retail level.

Distributors Channels. Revenues for the three months ended March 31, 2017 were $0 which was comparable to $101 for the same period in 2016.

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

  For the Three Months Ended
March 31,
 
  2017  2016 
North America $2,475  $6,040 
International  1,064   3,882 
         
Total Consumer Revenues $3,539  $9,922 

The consumer products division was sold to ICTV Brands, Inc. on January 23, 2017, see Acquisitionspayroll and Dispositions for more information.

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Physician Recurring Segment

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

  For the Three Months Ended
March 31,
 
  2017  2016 
Neova skincare  -   1,208 
Other  -   - 
         
Total Physician Recurring Revenues $-  $1,208 

NEOVA skincare

For the three months ended March 31, 2017, revenues were $0 compared to $1,208 for the three months ended March 31, 2016. These revenues were generated from the sale of various skin, hair,related expenses, professional service, rent and wound care products to physicians in both the domestic and international markets. The asset sale of the Neova product line was completed on September 15, 2016. See Item 1. Business – Our Company in the Company’s form 10-K for the year ended December 31, 2016 for more information.

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

  For the Three Months Ended
March 31,
 
  2017  2016 
North America $-  $1,208 
International  -   - 
         
Total Physicians Recurring Revenues $-  $1,208 

Professional Segment

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

  For the Three Months Ended
March 31,
 
  2017  2016 
LHE equipment $-  $103 
Omnilux equipment  -   - 
         
Total Professional Revenues $-  $103 

LHE® brand products

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

For the three months ended March 31, 2017 and 2016, LHE® brand products revenues were $0 and $103, respectively.

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

  For the Three Months Ended
March 31,
 
  2017  2016 
North America $-  $103 
International  -   - 
         
Total Professional Revenues $-  $103 

Cost of Revenues: all segments

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

  For the Three Months Ended
March 31,
 
  2017  2016 
Consumer $100  $2,219 
Physician Recurring  -   466 
Professional  -   69 
         
Total Cost of Revenues $100  $2,754 

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

Gross Profit Analysis

Gross profit decreased to $3,439 for the three months ended March 31, 2017 from $8,479 during the same period in 2016. As a percentage of revenues, the gross margin was 97.1% for the three months ended March 31, 2017 from 75.5% during the same period in 2016.

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

Company Profit Analysis For the Three Months Ended
March 31,
 
  2017  2016 
Revenues $3,539  $11,233 
Percent decrease  (68.5)%    
Cost of revenues  100   2,754 
Percent decrease  (96.4)%    
Gross profit $3,439  $8,479 
Gross margin percentage  97.1%  75.5%

The primary reasons for the changes in gross profit for the three months ended March 31, 2017, compared to the same period in 2016, was due to the sale of the consumer division to ICTV. (See Acquisitions and Disposition for more information.).

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

Consumer Segment For the Three Months Ended
March 31,
 
  2017  2016 
Revenues $3,539  $9,922 
Percent decrease  (64.3)%    
Cost of revenues  100   2,219 
Percent decrease  (95.4)%    
Gross profit $3,439  $7,703 
Gross margin percentage  97.1%  77.6%

Gross profit for the three months ended March 31, 2017 decreased by $4,264 from the comparable period in 2016. The decrease in sales was due to the asset sale of the consumer division to ICTV. See Acquisitions and Dispositions for more information.

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

Physician Recurring
Segment
 For the Three Months Ended
March 31,
 
  2017  2016 
Revenues $-  $1,208 
Percent decrease        
Cost of revenues  -   466 
Percent decrease        
Gross profit $-  $742 
Gross margin percentage      61.4%

Gross profit for the three months ended March 31, 2017 decreased by $742 from the comparable period in 2016. The Physician Recurring segment had a decrease in revenue due to the asset sale of the Neova product line completed on September 15, 2016 (See Item 1. Business – Our Company in the Company’s form 10-K for the year ended December 31, 2016 for more information).

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

Professional Segment For the Three Months Ended
March 31,
 
  2017  2016 
Revenues $-  $103 
Percent increase        
Cost of revenues  -   69 
Percent increase        
Gross profit $-  $34 
Gross margin percentage      33.0%

Gross profit for the three months ended March 31, 2017 decreased by $34 from the comparable period in 2016. The primary reason for the decreased gross margin is the decrease in marketing for this segment.

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Engineering and Product Development

Engineering and product development expenses for the three months ended March 31, 2017 decreased to $143 from $314 for the three months ended March 31, 2016. The majority of this expense relates to the salaries of our worldwide engineering and product development team that were transitioned to ICTV with the sale of the consumer division January 23, 2017. See Acquisitions and Dispositions for more information.

Selling and Marketing Expenses

For the three months ended March 31, 2016, selling and marketing expenses decreased to $620 from $7,803 for the three months ended March 31, 2016. The decrease is related to ceasing advertising operations after the sale of the consumer division to ICTV on January 23, 2017.

General and Administrative Expenses

other operating expenses. For the three months ended March 31, 2017, general and administrative expenses were included in the loss from discontinued operations.

Revaluation of option to purchase redeemable convertible preferred stock.For the three months ended March 31, 2018, the revaluation of the option to purchase redeemable convertible preferred stock increased by approximately $273 due to the increase in the conversion rate of the underlying redeemable convertible preferred stock, which caused the fair value of the instrument to increase. The carrying amount of this instrument included in the accompanying condensed consolidated balance sheet decreased by $677 during the three months ended March 31, 2018 due to $2,342 from $3,965the partial exercise of the written call option.

Interest and other financing expense, net. Net interest and other financing expense related to our notes payable for the three months ended March 31, 2016. The decrease2018 was due mainly to the following:

Decrease in accounting and legal expense of $838

Decrease in salary and commission expense of $581approximately $34.

 

DecreaseNet Loss. The factors discussed above resulted in other general operation costsa net loss, including discontinued operations, of $204

Interest and Other Financing Expense, Net

Net interest and other financing expense for the three months ended March 31, 2017 decreased to $77 from $333 for the three months ended March 31, 2016. The decrease of $256 is mainly due to repayment of long term debtapproximately $1.65 million during the three months ended March 31, 2016.

Taxes on Income, Net

For the three months ended March 31, 2017, the net tax expense amounted to $212018, as compared to $93 for the three months ended March 31, 2016.

Net Loss

The factors described above resulted in net loss of $1,849approximately $1.85 million fully attributable to discontinued operations during the three months ended March 31, 2017, as compared to $4,872, duringwith the three months ended March 31, 2016,Company primarily becoming a decrease of 62%.real estate asset management and development company.

 

Liquidity and Capital Resources

 

At March 31, 2017, our current ratio was 0.74 compared to 0.99 at December 31, 2016.

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

As of March 31, 20172018, we had $3,431 working capital deficit compared to aan accumulated deficit of $1,492 asapproximately $138.5 million and stockholders’ deficit of December 31, 2016. Cashapproximately $7.1 million. To date, and cash equivalents were $3,367 assubsequent to the recent sale of March 31, 2017, as comparedour last significant business unit, we have dedicated most of our financial resources to $2,677 as of December 31, 2016.general and administrative expenses.

 

Cash and cash equivalents as of March 31, 20172018 were $3,367, including restricted cash of $345. The Company hasapproximately $2.2 million. We have historically financed its activities with cash from operations, the private placement of equity and debt securities, borrowings under lines of credit and, in the most recent periods with the sale of certain assets and business units. The Company will be required to obtain additional liquidity resources in order to support its operations. The Company is addressing its liquidity needs by seeking additional funding from lenders as well as collecting amounts due from past sales of business assets and amounts due from asset sales that occurred after the year ending December 31, 2016 (see Acquisitions below). On January 23, 2017, the Company sold its consumer products division to ITCTV Brands, Inc., for a total selling price of $9.5 million.  The Company has collected $5 million of that purchase price; the remaining $4.5 million is payable through a contingent royalty on the sale of consumer products by ICTV Brands.  There are no assurances, however, that the Company will be able to collect all, or a portion, of the remaining royalty amounts due from sale of these assets and product lines. 

On March 31, 2017, the Companywe entered into an Interestthe Contribution Agreement, with First Capital Real Estate Operating Partnership, L.P., and its parent, First Capital Real Estate Trust Incorporated, under which certain real estate investment properties will bewere contributed to the Companyour company in exchange for the issuance of Company stock equal toour capital stock. Closing of the value of those properties. The closingContribution Agreement occurred on the First Contribution under this pending transaction is due to occur on or before May 17, 2017. However, the assets assumed in such contribution do not represent a business and are not producing cash flows and/or revenues at present.

On December 22, 2017, we entered into a securities purchase agreement, or the OFI Purchase Agreement, with Opportunity Fund I-SS, LLC, a Delaware limited liability company, or OFI, under which OFI may invest up to $15 million in the Company in a series of closings, in exchange for which OFI will receive shares of our newly designated Series B Preferred Stock at a purchase price of $1.00 per share. On December 22, 2017, the Company completed the first closing under the OFI Purchase Agreement, pursuant to which OFI provided $1.5 million to us in exchange for 1,500,000 shares of Series B Preferred Stock. On January 24, 2018, the Company completed a second closing under the OFI Purchase Agreement, pursuant to which OFI provided approximately $2.2 million to us in exchange for 2,225,000 shares of Series B Preferred Stock. On April 20, 2018, we entered into a Cancellation and Exchange Agreement, or the Exchange Agreement, with OFI, pursuant to which the parties agreed to complete a third closing under the OFI Purchase Agreement, pursuant to which OFI agreed to provide $2 million to us in exchange for 2,000,000 shares of Series B Preferred Stock. In addition, OFI agreed to cancel 95,770 shares of our Series A Convertible Preferred Stock held by it, in exchange for which we agreed to issue 5,382,274 shares of our common stock to OFI, subject to stockholder approval. On April 18, 2018, we obtained stockholder approval of such issuance, which will become effective 20 days following our mailing of an information statement on Schedule 14C to our stockholders. The third closing will take place within three (3) days after our mailing of such information statement.

Under the OFI Purchase Agreement, OFI may, but is not obligated to, make additional investments in one or more subsequent closings until an aggregate amount of $15 million has been invested or the OFI Purchase Agreement has been terminated in accordance with its terms. OFI has no obligation to continue to invest in the Company, and there is no guarantee that the closingare restrictions placed by OFI on the First Contribution under the pending transaction with First Capital will close, or will close on time; that we will be able to obtain an adequate leveluse of financial resources required for the short and long-term support of its operations if the remaining amounts due from the sale of assets and product lines remain uncollected or not paid when due; or that we will be able to obtain additional financing as needed , or meet the conditions of such financing, or that the costs of such financing may not be prohibitive. In light of the Company’s recent operating losses and negative cash flows and the uncertainty of collecting amounts due from the sales of its product lines, there is no assurance that the Company will be able to continue as a going concern.these funds.

 

34

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

 

The restrictedWe have historically financed our activities with cash account includes $250 from operations, the Neova Escrow Agreement (see Note 1 Acquisitionsprivate placement of equity and Dispositions). Restricted cash also includes $95 reflecting certain commitments connected to our leased office facilitiesdebt securities, borrowings under lines of credit and, in Israel.

On August 30, 2016, the Company entered into an Asset Purchase Agreement for themost recent periods with sale of its Neova product line. The sale was completed on September 15, 2016 resulting immediate proceeds to the Company of $1.5 millioncertain assets and the Company recorded a loss of $1,731 from the transaction during the three months ended September 30, 2016. (See Note 1 Acquisitions and Dispositions.)business units.

On October 4, 2016, the Company entered into an Asset Purchase Agreement for the sale of its Consumer Division for $9.5 million, including $5 million in cash plus a $4.5 million royalty agreement. (See Note 1 Acquisitions and Dispositions). On January 23, 2017, the Company entered into a First Amendment (the “First APA Amendment”) to the Asset Purchase Agreement which revised the definition of Business Assets and Assumed Liabilities, provided for the establishment of employee benefit plans by the Purchaser and substituted a new Disclosure Letter for the one delivered concurrently with the signing of the original Asset Purchase Agreement.  The amendment also extended the term of the Letter of Credit issued in connection with the Asset Purchase Agreement to 100 days after the Closing Date.   The Company also entered into a First Amendment (the “First TSA Amendment”) to the Transition Services Agreement between the Company and its subsidiaries and the Purchaser of the Consumer Products division, pursuant to which the Company and its subsidiaries will provide the Purchaser with certain accounting, benefit, payroll, regulatory, IT support and other services for periods ranging from approximately three to up to one year following the Closing Date, during which time the Purchaser will arrange to transition the services it receives to its own personnel.  The First TSA Amendment revised references in the Transition Services Agreement from “Effective Date” to “Closing Date”, and clarified specifications regarding the lease for certain premises in Israel by and between Radiancy Israel and the landlord for those premises. This transaction was completed on January 23, 2017. See background paragraph above.

The Company had classified the assets of the Consumer Division as assets held for sale as of December 31, 2016.

As part of the sale of the consumer product line which transaction was determined to represent a complete liquidation of a foreign subsidiary the cumulative translation adjustment related to that foreign entity was reclassified from accumulated other comprehensive income (loss) and reported as part of gain or loss from the sale.

The Company accounted for the contingent consideration component (the amount that will be received as royalties, based on the performance of the consumer division in future periods) based on the ‘loss recovery approach’. Accordingly, anticipated royalties were recognized at the lesser of the amount of (1) the proceeds for which the likelihood of receipt is probable or (2) the total loss recognized in the sale transaction, without considering the contingent consideration component. Such accounting resulted recognition of $4,000 as long term royalties receivable. Royalties proceeds in excess of the amount recognized are subject to the gain contingency guidance in ASC Topic 450-30, and as such, they will not be recognized until all contingencies related to their receipt are resolve

35

 

We believe our existing balances of cash and cash equivalents as well as advances from our Advance agreement and expected proceeds from asset sales will be sufficientrequired to satisfyobtain additional liquidity resources in order to support our working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with our existing operations through the second quarter of 2017. However,operations. At this time, there is no guarantee that we will be able to obtain an adequate level of financial resources required for the closing on the First Contribution under the pending transaction with First Capital will close,short and long-term support of our operations or will close on time; that we will be able to obtain additional financing as needed, or meet the conditions of such financing, or that the costs of such financing may not be prohibitive; or that amounts due to the Company from certain asset sales will be collectible when due. Any such result could have a material adverse effect on us and our financial condition.prohibitive.

 

Summary of Cash Flows

The following table provides detailed information about our net cash flow for all financial statement periods presented in this report:

Cash Flow

(In thousands)

  Three Months Ended March 31, 
  2018  2017 
Net cash used in operating activities $

(808

) $(2,673)

Net cash provided by investing activities 

    3,262 
Net cash provided by financing activities  

2,023

    
Effect of exchange rate changes on cash  21  98 
Net increase in cash and cash equivalents  

1,236

   687 
Cash and cash equivalents at beginning of period  948   2,335 

Cash and cash equivalents at end of period 

 $2,814  $3,022 

Net cash and cash equivalents used in operating activities was $2,673approximately $808 thousand for the three months ended March 31, 20172018, compared to $1,326approximately $2.7 million net cash used in operating activities for the three months ended March 31, 2016. The use of cash in 2017 was mainly related to the asset sale of the consumer division.

Net cash and cash equivalents provided by investing activities was $3,262 for the three months ended March 31, 2017 compared to cash used in investing activities of $878 for the three months ended March 31, 2016.2017. The primary reason for the increase was $3,250 cash provided fromchange is the salecontinual wind-down of the consumer assets that were held for sale.former business operations ahead of the acquisition of income-producing real estate properties.

 

Net cash and cash equivalents provided by financingused in investing activities was $0 for the three months ended March 31, 20172018, compared to net cash and cash equivalentsapproximately $3.3 million provided by financing activities of $1,962 for the three months ended March 31, 2016. For2017. The primary reason for the change was the cash received from the sale of the consumer division to ICTV. On January 23, 2017, the Company sold its consumer products division to ICTV for a total selling price of $9.5 million (see Note 2 Discontinued Operations, to our consolidated financial statements). The Company collected $5 million of that purchase price and the remaining amount of up to $4.5 million was to be payable through a contingent royalty on the sale of consumer products by ICTV. That royalty was settled in July 2017 for a payment of $2 million. 

Net cash provided by financing activities was approximately $2.02 million for the three months ended March 31, 20162018, compared to $0 net cash provided by financing activities for the three months ended March 31, 2017. The increase was due to the $2.2 million of funding received from OFI, net of repayment of notes payable of approximately $202.

Private Placement

On December 22, 2017, we hadentered into the OFI Purchase Agreement with OFI, under which OFI may invest up to $15 million in the Company in a series of closings, in exchange for which OFI will receive shares of our newly designated Series B Preferred Stock at a purchase price of $1.00 per share. See Note 5 to our condensed consolidated financial statements for the terms of the Series B Preferred Stock.


On December 22, 2017, we completed the first closing under the OFI Purchase Agreement, pursuant to which OFI provided $1.5 million to us in exchange for 1,500,000 shares of Series B Preferred Stock. On January 24, 2018, we completed a second closing under the OFI Purchase Agreement, pursuant to which OFI provided $2.2 million to us in exchange for 2,225,000 shares of Series B Preferred Stock. Under the OFI Purchase Agreement, OFI may, but is not obligated to, make additional investments in one or more subsequent closings until an aggregate amount of $15 million has been invested or the OFI Purchase Agreement has been terminated in accordance with its terms.

On April 20, 2018, we entered into the Exchange Agreement with OFI, pursuant to which the parties agreed to complete a third closing under the OFI Purchase Agreement, pursuant to which OFI agreed to provide $2 million to us in exchange for 2,000,000 shares of Series B Preferred Stock. In addition, OFI agreed to cancel 95,770 shares of our Series A Convertible Preferred Stock held by it, in exchange for which we agreed to issue 5,382,274 shares of our common stock to OFI, subject to stockholder approval. On April 18, 2018, we obtained stockholder approval of such issuance, which will become effective 20 days following our mailing of an information statement on Schedule 14C to our stockholders. The third closing will take place within three (3) days after our mailing of such information statement. We also agreed that, as soon as OFI identifies two director nominees to us, our nominating committee will commence its customary vetting process. On or prior to the closing of the additional investment, we agreed to appoint such director nominees to our board of directors.

Under the OFI Purchase Agreement, the proceeds from notes payable, netthe first closing were to be used for working capital and general corporate purposes, the proceeds from the second closing were to be used to perform due diligence and invest in Income Generating Properties (as defined in the OFI Purchase Agreement) that have been approved by Board of repaymentsDirectors, and proceeds from subsequent closings were be used to invest in Income Generating Properties (as defined in the OFI Purchase Agreement) that have been approved by our Board of $1,962. NoDirectors or as otherwise agreed to between us and OFI in writing prior to such credit facilities were availablesubsequent closings. On March 16, 2018, we an OFI entered into a letter agreement, pursuant to which OFI agreed that we may use all proceeds for the purposes and uses described in a budget agreed to between us and OFI at the time the letter agreement was signed. In connection with such letter agreement, we agreed to provide OFI, on a quarterly basis, on or prior to 15 days after the end of each quarter, a report that describes, in reasonable detail, the actual expenses incurred and payments made during such period compared to the Company during 2017.expenses and payments specified in the budget for such period, certified by our Chief Financial Officer.

 

CommitmentsThe OFI Purchase Agreement is subject to the usual pre- and Contingenciespost-closing representations, warranties and covenants. In addition, we agreed that, so long as the shares of Series B Preferred Stock purchased by OFI are outstanding, our debt (as defined by U.S. generally accepted accounting principles) shall not exceed 45% of our fixed assets without the prior written consent of the Requisite Holders.

 

There wereAs a condition to the first closing, we entered into a registration rights agreement, or the OFI Registration Rights Agreement, with OFI, pursuant to which we agreed to register all shares of common stock that may be issued upon conversion of the Series B Preferred Stock, or the Registrable Securities, under the Securities Act. We agreed to file a registration statement covering the resale of such Registrable Securities within 30 days of the first closing and cause such registration statement to be declared effective under the Securities Act as soon as possible but, in any event, no itemslater than 120 days following the filing date if such registration statement is filed on Form S-3 or 150 days if such registration statement is filed on Form S-1. If such registration statement is not filed or declared effective by the SEC on or prior to such dates, or if after such registration statement is declared effective, without regard for the reason thereunder or efforts therefor, such registration statement ceases for any reason to be effective for more than an aggregate of 30 trading days during any 12-month period, which need not be consecutive, then in addition to any other rights the holders of Series B Preferred Stock may have under the OFI Registration Rights Agreement or under applicable law, we shall pay to each holder an amount in cash, as partial liquidated damages and not as a penalty, equal to 1.0% of the product obtained by multiplying (x) the Series B Original Issue Price by (y) the number of shares of Registrable Securities held by the holder (such product referred to herein as the Investment Amount); provided that, significantly impacted our commitmentsin no event will we be liable for liquidated damages in excess of (x) $1.00 by (y) the number of shares of Registrable Securities held by the holder (such product referred to as the OFI Investment Amount); provided that, in no event will we be liable for liquidated damages in excess of 1% of the OFI Investment Amount in any single month and contingencies as discussedthat the maximum aggregate liquidated damages payable to the holders under the OFI Registration Rights Agreement shall be 10% of the OFI Investment Amount. On January 23, 2018, we filed a registration statement on Form S-3 to register the shares issued to OFI in the first closing. OFI waived its right to liquidated damages in connection with the late filing of such registration statement. Pursuant to the Exchange Agreement, we agreed that the 5,382,274 shares of common stock to be issued to OFI shall constitute “Registrable Securities” under the OFI Registration Rights Agreement, and that we would use commercially reasonable efforts to promptly amend the registration statement to include these shares.


Under the OFI Purchase Agreement, we also agreed to indemnify and hold OFI and its successors and permitted assignees (collectively referred to herein as the Investor Indemnified Parties) harmless from, any and all Damages (as defined below) incurred or suffered by such Investor Indemnified Party arising out of any inaccuracy or other breach of any representation or warranty of our company in any of the Transaction Documents (as defined in the OFI Purchase Agreement) or any breach of covenant or agreement made by us in any of the Transaction Documents. “Damages” means the amount of (i) the sum of the aggregate amount of all damages, losses, liabilities and expenses (including reasonable expenses of investigation and reasonable attorneys’ fees and expenses) in connection with any action, suit or proceeding whether involving a third party claim or a claim solely between the parties, but excluding any incidental, indirect or consequential damages, losses, liabilities or expenses; (ii) multiplied by the Indemnity Gross Up Factor. The “Indemnity Gross Up Factor” is equal to X divided by Y, where X is equal to 1 and Y is equal to 1 minus a fraction, the numerator of which is equal to the number of shares of common stock held by OFI, determined and on a fully diluted basis assuming the full conversion of shares of Series B Preferred Stock that OFI is then entitled to convert; and the denominator of which is the number of shares of common stock determined on a fully diluted basis. Notwithstanding the foregoing, no Investor Indemnified Party shall be entitled to indemnification unless and until the aggregate Damages incurred in respect of all claims collectively exceeds $50,000 whereupon Investor Indemnified Parties shall only be entitled to indemnification for all such Damages in excess of such $50,000 threshold.

The Purchase Agreement may be terminated by the written agreement of us and OFI, or by us or OFI if the final closing does not take place prior to December 31, 2018.

Payout Notes and Stock Grant Agreement

Under the Contribution Agreement, amounts due to Dr. Dolev Rafaeli and Dennis M. McGrath under their employment agreements, as well as amounts due to Dr. Yoav Ben-Dror for his services as a board member and officer of our foreign subsidiaries, were converted to convertible secured notes in the principal amounts of $3,133,934, $977,666 and $1,515,000, respectively, following approval from our stockholders on October 12, 2017 (which we refer to as the Payout Notes). The Payout Notes were due on October 12, 2018, carried a ten percent (10%) interest rate, payable monthly in arrears commencing on December 1, 2017, and were secured by a security interest in all of our assets pursuant to a security agreement that we entered into with the holders of the Payout Notes on October 12, 2017. The Payout Notes were convertible into shares of our common stock and we agreed to register the shares underlying the Payout Notes within thirty (30) days of issuance with best efforts to cause the registration statement covering such shares to become effective within one-hundred twenty (120) days of issuance. On November 14, 2017, we filed a registration statement on Form S-3 (which we refer to as the Prior Registration Statement) to register all shares that may be issued upon conversion of the Payout Notes, which was subsequently amended to include the Payout Shares issued under the Stock Grant Agreement described below.

On December 22, 2017, we entered into a stock grant agreement, or the Stock Grant Agreement, with Dr. Dolev Rafaeli, Dennis M. McGrath and Dr. Yoav Ben-Dror (collectively referred to herein as the Note Holders) to (i) cause the early conversion of the Payout Notes into an aggregate of 5,628,291 shares of our common stock (which we refer to as the Payout Shares), (ii) effectuate the release of all security interests associated with the Payout Notes, (iii) provide for the issuance of an aggregate of 1,857,336 additional shares of common stock to the Note Holders as consideration for the various agreements of the Note Holders contained in the Stock Grant Agreement (which we refer to as the Additional Shares), (iv) provide for certain cash payments to the Note Holders in amounts equal to the interest payments that would have been made to the Note Holders absent the conversion of the Payout Notes, (v) obtain the agreement of the Note Holders to provide certain support services to our 2016 annual financial statementscompany, and (vi) obtain the conditional resignation of certain of the Note Holders from our Board of Directors. Accordingly, the Payout Notes were paid in full.

Pursuant to the Stock Grant Agreement, we agreed to make twelve (12) monthly payments on the first of each month commencing on January 1, 2018 in the amounts of $21,328.16, $6,653.56 and $10,310.42 to Messrs. Rafaeli, McGrath, and Ben-Dror, respectively (which we refer to as the Cash Payments). The Cash Payments are consideration for certain consulting services provided by the Note Holders specified in the Stock Grant Agreement. We are required to issue the Additional Shares promptly, but in any event within ten (10) days after we obtain stockholder approval of such issuance.


On December 22, 2017, in connection with the Stock Grant Agreement, we entered into a registration rights agreement, or the Note Holder Registration Rights Agreement, with the Note Holders, pursuant to which we agreed to register the Additional Shares under the Securities Act. We agreed to file a registration statement covering the resale of the Additional Shares within 30 days of the Stock Grant Agreement and cause such registration statement to be declared effective under the Securities Act as soon as possible but, in any event, no later than 120 days following the filing date if such registration statement is filed on Form S-3 or 150 days if such registration statement is filed on Form S-1. If such registration statement is not filed or declared effective by the SEC on or prior to such dates, or if after such registration statement is declared effective, without regard for the reason thereunder or efforts therefor, such registration statement ceases for any reason to be effective for more than an aggregate of 30 trading days during any 12-month period, which need not be consecutive, then in addition to any other rights the Note Holders may have under the Note Holder Registration Rights Agreement or under applicable law, we are required to pay to each Note Holder an amount in cash, as partial liquidated damages and not as a penalty, equal to 1.0% of the product obtained by multiplying (x) $1.00 by (y) the number of shares of common stock held by the Note Holder included in the registration statement (such product referred to as the Note Holder Investment Amount); provided that, in no event will we be liable for liquidated damages in excess of 1.0% of the Note Holder Investment Amount in any single month and that the maximum aggregate liquidated damages payable to the Note Holders under the Note Holder Registration Rights Agreement shall be ten percent (10%) of the Note Holder Investment Amount. The registration rights provision contained in the Payout Notes was incorporated by reference into the Note Holder Registration Rights Agreement, except that the Note Holders waived the breach by our Annual Reportcompany for failure to timely file the Prior Registration Statement and agreed that they are not entitled to liquidated damages as a result of such failure. Under the Note Holder Registration Rights Agreement, the Note Holders are entitled to liquidated damages if the Prior Registration Statement is not declared effective within 120 days following the date of the Payout Notes, but the Note Holders subsequently agreed to waive their right to such liquidated damages until May 31, 2018. On January 23, 2018, we filed a registration statement on Form 10-K.S-3 for the Additional Shares. The Note Holders waived their rights to liquidated damages in connection with the late filing of such registration statement and in connection with the effectiveness deadline for such registration statement until May 31, 2018.

 

Note Payable

In connection with the initial closing under the Contribution Agreement on May 17, 2017, we assumed an installment note, dated April 7, 2015, made by the Contributor in favor of George Zambelli in the original principal amount of $470 thousand and a Long Form Deed of Trust and Assignment of Rents, dated April 7, 2015, between First Capital Real Estate Investments, LLC, as trustor, Fidelity National Title Company, as trustee, and George Zambelli, as beneficiary, which secures the note. The note carries a per annum interest rate of 8% which is payable on a monthly basis from the initial closing date. As of March 31, 2018, the note amounted to $458 thousand ($453 thousand out of which is classified as non-current note payable) and has a maturity date of April 10, 2020.

Off-Balance Sheet Arrangements

 

At March 31, 2017,2018, we had no off-balance sheet arrangements.

Impact of Inflation

 

We have not operated in a highly inflationary period, and we dodoes not believe that inflation has had a material effect on salesrevenues or expenses.

Cautionary Note Regarding Forward-Looking Statements


Critical Accounting Policies

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subjectThere have been no material changes to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently availablecritical accounting policies previously disclosed in Amendment No. 1 to our management. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “intend,” “potential” and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements, including any statements regarding the proposed transactions with First Capital Real Estate Operating Partnership, L.P., and its parent, First Capital Real Estate Trust Incorporated, including the expected timing of each contribution of real estate property to PhotoMedex; the completion of each stage of this transaction; the ability to obtain approval for listing on Nasdaq for the shares of PhotoMedex common stock issuable in connection with this transaction or with the exercise of any preferred stock or warrants under this transaction; the ability to obtain the approval of the PhotoMedex stockholders to issue stock in connection with this transaction, change the PhotoMedex incorporation and operating documents, and approve new executive officers and a new  board of directors ; the possibility that one or more steps in the transaction may not be completed due to certain pre=closing conditions; any statements regarding the plans, strategies and objectives of PhotoMedex management for our future operations; any statements regarding  PhotoMedex's and the real estate investment properties' compliance with U.S. and foreign government regulations, changing legislation or regulatory environments; any statements of expectation or belief and any statements of assumptions underlying any of the foregoing. In addition, if and when one or more of the steps in this transaction are completed, there will be additional risks and uncertainties related to successfully integrating, developing and managing these properties into PhotoMedex's structure, as well as the ability to ensure PhotoMedex's continued regulatory compliance, performance and/or market growth. We discuss many of these risks, uncertainties and other factors in our Annual Report on Form 10-K10-K/A for the year ended December 31, 2016, and in this Quarterly Report on Form 10-Q in greater detail under Item 1A. “Risk Factors.” Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only2017.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which amends the existing accounting standards for revenue recognition. In August 2015, FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 by one year. FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. The new revenue recognition standard will be effective in the first quarter of 2018, with the option to adopt it in the first quarter of 2017. The Company currently anticipates adopting the new standard effective January 1, 2018. The new standard also permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). In April 2016, FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. ASU 2016-10 covers two specific topics: performance obligations and licensing. This amendment includes guidance on immaterial promised goods or services, shipping or handling activities, separately identifiable performance obligations, functional or symbolic intellectual property licenses, sales-based and usage-based royalties, license restrictions (time, use, geographical) and licensing renewals. In addition, in May 2016, FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which is intended to not change the core principle of the guidance in Topic 606, but rather affect only the narrow aspects of Topic 606 by reducing the potential for diversity in practice at initial application and by reducing the cost and complexity of applying Topic 606 both at transition and on an ongoing basis. The Company has adopted this filing. You should read this Quarterly Reportstandard effective January 1, 2018.  This new standard did not have a material impact on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by our cautionaryCompany’s consolidated financial statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

 

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In February 2016, the FASB issued ASU 2016-02, “Leases”. This guidance will require that lease arrangements longer than 12 months result in an entity recognizing an asset and liability equal to the present value of the lease payments in the statement of financial position. This guidance is effective for annual periods beginning after December 15, 2018, and interim periods therein. This standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its financial statements and related disclosures.

  

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): “Restricted Cash” (ASU 2016-18), which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted this guidance effective January 1, 2018. This new guidance did not have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01 Business Combinations (Topic 805): “Clarifying the Definition of a Business”. ASU 2017-01 provides amendments to clarify the definition of a business and affect all companies and other reporting organizations that must determine whether they have acquired or sold a business. The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and should be applied prospectively as of the beginning of the period of adoption. Early adoption is permitted under certain circumstances. The Company adopted this guidance effective January 1, 2018. This new guidance did not have a material impact on the Company’s consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09 “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting”, which includes guidance on changes to terms and conditions of share-based payment awards. The amendment provides guidance about which changes to terms or conditions of a share-based payment award require an entity to apply modification accounting. The guidance will be effective for the fiscal year beginning on January 1, 2018, including interim periods within that year (early adoption is permitted). The Company adopted this guidance effective January 1, 2018. This new guidance did not have a material impact on the Company’s consolidated financial statements. 

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

ITEM 3. Quantitative and Qualitative Disclosure about Market RiskNot applicable.

 

Foreign Exchange Risk

During the three months ended March 31, 2017, there were no material changes to our market risk disclosures as set forth in Part II Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” in the Annual Report on Form 10-K that we filed for the year ended December 31, 2016.


ITEM 4.CONTROLS AND PROCEDURES.

 

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

 

OurWe maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Rule 13a-15(e) of the Exchange Act, our management has carried out an evaluation, with the participation and under the supervision of our Chief Executive Officerchief executive officer and Chief Financial Officer, has evaluatedchief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, (as such term is defined in Rules 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)), as of March 31, 2017.2018. Based on that evaluation, management has concluded that,upon, and as of suchthe date of this evaluation, our chief executive officer and chief financial officer determined that, because of the material weakness described in Item 9A “Controls and Procedures” of Amendment No.1 to our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2017, which we are in the process of remediating as of March 31, 2018, our disclosure controls and procedures were effective at the reasonable assurance level described below.

Limitations on the Effectiveness of Controls.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within an organization have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our Chief Executive Officer and Chief Financial Officer have concluded, based on theireffective. This evaluation as of March 31, 2018 should be read in conjunction with Item 9A of Amendment No. 1 to our Annual Report on Form 10-K/A for the endfiscal year ended December 31, 2017 for the description of the period covered by this report, that our disclosure controls and procedures were effective to provide reasonable assurance that the objectives of our disclosure control system were met.material weakness.

Changes in Internal Control overOver Financial Reporting

 

There has been no change inWe regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.

During its evaluation of the effectiveness of our internal control over financial reporting as of March 31, 2018, our management identified a material weakness in the control regarding identification and valuation of select assets acquired in 2017. Management was reliant on a 3rd party valuation report that had misstatements as to specific property details that were the analysis drivers for the price per square foot and ultimate valuation of the assets acquired in 2017. This control deficiency resulted in the misstatement of the value of an asset acquired in mid-2017 for the year ended December 31, 2017 (and the restatement of the audited consolidated financial statements as of and for the year ended December 31, 2017, included in Amendment No. 1 to our Annual Report on Form 10-K/A for the year ended December 31, 2017).

We are remediating this material weakness by, among other things, implementing a process of enhanced, multi-stage review of the identification and valuation of all assets to be acquired by the Company, including verification of identifying indicators for each asset. The actions that we are taking are subject to ongoing senior management review, including review by our new senior management team which joined the Company as of January 2, 2018, as well as oversight by our Audit Committee. Management believes the foregoing efforts will effectively remediate the material weakness incurred in 2017 by implementing best practices in 2018 and reevaluating the effectiveness over the course of the year.

Other than in connection with the implementation of the remedial measures described above, there were no changes in our most recentinternal controls over financial reporting during the first quarter of fiscal quarter2018 that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - Other Information

OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS.

 

ITEM 1. Legal ProceedingsThere were no material developments during the first quarter of fiscal year 2018 to the legal proceedings previously disclosed in Item 3 “Legal Proceedings” of Amendment No. 1 to our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2017.

 

See Item 3, Legal Proceedings, in the Company’s Form 10-K for the year ending December 31, 2016 for further information on pending legal actions involving the Company and its subsidiaries.

ITEM 1A.RISK FACTORS.

 

ITEM 1A. Risk FactorsNot applicable.

 

As of March 31, 2017, our risk factors have not changed materially from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.


ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

ITEM 2. Unregistered sales ofWe have not sold any equity securities and useduring the first quarter of proceedsfiscal year 2018 that were not previously disclosed in a current report on Form 8-K that was filed during the quarter.

 

None.During the three-month period ended March 31, 2018, we did not repurchase any shares of common stock.

ITEM 3. Defaults upon senior securities.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES.

 

None.

ITEM 4.MINE SAFETY DISCLOSURES.

 

ITEM 4. Mine Safety DisclosuresNot applicable.

 

None.

ITEM 5.OTHER INFORMATION.

 

ITEM 5. Other Information

None.

ITEM 6. ExhibitsWe have no information to disclose that was required to be in a report on Form 8-K during the first quarter of fiscal year 2018, but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.

 

31.1ITEM 6.EXHIBITS.

Exhibit No. Rule 13a-14(a) Certificate of Chief Executive OfficerDescription
31.23.1 Rule 13a-14(a) CertificateAmended and Restated Articles of Chief Financial OfficerIncorporation of the Company filed with Nevada Secretary of State on October 19, 2017 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on October 25, 2017)
32.1
3.2 Certificate of ChiefDesignation of Series A Convertible Preferred Stock filed with Nevada Secretary of State on May 17, 2017 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on May 19, 2017)
3.3Certificate of Designation of Series B Preferred Stock filed with Nevada Secretary of State on December 22, 2017 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on December 29, 2017)
3.4Amended and Restated Bylaws of the Company adopted on May 17, 2017 (incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K filed on May 19, 2017)
10.1Letter Agreement, dated March 16, 2018, between the Company and Opportunity Fund I-SS, LLC (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on March 22, 2018)
10.2Amended and Restated Separation Agreement, dated February 12, 2018, between FC Global Realty Incorporated and Stephen Johnson (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on February 16, 2018)
31.1*Certifications of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*Certifications of Principal Financial and Chief FinancialAccounting Officer pursuantPursuant to 18 U.S.C. Section 1350, as adopted pursuant302 of the Sarbanes-Oxley Act of 2002
32.1*Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document
101.SCH32.2* XBRL Taxonomy Schema
101.CALXBRL Taxonomy Calculation Linkbase
101.DEFXBRL Taxonomy Definition Linkbase
101.LABXBRL Taxonomy Label Linkbase
101.PREXBRL Taxonomy Presentation Linkbase

*The certifications attached as Exhibit 32.1 accompany this Annual Report on Form 10-K pursuant to 18 U.S.C. Section 1350, as adopted pursuantCertification of Principal Financial and Accounting Officer 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.
101.INS ++XBRL Instance Document
101.SCH ++XBRL Taxonomy Extension Schema Document
101.CAL ++XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF ++XBRL Taxonomy Extension Definition Linkbase Document
101.LAB ++XBRL Taxonomy Extension Label Linkbase Document
101.PRE ++XBRL Taxonomy Extension Presentation Linkbase Document

 

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* Filed herewith

 

++XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a report for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.


SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Reportreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: May 21, 2018PHOTOMEDEX, INC.FC GLOBAL REALTY INCORPORATED
 
 /s/ Vineet P. Bedi
 Name: Vineet P. Bedi
Date  May 17, 2017By:Title: Chief Executive Officer
/s/ Dolev Rafaeli 
 Name  Dolev Rafaeli/s/ Matthew Stolzar
 Title    Chief Executive OfficerName: Matthew Stolzar
 
Date  May 17, 2017By:/s/ Dennis M. McGrath
Name  Dennis M. McGrath
Title    President &Title: Chief Financial Officer

 

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