| The Company | Note
1 The
Company: Background PhotoMedex,
Inc. (and its subsidiaries) (the “Company”) is a Global Skin Health company providing integrated disease management
and aesthetic solutions to dermatologists, professional aestheticians and consumers. The Company provides proprietary products
and services that address skin diseases and conditions including psoriasis, vitiligo, acne, actinic keratosis (a precursor to
certain types of skin cancer), photo damage and unwanted hair. Acquisitions
and Dispositions On
May 12, 2014, PhotoMedex completed the acquisition of 100% of the shares of LCA-Vision Inc. (“LCA-Vision” or “LCA”),
which was a publicly–traded Delaware corporation. LCA is a provider of fixed-site laser vision corrections services at its
Lasik Plus Note 3 Acquisition of LCA-Vision Inc. On
January 31, 2015, the Company sold 100% of the shares of LCA-Vision Inc. for $40 million in cash. Excluding working capital adjustments
and professional fees, the Company realized net proceeds of approximately $37.7 million, substantially all of which were used
to repay indebtedness. The LCA-Vision assets and liabilities were considered to be held for sale as of December 31, 2014. For
the statement of comprehensive loss, for the three and nine months ended September 30, 2015, the activity related to LCAÂ’s
operations through the date of disposition, and any gains or losses therefrom, are captured as discontinued operations. (See Note
2, Discontinued Operations On
June 22, 2015, the Company, and certain subsidiaries, sold the assets, and related liabilities, of the XTRAC and VTRAC business
for $42.5 million in cash, including restricted cash of $750 to be held in escrow for twelve months. The Company realized net
proceeds of approximately $41 million, substantially all of which were used to repay the remaining balance of the credit facilities,
including any outstanding forbearance fees and transaction fees. As management determined that the XTRAC and VTRAC business represent
a component of which operations and cash flows can be clearly distinguished operationally and for financial reporting purposes,
and also that the disposal represent a strategic shift that will have a major effect on the companyÂ’s remaining operations
and financial results, it was concluded that the disposal qualified as a discontinued operations. Thus for the statements of operations,
for the three and nine months ended September 30, 2015 and 2014, the activity related to the XTRAC and VTRAC businessÂ’ operations
through the date of disposition, and any gains or losses there from, are reported as discontinued operations. The XTRAC and VTRAC
business assets and liabilities were retrospectively reclassified as held for sale in the accompanying condensed consolidated
balance sheet as of December 31, 2014. (See Note 2, Discontinued Operations On
August 31, 2015 the Company entered into a First Amendment (the “First Amendment”) to its Stock Purchase Agreement (the
“Stock Purchase Agreement”) of January 31, 2015, under which the Company and its subsidiary LCA-Vision Inc. (“LCA”)
sold LCA and its subsidiaries to Vision Acquisition, LLC (“Vision”). The First Amendment amends the Stock Purchase Agreement
to permit an Internal Revenue Code Section 338(h)(10) or 336(e) election under which all parties to the transaction, including
the Company, are treated for tax purposes as if Vision had purchased the assets of LCA rather than LCAÂ’s stock. Vision agreed
to pay the Company the sum of $300 for entry into the First Amendment. The transaction was completed as of August 31, 2015 and
such amount was included in the three months ended at September 30, 2015 as an additional gain on the sale of discontinued operations. Liquidity On
May 12, 2014, the Company had entered into $85 million senior secured credit facilities (“the Facilities”) with JP Morgan
Chase (“Chase”) which included a $10 million revolving credit facility and a $75 million four-year term loan. The facilities
were utilized to refinance the existing term debt with Chase, fund the acquisition of LCA and for working capital and other general
corporate purposes. Effective
February 28, 2015, the Company had entered into a Second Amended and Restated Forbearance Agreement (the "Second Amended Forbearance
Agreement") with the lenders that were parties to the Credit Agreement dated May 12, 2014, and with Chase, as Administrative Agent
for the Lenders. Pursuant
to the terms of the Second Amended Forbearance Agreement, the Lenders had agreed to forbear from exercising their rights and remedies
with respect to the Specified Events of Default from August 25, 2014 until April 1, 2016, or earlier if any new event of default
occurs (the "Forbearance Period"). Chase and the Lenders also agreed that the Company would not be obligated to pay the principal
amounts set forth in the Credit Agreement for any date identified therein during the period beginning on February 28, 2015 and
ending on the end of the Forbearance Period (the "Effective Period"), and that any failure to do so would not constitute a default
or event of default. Instead, the Lenders and the Company agreed that the Company would make prepayments against the Term Loan
of $250 on the first business day of each month during the Forbearance Period, which were applied in direct order of maturity.
The Company also agreed that, on or before the fifth calendar day of each month, the Company would pay against the Term Loan $125
to the extent that the cash-on-hand exceeded $5 million, and 100% of the cash-on-hand in excess of $7 million, also to be applied
to the Term Loan in inverse order of maturity. There were additional terms agreed to by the Company regarding the interest rate
to be charged upon the outstanding balance of the Loans, compensation paid to officers, the use of funds for capital projects,
and the preparation of a strategic business plan to repay the outstanding balances to the Lenders. Also,
as consideration for the Lender's entry into the Second Amended Forbearance Agreement, the Company had agreed to pay the Lenders
certain forbearance fees (the "Forbearance Fees"), which were earned on the last business day of each of the specified months:
for May and June 2015, $750 each month, with additional amounts specified for later periods. In addition, the $500 Forbearance
Fee set forth in Section 4.10(b) of the Amended Forbearance Agreement remained due and payable to the Lenders on the earlier of
the Expiration Date or the Termination Date of the Forbearance Period. The Second Amended Forbearance Agreement was also subject
to customary covenants, including limitations on the incurrence of or payments on indebtedness to other persons or entities and
requirements that the Company provide periodic financial information and information regarding the status of outstanding litigation
involving the Company and its subsidiaries to the Lenders. On
June 23, 2015, the Company repaid in full the outstanding balances of the Facilities (including all unpaid interest). Pursuant
to the Payoff Letter, effective as of June 23, 2015, and all other termination and release documents in connection therewith,
the Company and its subsidiaries have been released from all of their obligations, including any guarantee and collateral obligations,
and other additional terms in connection with the Facilities. The Company has used the proceeds from the sale of the XTRAC and
VTRAC Business to complete payment of the outstanding amounts under the Facilities and ancillary costs, which totaled $40.3 million. On
September 1, 2015, PhotoMedex, Inc. and its subsidiary PhotoMedex Technology, Inc. (“PTECH”) entered into an Asset Purchase
Agreement and a Supplemental Agreement (together, the “Asset Purchase Agreement”) with DaLian JiKang Medical Systems
Import & Export Co., LTD, (“JIKANG”). Under the Asset Purchase Agreement, JIKANG is to acquire the SLT® surgical
laser business (the “Transferred Business”) from PTECH, for a total purchase price of $1.5 million (the “Purchase
Price”). The agreement was later amended to add an affiliate company to the transaction. The Company will receive net cash
of approximately $1.2 million after payment of closing and ancillary costs. The Purchase Price is payable to the Company in three
installments. An initial deposit of $300 was made on September 2, 2015. JIKANG will provide two letters of credit to the Company
for the remainder of the Purchase Price. The $1 million Letter of Credit will become payable to the Company on or about November
17, 2015, at which time substantially all the assets will be then be transferred to Basis
of Presentation Accounting
Principles The
accompanying condensed consolidated financial statements and related notes should be read in conjunction with our consolidated
financial statements and related notes contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014
(“fiscal 2014”). 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 (“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 CompanyÂ’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, 2014 has been derived from our audited consolidated financial
statements contained in our Annual Report on Form 10-K for fiscal 2014, and has been retrospectively adjusted to reflect the assets
and liabilities of certain discontinued operations within assets and liabilities held for sale. (See Note Discontinued
Operations The
results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results to be expected for
the year ending December 31, 2015 or for any other interim period or for any future period. Principles
of Consolidation The
consolidated financial statements include the accounts of the Company and the wholly- and majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation. Held
for Sale Classification and Discontinued Operations A
disposal group is reported as held for sale when management has approved or received approval to sell and is committed to a formal
plan, the disposal group is available for immediate sale, the business is being actively marketed, the sale is anticipated to
occur during the next 12 months and certain other specified criteria are met. A disposal group classified as held for sale is
recorded at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying value of the business
exceeds its estimated fair value less cost to sell, a loss is recognized. However, when disposal group meets the held for sale
criteria, the Company first evaluates whether the carrying amounts of the assets not covered by ASC 360-10 included in the disposal
group (such as goodwill) are required to be adjusted in accordance with other applicable GAAP before measuring the disposal group
at fair value less cost to sell. Assets
and liabilities related to a disposal group classified as held for sale are segregated in the consolidated balance sheet in the
period in which the business is classified as held for sale. Until
December 31, 2014, in accordance with previous US GAAP, operations of a disposal group were reported as discontinued operations
if the disposal group is classified as held for sale, the operations and cash flows of the business have been or will be eliminated
from our ongoing operations as a result of a disposal transaction and we will not have any significant continuing involvement
in the operations of the business after the disposal transaction. See below regarding change to the criteria for reporting discontinued
operations. Accordingly,
the disposal of LCA-Vision was presented as discontinued operations. Commencing
January 1, 2015 (the effective date of the ASU 2014-08-see below), only disposal of a component of an entity is 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. Accordingly, the
assets and liabilities of the XTRAC and VTRAC as of December 31, 2014 were reclassified and presented as assets and liabilities
held for sale (without changing their classification as current or non-current). Also, the results of the operations of LCA operating
segment and the XTRAC and VTRAC business were presented as discontinued operations in the consolidated statements of operations
(see also Note Discontinued operations The
results of discontinued operations are reported in discontinued operations in the consolidated statement of comprehensive loss
for current and prior periods commencing in the period in which the business meets the criteria of a discontinued operation, and
include any gain or loss recognized on closing or adjustment of the carrying amount to fair value less cost to sell. Depreciation
is not recorded on assets of a business while it is classified as held for sale. Revenue
Recognition The
Company recognizes revenues from product sales when the following four criteria have been met: (i) the product has been delivered
and the Company has no significant remaining obligations; (ii) persuasive evidence of an arrangement exists; (iii) the price to
the buyer is fixed or determinable; and (iv) collection is reasonably assured. Revenues from product sales are recorded net of
provisions for estimated chargebacks, rebates, expected returns and cash discounts. The
Company ships most of its products FOB shipping point, although from time to time certain customers, for example governmental
customers, will be granted FOB destination terms. Among the factors the Company takes into account when determining the proper
time at which to recognize revenue are (i) when title to the goods transfers and (ii) when the risk of loss transfers. Shipments
to distributors or physicians that do not fully satisfy the collection criteria are recognized when invoiced amounts are fully
paid or fully assured and included in deferred revenues until that time. For
revenue arrangements with multiple deliverables within a single, contractually binding arrangement (usually sales of products
with separately priced extended warranty), each element of the contract is accounted for as a separate unit of accounting when
it provides the customer value on a stand-alone basis. With
respect to sales arrangements under which the buyer has a right to return the related product, revenue is recognized only if all
the following conditions are met: the price is fixed or determinable at the date of sale; the buyer has paid, or is obligated
to pay and the obligation is not contingent on resale of the product; the buyer's obligation would not be changed in the event
of theft or physical destruction or damage of the product; the buyer has economic substance; the Company does not have significant
obligations for future performance to directly bring about resale of the product by the buyer; and the amount of future returns
can be reasonably estimated. The
Company provides a provision for product returns based on the experience with historical sales returns, in accordance with ASC
Topic 605-15 with respect to sales of product when a right of return exists. Reported revenues are shown net of the returns provision.
Such allowance for sales returns is included in Other Accrued Liabilities Note 9 Deferred
revenue includes amounts received with respect to extended warranty maintenance, repairs and other billable services and amounts
not yet recognized as revenues. Revenues with respect to such activities are deferred and recognized on a straight-line basis
over the duration of the warranty period, the service period or when service is provided, as applicable to each service. Functional
Currency The
currency of the primary economic environment in which the operations of the Company, its U.S. subsidiaries and Radiancy Ltd.,
its subsidiary in Israel, are conducted is the US dollar ("$" or "dollars"). Thus, the functional currency of the Company and
its subsidiaries (other than the foreign subsidiaries mentioned below) is the dollar (which is also the reporting currency of
the Group). The operations of the other foreign subsidiaries are each conducted in the local currency of the subsidiary. These
currencies include: Great Britain Pounds (GBP), Brazilian Real (BRL), Hong Kong Dollar (HKD), Columbian Peso (COP), South Korean
Won (KRW) and Indian Rupee (INR). Substantially all of the Group's revenues are derived in dollars or in other currencies linked
to the dollar. Purchases of most materials and components are carried out in, or linked to the dollar. Balances
denominated in, or linked to, foreign currencies are stated on the basis of the exchange rates prevailing at the balance sheet
date. For foreign currency transactions included in the statement of comprehensive income (loss), the exchange rates applicable
to the relevant transaction dates are used. Transaction gains or losses arising from changes in the exchange rates used in the
translation of such balances are carried to financing income or expenses. Assets
and liabilities of foreign subsidiaries, whose functional currency is their local currency, are translated from their respective
functional currency to U.S. dollars at the balance sheet date exchange rates. Income and expense items are translated at the average
rates of exchange prevailing during the year. Translation adjustments are reflected in the consolidated balance sheets as a component
of accumulated other comprehensive income (loss). Deferred taxes are not provided on translation adjustments as the earnings of
the subsidiaries are considered to be permanently reinvested . Fair
Value Measurements The
Company measures and discloses fair value in accordance with Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification 820, Fair Value Measurements and Disclosures
• 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. The
fair value of cash and cash equivalents and short term bank deposits are based on its demand value, which is equal to its carrying
value. The estimated fair values of notes payable and long term debt which are based on borrowing rates that are available to
the Company for loans with similar terms, collateral and maturity approximate the carrying values. Additionally, the carrying
value of all other monetary assets and liabilities is estimated to be equal to their fair value due to the short-term nature of
these instruments. Derivative
financial instruments are measured at fair value, on a recurring basis. The fair value of derivatives generally reflects the estimated
amounts that the Group would receive or pay to terminate the contracts at the reporting dates, based on the prevailing currency
prices and the relevant interest rates. Such measurement is classified within Level 2. In
addition to items that are measured at fair value on a recurring basis, there are also assets and liabilities that are measured
at fair value on a nonrecurring basis. Assets and liabilities that are measured at fair value on a nonrecurring basis include
certain long-lived assets, including goodwill. As such, we have determined that each of these fair value measurements reside within
Level 3 of the fair value hierarchy. Derivatives The
Company applies the provisions of Accounting Standards Codification ("ASC") Topic 815, Derivatives and Hedging From
time to time the Company carries out transactions involving foreign exchange derivative financial instruments (mainly forward
exchange contracts) which are expected to be paid with respect to forecasted expenses of the Israeli subsidiary (Radiancy) denominated
in Israeli local currency (NIS) which is different than its functional currency. Such
derivatives were not designated as hedging instruments, and accordingly they were recognized in the balance sheet at their fair
value, with changes in the fair value carried to the Statement of Comprehensive Income (Loss) and included in interest and other
financing expenses, net. At
September 30, 2015, the balance of such derivative instruments amounted to approximately $0 in liabilities and approximately $113
were recognized as financing expense in the Statement of Comprehensive (Loss) Income during the nine months ended that date. The
nominal amounts of foreign currency derivatives as of September 30, 2015 consist of forward transactions for the exchange of $0
into NIS as of September 30, 2015. Accrued
Warranty Costs The
Company offers a standard warranty on product sales generally for a one to two-year period. The Company provides for the estimated
cost of the future warranty claims on the date the product is sold. Total accrued warranty is included in Other Accrued
Liabilities
September
30,
2015 2014
(unaudited) (unaudited)
Accrual at beginning of
period $ 529 $ 1,151
Additions charged to warranty expense 202 545
Expiring warranties (14 ) (209 )
Claims satisfied (345 ) (667 )
Balance at end
of period $ 372 $ 820 For
extended warranty on the consumer products, see Revenue Recognition Earnings
Per Share Basic
and diluted earnings per common share were calculated using the following weighted-average shares outstanding:
For
the Three Months Ended For
the Nine Months Ended
2015 2014 2015 2014
Weighted-average number of common and
common equivalent shares outstanding:
Basic number
of common shares outstanding 21,488,832 18,724,419 19,958,623 18,722,459
Dilutive
effect of stock options and warrants - - - -
Diluted number
of common and common stock equivalent shares outstanding 21,488,832 18,724,419 19,925,623 18,722,459 Diluted
earnings per share for the three and nine months ended September 30, 2015, exclude the impact of common stock options and warrants,
totaling 1,459,824 shares, as the effect of their inclusion would be anti-dilutive, due to the loss from continuing operations
for the periods. Diluted earnings per share for the three and nine months ended September 30, 2014, excluded the impact of common
stock options and warrants, totaling 2,623,682 shares, as the effect of their inclusion would be anti-dilutive, due to the loss
from continuing operations for the periods. Adoption
of New Accounting Standards In
April 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial Statements (Topic
205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components
of an Entity ("ASU 2014-08"). The
amendments in ASU 2014-08 change the criteria for reporting discontinued operations while enhancing disclosures in this area.
Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations.
Those strategic shifts should have a major effect on the organizationÂ’s operations and financial results. In addition, the
new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more
information about the assets, liabilities, income, and expenses of discontinued operations. The
provisions of ASU 2014-08 were required to be applied in a prospective manner to disposals or classifications as held for sale
components of an entity that occur with annual periods beginning on or after December 15, 2014 and interim periods within those
years. The
Company applied the provisions of ASU 2014-08 in the first quarter of 2015. Accordingly, the company applied ASU 2014-08 with
respect to the discontinuance of the XTRAC and VTRAC business which occurred during June 2015 (see Note Discontinued
Operations The
adoption of ASU 2014-08 did not have a material impact on the Company's consolidated results of operations and financial condition
and also did not affect disposals or classifications as held for sale, of components (such as the sale of LCA) that occurred before
the provisions of ASU 2014-08 became effective. Recently
Issued Accounting Standards In
July, 2015, The FASB issued ASU No. 2015-11 , Simplifying the Measurement of Inventory (Topic 330) ASU
2015-11 outlines that inventory within the scope of its guidance be measured at the lower of cost and net realizable value. Inventory
measured using last-in, first-out (LIFO) and the retail inventory method (RIM) are not impacted by the new guidance. Prior to
the issuance of ASU 2015-11, inventory was measured at the lower of cost or market (where market was defined as replacement cost,
with a ceiling of net realizable value and floor of net realizable value less a normal profit margin). For
a public entity, the amendments in ASU 2015-11 are effective, in a prospective manner, for annual reporting periods beginning
after December 15, 2016, including interim periods within that reporting period (the first quarter of fiscal year 2017 for the
Company). Early adoption is permitted as of the beginning of an interim or annual reporting period. The
Company is in the process of assessing the impact, if any, of ASU 2015-11 on its consolidated financial statements. In
May 2014, The FASB issued ASU No. 2014-09 , Revenue from Contracts with Customers (Topic 606) ASU
2014-09 outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes
most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 also requires entities to disclose
sufficient information, both quantitative and qualitative, to enable users of financial statements to understand the nature, amount,
timing, and uncertainty of revenue and cash flows arising from contracts with customers. An
entity should apply the amendments in this ASU using one of the following two methods: 1. Retrospectively to each prior reporting
period presented with a possibility to elect certain practical expedients, or, 2. Retrospectively with the cumulative effect of
initially applying ASU 2014-09 recognized at the date of initial application. If an entity elects the latter transition method,
it also should provide certain additional disclosures. For
a public entity, the amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2017 which
effective date was recently updated according to ASU 2015-14, including interim periods within that reporting period (the first
quarter of fiscal year 2018 for the Company). Early application is permitted only as of annual reported periods beginning after
December 15, 2016, including interim periods within such reporting period. The Company is in the process of assessing the impact,
if any, of ASU 2014-09 on its consolidated financial statements. In
August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure
of Uncertainties about an EntityÂ’s Ability to Continue as a Going Concern In
September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments For
public business entities, the amendments ASU 2015-16 are effective for fiscal years beginning after December 15, 2015, including
interim periods within those fiscal years. The amendments should be applied prospectively to adjustments to provisional amounts
that occur after the effective date of ASU 2015-16 with earlier application permitted for financial statements that have not been
issued. |
