Gadsden Properties, Inc. - Quarter Report: 2014 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10 - Q

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

OR

SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to ___________

Commission File Number 0-11365

(Exact name of registrant as specified in its charter)

(Address of principal executive offices, including zip code)

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant: (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days.

Yes   No 

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

Yes   No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

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

Yes   No 

The number of shares outstanding of the issuer's common stock as of November 10, 2014 was 19,049,582 shares.

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PHOTOMEDEX, INC.

INDEX TO FORM 10-Q

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PART I – Financial Information

ITEM 1. Financial Statements

PHOTOMEDEX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

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

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PHOTOMEDEX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In thousands, except share and per share amounts)

(Unaudited)

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

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PHOTOMEDEX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In thousands, except share and per share amounts)

(Unaudited)

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

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PHOTOMEDEX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014

(In thousands, except share and per share amounts)

(Unaudited)

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

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PHOTOMEDEX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, except share and per share amounts)

(Unaudited)

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

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Note 1

The Company:

Background

PhotoMedex, Inc. (and its subsidiaries) (the "Company") is a Global Health products and services company providing integrated disease management and aesthetic solutions to dermatologists, professional aestheticians, ophthalmologists, optometrists, consumers and patients. The Company provides proprietary products and services that address skin diseases and conditions including psoriasis, vitiligo, acne, actinic keratosis photo damage, unwanted hair as well as fixed-site laser vision correction services at our LasikPlus® vision centers.

On December 13, 2011, the Company closed the reverse merger with Radiancy, Inc. Immediately following the reverse merger, the pre-reverse merger shareholders of PhotoMedex, Inc. ("Pre-merged PhotoMedex") collectively owned approximately 20% of the Company's outstanding common stock, and the former Radiancy, Inc. stockholders owned approximately 80% of the Company's outstanding common stock.

The merger was accounted for as a reverse acquisition with Radiancy treated for accounting purposes as the acquirer. As such, the financial statements of Radiancy, Inc. were treated as the historical financial statements of the Company, with the results of Pre-merged PhotoMedex, Inc. being included from December 14, 2011 and thereafter.

On March 3, 2014, PhotoMedex' wholly-owned subsidiary, Radiancy, Inc., formed a wholly-owned subsidiary in Hong Kong, Radiancy (HK) Limited, through which the Company has started to directly market certain products and services to patients and consumers in selected markets in that region.

On March 5, 2014, PhotoMedex formed a wholly-owned subsidiary in India, PhotoMedex India Private Limited, through which the Company plans to directly market certain products and services to patients and consumers in selected markets in that country.

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 LasikPlus® vision centers. Through this acquisition, the Company added an additional operating segment to its organization. The Company plans to begin to directly market certain of its existing products from these centers. The results of operations of LCA-Vision have been included from May 13, 2014 through September 30, 2014 in the Company's consolidated financial statements. (See Note 2, Acquisition of LCA-Vision Inc.).

On August 18, 2014, the Company formed a wholly-owned subsidiary in Korea, PhotoMedex Korea Limited, through which the Company plans to directly market certain products and services to patients and consumers in selected markets in that country.

The Company has a business plan focused on four key components – skilled direct sales force to target Physician and Professional Segments; expertise in global consumer marketing; a full product life cycle model representing the ability to develop and commercialize innovative products from concept through regulatory, physician acceptance, and ultimately marketed directly to the consumer as dictated by normal product-life-cycle evolution and gaining market share in the competitive laser vision correction space through adaptation of the Company's established marketing methodologies as well as establishing XTRAC centers of excellence in key markets where our clinics exist and thereby leverage under-utilized capacity at these clinics. The Company reorganized its business into four operating segments to better align its organization based upon the Company's management structure, products and services offered, markets served and types of customers.

On May 12, 2014, the Company entered into an $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.

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Interest is determined at Eurodollar plus a margin between 3.25% and 4.50%. The margin is updated quarterly based on the then-current leverage ratio. The facilities are secured by a first priority security interest in and lien on all assets of the Company. All current and future subsidiaries are guarantors on the facilities.

There are financial covenants including a maximum leverage covenant and a minimum fixed charge covenant, which the Company must maintain. These covenants will be determined quarterly based on a rolling past four quarters of financial data. As of September 30, 2014, the Company continued to fail to meet both financial covenants and remains in default of the credit facilities.

On August 4, 2014, the Company received a notice of default and a reservation of rights from Chase and engaged a third-party independent advisor to assist the Company in negotiating a longer term solution to the defaults. The parties had entered into an initial Forbearance Agreement (the "Initial Forbearance Agreement") on August 25, 2014. On November 4, 2014, the Company entered into an Amended and Restated Forbearance Agreement (the "Amended Forbearance Agreement") with the lenders that are parties to the Credit Agreement and with Chase, as Administrative Agent for the Lenders.

Pursuant to the terms of the Amended Forbearance Agreement, the Lenders have agreed to forbear from exercising their rights and remedies with respect to the Specified Events of Default from August 25, 2014 until February 28, 2015, or earlier if an event of default occurs (the "Forbearance Period"). The Company agreed to make prepayments on the term loan of $938 each on November 1 and December 1, 2014, and on January 1 and February 1, 2015, which will be applied in direct order of maturity. The Company also agreed that on or before the second business day after certain dates set forth in the Amended Forbearance Agreement, the Company would pay against the revolving loans an amount equal to 75% of cash-on-hand that exceeded $18 million. In addition, the Company will make a payment of $1.5 million toward the revolving loans on or before February 16, 2015. The interest rates on the Loans under the Credit Agreement is increased beginning November 1, 2014 to the CB Floating Rate plus 4.00%; an additional 2.00% will be added to that rate upon the occurrence and continuance of any Default or Event of Default (other than a specified event of default).

The Company has retained the services of both Getzler Henrich, a third-party independent business advisor, as well as Canaccord Genuity, a banking and financial services company. During the Forbearance Period, the Company and these advisors will prepare and distribute offering memoranda and other marketing materials to prospective lenders with regard to seeking a new credit facility for the Company, the proceeds of which would be in an amount sufficient to repay in full the Company's obligations under the Credit Agreement. The closing of such a proposed Refinancing would occur no later than the end of the Forbearance Period. Furthermore, the Company will evaluate all strategic alternatives as part of its engagement with its investment advisors.

The Company agreed to limit certain capital expenditures to $575, except for those involving the Company's XTRAC or VTRAC medical devices, and will not make investments or acquire any other interests in affiliated companies except as agreed to by the Lenders. The Company also agreed to execute certain documents pledging 64,896 shares of Radiancy (Israel) Ltd. and 13,000 shares of PhotoMedex Korea Ltd., as well as a Subordination Agreement in favor of the Administrative Agent and the Lenders with respect to the Company's secured loan to its subsidiary, PhotoMedex Technology, Inc.

The Amended Forbearance Agreement is 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.

If, by the end of the Forbearance Period, the Company and its Lenders have not entered into another Forbearance Agreement or otherwise reached an agreement regarding the Credit Agreement and the Facilities, the Lenders have

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

the right to declare all of the obligations under the Credit Agreement and Facilities due and payable, including principal and interest, as authorized by the Credit Agreement, and to enforce additional obligations under the Forbearance Agreement. Such a result would have a material adverse effect on the Company and its financial condition.

As consideration for the Lender's entry into the Forbearance Agreement, the Company paid the Lender a fee of $196.

Basis of Presentation:

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, 2013 ("fiscal 2013"). The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC") related to interim financial statements. As permitted under those rules, certain information and footnote disclosures normally required or included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") have been condensed or omitted. The financial information contained herein is unaudited; however, management believes all adjustments have been made that are considered necessary to present fairly the results of the Company's financial position and operating results for the interim periods. All such adjustments are of a normal recurring nature.

The results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the year ending December 31, 2014 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- -owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The LCA-Vision results have been included in the financial statements from May 13, 2014, the day following the closing date of the acquisition.

Reclassification

Certain reclassifications from the prior year presentation have been made to conform to the current year presentation. These reclassifications did not have material impact on the Company's equity, net assets, results of operations or cash flows.

Revenue Recognition

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

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

For revenue arrangements with multiple deliverables within a single, contractually binding 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.

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

With respect to sales arrangements under which the buyer has a right to return the related product, revenue is recognized only if all the following conditions are met: the price is fixed or determinable at the date of sale; the buyer has paid, or is obligated to pay and the obligation is not contingent on resale of the product; the buyer's obligation would not be changed in the event of theft or physical destruction or damage of the product; the buyer has economic substance; the Company does not have significant obligations for future performance to directly bring about resale of the product by the buyer; and the amount of future returns can be reasonably estimated.

The Company provides a provision for product returns based on the experience with historical sales returns, in accordance with ASC Topic 605-15 with respect to sales of product when a right of return exists. Reported revenues are shown net of the returns provision. Such allowance for sales returns is included in Other Accrued Liabilities. (See Note 8).

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

The Company has two distribution channels for its phototherapy treatment equipment. The Company either (i) sells its lasers through a distributor or directly to a physician or (ii) places its lasers in a physician's office (at no charge to the physician) and generally charges the physician a fee for an agreed upon number of treatments. In some cases, the Company and the customer stipulate to a quarterly or other periodic target of procedures to be performed, and accordingly revenue is recognized ratably over the period.

When the Company places a laser in a physician's office, it generally recognizes service revenue based on the number of patient treatments performed, or purchased under a periodic commitment, by the physician. Amounts collected with respect to treatments to be performed through laser-access codes that are sold to physicians free of a periodic commitment, but not yet used, are deferred and recognized as a liability until the physician performs the treatment. Unused treatments remain an obligation of the Company because the treatments can only be performed on Company-owned equipment. Once the treatments are performed, this obligation has been satisfied.

The Company defers substantially all revenue from sales of laser-access treatment codes ordered by its customers within the last two weeks of the period in determining the amount of procedures performed by its physician-customers. Management believes this approach closely approximates the actual amount of unused treatments that existed at the end of a period.

Patient Receivables and Allowance for Doubtful Accounts

The Company, through its subsidiary LCA-Vision, provides financing to some of its patients, including those who could not otherwise obtain third-party financing. The terms of the financing usually require the patient to pay an up-front fee which is intended to cover some or all of the variable costs, and then generally the remainder of the payments are automatically deducted from the patient's bank account over a period of 12 to 36 months. The Company has recorded an allowance for doubtful accounts as a best estimate of the amount of probable credit losses from the patient financing program. Each month, management reviews and adjusts the allowance based upon past experience with patient financing. The Company charges-off receivables against the allowance for doubtful accounts when it is probable that a receivable will not be recovered. The Company's policy is to reserve for all patient receivables that remain open past their financial maturity date and to provide reserves for patient collectability rates, recent default activity and the current credit environment. Bad debt expense, on patient receivables, was $133 and $244 or less than 1% of the clinics revenues for the three months ended September 30, 2014 and the period of May 13, 2014 through September 30, 2014, respectively.

For patients that the Company internally finances, the Company charges interest at market rates. Finance and interest charges on patient receivables were $205 and $318 for the periods ended September 30, 2014.

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Insurance Reserves

The Company, through its subsidiary LCA-Vision, maintains a captive insurance company to provide professional liability insurance coverage for claims brought against the Company and its optometrists. In addition, the captive insurance company's charter allows it to provide professional liability insurance for the Company's ophthalmologists, none of whom are currently insured by the captive. The Company uses the captive insurance company for both primary insurance and excess liability coverage. A number of claims are now pending with the captive insurance company. Since the captive insurance company is wholly-owned enterprise, it is included in the Company's consolidated financial statements. As of September 30, 2014, the insurance reserves were $6,094, which represented an actuarially determined estimate of future costs associated with claims filed as well as claims incurred but not yet reported. The actuaries determine loss reserves by comparing the Company's historical claim experience to comparable insurance industry experience.

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 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) 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.

Fair Value Measurements

The Company measures and discloses fair value in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification 820, Fair Value Measurements and Disclosures ("ASC Topic 820"). ASC Topic 820 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions there exists a three-tier fair-value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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 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 (including long term receivables which bear interest) and liabilities (including the secured credit facilities) is estimated to be equal to their fair value due to the short-term nature or commercial terms 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 group applies the provisions of Accounting Standards Codification ("ASC") Topic 815, Derivatives and Hedging. In accordance with ASC Topic 815, all the derivative financial instruments are recognized as either financial assets or financial liabilities on the balance sheet at fair value. The accounting for changes in the fair value of a derivative financial instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For derivative financial instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation.

From time to time the Company carries out transactions involving foreign exchange derivative financial instruments (mainly forward exchange contracts) which are designed to hedge the cash flows expected to be paid with respect to forecasted expenses of the Israeli subsidiary (Radiancy) denominated in Israeli local currency (NIS) which is different than its functional currency.

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

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

At September 30, 2014, the balance of such derivative instruments amounted to approximately $632 in liabilities and approximately $449 and $266 were recognized as financing expense in the Statement of Comprehensive Income during the three and nine months ended September 30, 2014, respectively.

The nominal amounts of foreign currency derivatives as of September 30, 2014 consist of forward transactions for the exchange of $17,807 into NIS as of September 30, 2014.

Accrued Enhancement Expense

The Company, through its subsidiary LCA-Vision, includes participation in its LasikPlus Advantage Plan® (acuity program) in the base surgical price for substantially all of its patients. Under the acuity program, if determined to be medically appropriate, the Company provides post-surgical enhancements free of charge should the patient not achieve the desired visual correction during the initial procedure. Under this pricing structure, the Company accounts for the acuity program similar to a warranty obligation. Accordingly, the Company accrues the costs expected to be incurred to satisfy the obligation as a liability and cost of revenue at the point of sale given its ability to estimate reasonably such costs based on historical trends and the satisfaction of all other revenue recognition criteria.

This estimate is reviewed throughout the year with consideration to factors such as procedure cost and historical procedure volume when determining the appropriateness of the recorded balance.

Accrued Warranty Costs

The Company offers a standard warranty on product sales generally for a one to two-year period. In the case of domestic sales of XTRAC lasers, however, the Company has offered longer warranty periods, ranging from three to four years, in order to meet competition or meet customer demands. The Company provides for the estimated cost of the future warranty claims on the date the product is sold. Total accrued warranty is included in Other Accrued Liabilities on the balance sheet. The activity in the warranty accrual during the nine months ended September 30, 2014 and 2013 is summarized as follows:

For extended warranty on the consumer products, see Revenue Recognition above.

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Earnings Per Share

Basic and diluted earnings per common share were calculated using the following weighted-average shares outstanding:

Diluted earnings per share for the three and nine months ended September 30, 2014, exclude the impact of unvested restricted stock, common stock options and warrants, totaling 2,623,682 shares, as the effect of their inclusion would be anti-dilutive. Diluted earnings per share for the three and nine months ended September 30, 2013, excluded the impact of unvested restricted stock, common stock options and warrants, totaling 2,101,873 shares, as the effect of their inclusion would be anti-dilutive.

Recently Issued Accounting Standards

In May 2014, The FASB issued Accounting Standard Update 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09").

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, 2016, including interim periods within that reporting period (the first quarter of fiscal year 2017 for the Company). Early application is not permitted. 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 Accounting Standards Update 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern ("ASU 2014-15"). ASU 2014-15 provide guidance on management's responsibility in evaluating whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). ASU 2014-15 also provide guidance related to the required disclosures as a result of management evaluation. 

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

The amendments in ASU 2014-15 are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.

Adoption of New Accounting Standards

Effective January 1, 2014, the Company adopted Accounting Standard Update 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force) ("ASU 2013-11").

The amendments in ASU 2013-11 state that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows: To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be presented net of deferred tax assets.

ASU 2013-11 applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. For public companies the amendments in this ASU became effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments were applied prospectively to all unrecognized tax benefits that existed at the effective date.

The adoption of the standard did not have a material impact on the Company's consolidated results of operations and financial condition.

Effective January 1, 2014, the Company adopted Accounting Standards Update 2013-5, Foreign Currency Matters (Topic 830) Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity ("ASU 2013-5").

ASU 2013-5 clarifies that, when a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets that is a business (other than a sale of in-substance real estate or conveyance of oil and gas mineral rights) within a foreign entity, the parent is required to apply the guidance in Subtopic 830-30 to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. ASU 2013-5 also clarifies that if the business combination achieved in stages relates to a previously held equity method investment (step-acquisition) that is a foreign entity, the amount of accumulated other comprehensive income that is reclassified and included in the calculation of gain or loss shall include any foreign currency translation adjustment related to that previously held investment.

For public companies, the amendments in this Update became effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. In accordance with the transition requirements, the amendments should be applied prospectively to derecognition events occurring after the effective date. Prior periods should not be adjusted.

The adoption of the standard did not have a material impact on the Company's consolidated results of operations and financial condition.

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Note 2

Acquisition of LCA-Vision Inc.:

On May 12, 2014, PhotoMedex Inc., completed the acquisition of 100% of the shares of LCA-Vision, a previously publicly-traded Delaware corporation.

LCA is a provider of fixed-site laser vision corrections services at its LasikPlus® vision centers. The vision centers provide the staff, facilities, equipment and support services for performing laser vision correction that employs advanced laser technologies to help correct nearsightedness, farsightedness and astigmatism. The vision centers are supported by independent ophthalmologists and credentialed optometrists, as well as other healthcare professionals. Substantially all of LCA's revenues are derived from the delivery of laser vision correction procedures performed in the vision centers.

The purchase price of LCA-Vision was $106,552 in aggregate consideration, paid in cash (including the full use of the credit facility), consisting of:

 

The fair value of the assets acquired and liabilities assumed were based on management estimates and values derived from an outside independent appraisal. The Company expects that the allocation will be finalized within twelve months after the merger. Based on the purchase price allocation, the following table summarizes the estimated provisional fair value amounts of the assets acquired and liabilities assumed at the date of acquisition:

The purchase price exceeded the fair value of the net assets acquired by $49,582, which was recorded as goodwill.

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

The consolidated results of operations do not include any revenues or expenses related to the LCA-Vision business on or prior to May 13, 2014, the consummation date of the acquisition. The Company's unaudited pro-forma results for the three and nine months ended September 30, 2013 and for the nine months ended September 30, 2014 summarize the combined results of PhotoMedex and LCA-Vision in the following table, assuming the acquisition had occurred on January 1, 2013 and after giving effect to the acquisition adjustments, including amortization of the tangible and definite-lived intangible assets were acquired in the transaction:

These unaudited pro-forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which would have actually resulted had the acquisition occurred on January 1, 2013, nor to be indicative of future results of operations.

Note 3

Inventories, net:

Work-in-process is immaterial, given the Company's typically short manufacturing cycle, and therefore is disclosed in conjunction with raw materials.

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Note 4

Property and Equipment, net:

Depreciation and related amortization expense was $4,727 and $2,085 for the nine months ended September 30, 2014 and 2013, respectively.

Note 5

Patents and Licensed Technologies, net:

Related amortization expense was $1,541 and $1,532 for the nine months ended September 30, 2014 and 2013, respectively.

Estimated amortization expense for amortizable patents and licensed technologies assets for the next five years is as follows:

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Note 6

Goodwill and Other Intangible Assets, net:

The Company has no impairment loss on goodwill or indefinite-lived assets as of September 30, 2014.

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

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Related amortization expense was $1,331 and $900 for the periods ended September30, 2014 and 2013, respectively. Customer Relationships embody the value to the Company of relationships that Pre-merged PhotoMedex had formed with its customers. Definite useful life trademarks include the tradenames and various trademarks associated with Pre-merged PhotoMedex products (e.g. "XTRAC", "Neova" "Omnilux" and "Lumiere"). Additions to Trademarks include the tradename/trademark associated with LCA-Vision services. This tradename is considered to have an indefinite live. Managed Care Network relates to relationships with leading managed care providers (i.e. employee vision plans) that refers business to LCA-Vision. The Managed Care Network is to be amortized over a ten-year life.

Estimated amortization expense for the above amortizable intangible assets for the next five years is as follows:

Note 7

Accrued Compensation and related expenses:

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Note 8

Other Accrued Liabilities:

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

Note 9

Long-Term Other Liabilities:

Note 10

Long-term Debt:

In the following table is a summary of the Company's long-term debt:

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Senior Secured Credit Facilities

On May 12, 2014, the Company entered into an $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.

Interest is determined at Eurodollar plus a margin between 3.25% and 4.50%. The margin is updated quarterly based on the then-current leverage ratio. The facilities are secured by a first priority security interest in and lien on all assets of the Company. All current and future subsidiaries are guarantors on the facilities. There are financial covenants including; a maximum leverage covenant and a minimum fixed charge covenant, which the Company must maintain. These covenants will be determined quarterly based on a rolling past four quarters of financial data. As of September 30, 2014, the Company continued to fail to meet both financial covenants and is in default of the credit facilities

On August 4, 2014, the Company received a notice of default and a reservation of rights from Chase and engaged a third-party independent advisor to assist the Company in negotiating a longer term solution to the defaults. The parties had entered into an initial Forbearance Agreement (the "Initial Forbearance Agreement") on August 25, 2014. On November 4, 2014, the Company entered into an Amended and Restated Forbearance Agreement (the "Amended Forbearance Agreement") with the lenders that are parties to the Credit Agreement and with Chase, as Administrative Agent for the Lenders.

Pursuant to the terms of the Amended Forbearance Agreement, the Lenders have agreed to forbear from exercising their rights and remedies with respect to the Specified Events of Default from August 25, 2014 until February 28, 2015, or earlier if an event of default occurs (the "Forbearance Period"). The Company agreed to make prepayments on the term loan of $938 each on November 1 and December 1, 2014, and on January 1 and February 1, 2015, which will be applied in direct order of maturity. The Company also agreed that on or before the second business day after certain dates set forth in the Amended Forbearance Agreement, the Company would pay against the revolving loans an amount equal to 75% of cash-on-hand that exceeded $18 million. In addition, the Company will make a payment of $1.5 million toward the revolving loans on or before February 16, 2015. The interest rates on the Loans under the Credit Agreement is increased beginning November 1, 2014 to the CB Floating Rate plus 4.00%; an additional 2.00% will be added to that rate upon the occurrence and continuance of any Default or Event of Default (other than a specified event of default).

The Company has retained the services of both Getzler Henrich, a third-party independent business advisor, as well as Canaccord Genuity, a banking and financial services company. During the Forbearance Period, the Company and these advisors will prepare and distribute offering memoranda and other marketing materials to prospective lenders with regard to seeking a new credit facility for the Company, the proceeds of which would be in an amount sufficient to repay in full the Company's obligations under the Credit Agreement. The closing of such a proposed Refinancing would occur no later than the end of the Forbearance Period. Furthermore, the Company will evaluate all strategic alternatives as part of its engagement with its investment banking advisors.

The Company agreed to limit certain capital expenditures to $575, except for those involving the Company's XTRAC or VTRAC medical devices, and will not make investments or acquire any other interests in affiliated companies except as agreed to by the Lenders. The Company also agreed to execute certain documents pledging 64,896 shares of Radiancy (Israel) Ltd. and 13,000 shares of PhotoMedex Korea Ltd., as well as a Subordination Agreement in favor of the Administrative Agent and the Lenders with respect to the Company's secured loan to its subsidiary, PhotoMedex Technology, Inc.

The Amended Forbearance Agreement is 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.

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

If, by the end of the Forbearance Period, the Company and its Lenders have not entered into another Forbearance Agreement or otherwise reached an agreement regarding the Credit Agreement and the Facilities, the Lenders have the right to declare all of the obligations under the Credit Agreement and Facilities due and payable, including principal and interest, as authorized by the Credit Agreement, and to enforce additional obligations under the Forbearance Agreement. Such a result would have a material adverse effect on the Company and its financial condition.

As consideration for the Lender's entry into the Forbearance Agreement, the Company paid the Lender a fee of $196.

As the Amended Forbearance Agreement restructures the secured credit facilities and the related payment terms, the debt is no longer considered to be long term payment terms. As such the Company has classified the debt as current. In addition, due to the intention to refinance the credit facility with other creditors, the unamortized related debt issue costs and debt discount of $2,021 have been expensed in the three months ended September 30, 2014.

Term-Note Credit Facility

In December 2013, the Company, through its subsidiary, Radiancy, Inc., entered into a term-note facility with JP Morgan Chase ("Chase"). The facility has maximum principal amount of $15 million and is for a term of one year. As of December 31, 2013, the Company had total borrowings of $10 million under this facility. The stated interest rate for any draw under the credit facility was set as the greater of (i) prime rate, (ii) federal funds effective rate plus .5% or (iii) LIBOR plus 2.5%. Each draw has a repayment period of one year with principal due at maturity, although any draw may be paid early with penalty. This term-note was cancelled at the time the senior secured credit facilities were entered into.

Third-party debt

Through the acquisition of LCA-Vision, the Company assumed debt to a third party for purchases of equipment. LCA-Vision had outstanding debt related to the 2013 purchases of excimer lasers for all of the full-service vision centers. The terms of the financing are over an original 36-month term at a fixed interest rate of 3.5%. The financing agreement does not contain any financial covenants and is secured by the excimer lasers.

The following table summarizes the future minimum payments that the Company expects to make for long-term debt:

Note 11

Income Taxes:

The Company's effective tax rate is dependent upon the geographic distribution of its earnings or losses (mainly between US and Israel).

The difference between the Company's effective tax rates for the three and nine month periods ended September 30, 2014 and the U.S. Federal statutory rate (34%) resulted primarily from Pre-merged PhotoMedex current operations which have generated losses, which reduced the overall corporate tax expense and which will have effect on current tax expense when the Company elected to file a U.S. consolidated income tax return. In addition, the Israeli and UK subsidiaries' earnings are taxed at rates lower than the federal statutory rate (Israel 16% preferred income tax rate, 26.5% standard corporation tax rate and in the UK 20%).

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and can be ambiguous; the Company is, therefore, obliged to make many subjective assumptions and judgments regarding the application of such laws and regulations to its facts and circumstances. In addition, interpretations of and guidance surrounding income tax laws and regulations are subject to changes over time. Any changes in the Company's subjective assumptions and judgments could materially affect amounts recognized in its consolidated balance sheets and statements of income.

Note 12

Commitments and contingencies:

With the acquisition of LCA-Vision, the Company has additional operating lease obligations. The total value of these lease obligations are $19,630, with $5,322 due less than 1 year; $8,653 due between 1 to 3 years; $4,728 due 3 to 5 years and $927 due more than 5 years from now.

The Company's subsidiary, LCA-Vision, is in a business that results in malpractice lawsuits. LCA-Vison is insured through the captive insurance company to provide coverage for current claims brought against LCA-Vision. The captive insurance company is used for both primary insurance and excess liability coverage. A number of claims are now pending with the captive insurance company.

The loss reserves are based on the LCA-Vision's historical claim experience, comparable industry experience and recent trends that would impact the ultimate settlement of claims. However, due to the uncertainties inherent in the determination of these liabilities, the ultimate settlement of claims incurred through September 30, 2014 could differ from the amounts recorded. At September 30, 2014, the Company maintained insurance reserves of $6,094 of which $803 is considered to be current. Although the insurance reserve reflects management's best estimate of the amount of probable loss, management believes the range of loss that is reasonably possible to have been incurred to be approximately $4,327 to $12,935 at September 30, 2104. Any adjustments required with respect to the recorded insurance reserve as a result of changes of these estimates are recorded in the period determined.

During the year ended December 31, 2013, Radiancy, Inc., a wholly-owned subsidiary of PhotoMedex, commenced legal action against Viatek Consumer Products Group, Inc., over Viatek's Pearl and Samba hair removal products which Radiancy believes infringe the intellectual property covering its no!no! hair removal devices. The first suit, which was filed in the United States Federal Court, Southern District of New York, includes claims against Viatek for patent infringement, trademark and trade dress infringement, and false and misleading advertising. A second suit against Viatek was filed in Canada, where the Pearl is offered on that country's The Shopping Channel, alleging trademark and trade dress infringement, and false and misleading advertising. Viatek's response contains a variety of counterclaims and affirmative defenses against both Radiancy and its parent company PhotoMedex, including, among other counts, claims regarding the invalidity of Radiancy's patents and antitrust allegations regarding Radiancy's conduct.

Radiancy, and PhotoMedex, had moved to dismiss PhotoMedex from the case, and to dismiss the counterclaims and affirmative defenses asserted by Viatek. On March 28, 2014, the Court granted the Company's motion and dismissed our parent company, PhotoMedex, from the lawsuit. The Court also dismissed certain counterclaims and affirmative defenses asserted by Viatek, including Viatek's counterclaims against Radiancy for antitrust, unfair competition, and tortious interference with business relationships and Viatek's affirmative defenses of unclean hands and inequitable conduct before the U.S. Patent and Trademark Office in procuring its patent. Radiancy had also moved for sanctions against Viatek for failure to provide meaningful and timely responses to Radiancy's discovery requests; on April 1, 2014, the Court granted Radiancy's motion for sanctions against Viatek. Viatek appealed both the sanctions ruling and the dismissal of Viatek's counterclaims and defenses from the case, as well as PhotoMedex's dismissal as a plaintiff; the Court has denied those appeals in their entirety. The Court also appointed a Special Master to oversee discovery Viatek has requested a Markman hearing as well as the opportunity to supplement its patent invalidity contentions in the US case; the Company and Radiancy are opposing both requests to the Court. Radiancy has been granted permission by the US Court to supplement its earlier sanctions motion to include the legal fees and costs associated with preparing and prosecuting that motion.

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

As of October 30, 2014, discovery continues in both the US and the Canadian cases. At this time, the amount of any loss, or range of loss, cannot be reasonably estimated as the case is still in the early stages of discovery to determine the validity of any claim or claims made by Viatek. Therefore, the Company has not recorded any reserve or contingent liability related to this particular legal matter. However, in the future, as the case progresses, the Company may be required to record a contingent liability or reserve for this matter.

On December 20, 2013, PhotoMedex, Inc. was served with a putative class action lawsuit filed in the United States District Court for the Eastern District of Pennsylvania against the Company and its two top executives, Dolev Rafaeli, Chief Executive Officer, and Dennis M. McGrath, President and Chief Financial Officer. The suit, filed by Mr. Guy Ratz, a former employee of Radiancy (Israel) Ltd., a wholly-owned subsidiary of the Company, alleges various violations of the Federal securities laws between November 7, 2012 and November 14, 2013, including that the Company and its officers made false and misleading statements or failed to disclose material facts concerning the Company's business. Two other shareholders filed suit through other firms; the Asbestos Workers Local 14 Pension Fund was appointed the lead plaintiff in this case. An amended complaint was filed by the plaintiffs on April 15, 2014. The Company filed a motion to dismiss the case in its entirety; briefing continues on that motion. The complaint seeks certification of the putative class as well as an unspecified amount of monetary damages, pre-and post-judgment interest and attorneys' fees, expert witness fees and other costs. The Company and its officers intend to vigorously defend themselves against this lawsuit. A mediation on possible settlement of this action has been scheduled for November 10, 2014. At this time, the amount of any loss, or range of loss, cannot be reasonably estimated as the cases have only been initiated and no discovery has been conducted to determine the validity of any claim or claims made by plaintiffs. Therefore, the Company has not recorded any reserve or contingent liability related to these particular legal matters. However, in the future, as the cases progress, the Company may be required to record a contingent liability or reserve for these matters.

Six putative class-action lawsuits were filed in connection with PhotoMedex's proposed acquisition of LCA-Vision, Inc. Two of those suits were filed in the Court of Chancery of the State of Delaware and four were filed in the Court of Common Pleas of Hamilton County, Ohio. All cases assert claims against LCA-Vision, Inc., and a mix of other defendants, including LCA's chief executive officer and directors, PhotoMedex, and Gatorade Acquisition Corp., a wholly owned subsidiary of PhotoMedex. The complaints generally allege that the proposed acquisition undervalued LCA and deprived LCA's shareholders of the opportunity to participate in LCA's long-term financial prospects, that the "go shop" and "deal-protection" provisions of the Merger Agreement were designed to prevent LCA from soliciting or receiving competing offers, that LCA's Board breached its fiduciary duties and failed to maximize that company's stockholder value, and that LCA, PhotoMedex, and Gatorade aided and abetted the LCA defendants' alleged breaches of duty. The complaints seek injunctive relief, unspecified damages, and other relief. The Ohio plaintiffs agreed to consolidate their suits and take the lead on this matter, although the Ohio Court did not formally consolidate the suits until April 24, 2014. The Delaware suits were consolidated on March 25, 2014; on or around that same date, the parties reached an agreement by which LCA and the other defendants agreed to produce certain discovery to the plaintiffs on an expedited basis. On April 30, 2014, the Ohio plaintiffs (with the Delaware plaintiffs' concurrence) agreed to withdraw their motion for a preliminary injunction and not seek to enjoin the stockholder vote or the consummation of the merger in return for LCA's agreement to make certain supplemental disclosures related to the merger. Those supplemental disclosures were filed by LCA under a Form 8-K on April 30, 2014. This agreement did not affect the terms of the Merger Agreement or the amount of consideration LCA stockholders would be entitled to receive in the merger. The Company intends to continue to vigorously defend itself in the lawsuits if the parties cannot enter into a formal stipulation of settlement. At this time, the amount of any loss, or range of loss, cannot be reasonably estimated, as the cases have only been recently initiated and little 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 if the cases cannot be resolved.

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

On April 25, 2014, a putative class action lawsuit was filed in the United States District Court for the District of Columbia against the Company's subsidiary, Radiancy, Inc. and Dolev Rafaeli, Radiancy's President. The suit was filed by Jan Mouzon and twelve other customers residing in ten different states who purchased Radiancy's no!no! Hair products. It alleges various violations of state business and consumer protection codes including false and misleading advertising, unfair trade practices, and breach of express and implied warranties. The complaint seeks certification of the putative class, or, alternatively, certification as subclasses of plaintiffs residing in those specific states. The complaint also seeks an unspecified amount of monetary damages, pre-and post-judgment interest and attorneys' fees, expert witness fees and other costs. Dr. Rafaeli was served with the Complaint on May 5, 2014; to date, Radiancy, has not been served. The Company has filed a motion to dismiss this case; that motion is pending before the Court. A mediation has been scheduled in this matter for November 24, 2014. Radiancy and its officers intend to vigorously defend themselves against this lawsuit. At this time, the amount of any loss, or range of loss, cannot be reasonably estimated as the 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.

On June 30, 2014, the Company's subsidiary, Radiancy, Inc., was served with a putative class action lawsuit filed in the Superior Court in the State of California, County of Kern. The suit was filed by April Cantley, who purchased Radiancy's no!no! Hair products. It alleges various violations of state business and consumer protection codes including false and misleading advertising, breach of express and implied warranties and breach of the California Legal Remedies Act. The complaint seeks certification of the putative class, which consists of customers in the State of California who purchased the no!no! Hair devices. The complaint also seeks an unspecified amount of monetary damages, pre-and post-judgment interest and attorneys' fees, expert witness fees and other costs. Radiancy and its officers intend to vigorously defend themselves against this lawsuit. Discovery has now commenced in this action. 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.

The Company was served on July 29, 2014 with an application to certify a class action, filed in Israel District Court for Tel Aviv against the Company and its two top executives, Dolev Rafaeli, Chief Executive Officer, and Dennis M. McGrath, President and Chief Financial Officer. Under Israeli procedures, an application is filed with the Court, the Company had 90 days to submit its response, and then the Court reviews the application and the response and determines whether to certify the application as a class action. The application, served by a shareholder of the Company, alleges various violations of the Israeli Securities Law 5728-1968, including that the Company and its officers made false and/or misleading statements or failed to disclose material facts in its public reports concerning the Company's business, and therefore influenced the Company's share price. The plaintiff seeks class action status to include all purchasers of the Company's stock between May 3, 2012 and November 6, 2013, specifying an amount in monetary damages of 145 Million New Israeli Shekels or $42,050,000. The plaintiff also seeks pre-and post-judgment interest and attorneys' fees and other costs. The Israeli Court has rejected the service of process by plaintiffs, noting that the agency upon whom service was effected was not authorized to receive service for any of the defendants, and that both Dr. Rafaeli and Mr. McGrath were not residents of Israel for purposes of service of process. The Court also held that the plaintiffs were in violation of key procedural rules governing the filing and prosecution of such matters. Plaintiffs' counsel filed an appeal of the Court's decision on or about October 6, 2014.The Company and its officers are already parties to a lawsuit containing similar allegations filed in the United States District Court for the Eastern District of Pennsylvania on December 20, 2013, and intend to vigorously defend themselves against both actions.  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 and any damages stated 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.

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

From time to time in the ordinary course of our business, we and certain of our subsidiaries are involved in certain other legal actions and claims, including product liability, consumer, commercial, tax and governmental matters, and claims regarding false advertising and product efficacy which were already raised and reviewed in the Tria litigation. We believe, based on discussions with legal counsel, that these other litigations and claims will likely be resolved without a material effect on our consolidated financial position, results of operations or liquidity. However, litigation is inherently unpredictable, and excessive verdicts can result from litigation. Although we believe we have substantial defenses in these matters, we may, in the future, incur judgments or enter into settlements of claims that could have a material adverse effect on our results of operations in a particular period.

Note 13

Employee Stock Benefit Plans:

Post-Reverse Merger

Following the closing of the December 2011 reverse acquisition, the previous Non-Employee Director Stock Option Plan of PhotoMedex (the acquired entity) was adopted by the group. This plan has authorized 120,000 shares; of which 7,000 shares had been issued or were reserved for issuance as awards of shares of common stock, and 14,578 shares were reserved for outstanding stock options. On July 31, 2014, the shareholders approved an increase in the authorized shares to 370,000 shares under the stock based benefit plan.

In addition, following the closing of the December 2011 reverse acquisition, the previous 2005 Equity Compensation Plan ("2005 Equity Plan") of Pre-merged PhotoMedex (the acquired entity) was also adopted for use by the group. The 2005 Equity Plan has authorized 3,000,000 shares, of which 867,432 shares had been issued or were reserved for issuance as awards of shares of common stock, and 1,293,601 shares were reserved for outstanding options. On July 31, 2014, the shareholders approved an increase in the authorized shares to 6,000,000 shares under the stock based benefit plan.

Stock option activity under all of the Company's share-based compensation plans for the nine months ended September 30, 2014 was as follows:

At September 30, 2014, there was $8,004 of total unrecognized compensation cost related to non-vested option grants and stock awards that is expected to be recognized over a weighted-average period of 2.5 years. The intrinsic value of options outstanding and exercisable at September 30, 2014 was not significant.

The Company calculates expected volatility for a share-based grants based on historic daily stock price observations of its common stock. For estimating the expected term of share-based grants made in the three and nine months ended September 30, 2014, the Company has adopted the simplified method. The Company has used historical data to estimate expected employee behaviors related to option exercises and forfeitures and included these expected forfeitures as a part of the estimate of expense as of the grant date.

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

The Company uses the Black-Scholes option-pricing model to estimate fair value of grants of stock options with the following weighted-average assumptions:

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 April 17, 2014, the Company issued 5,000 shares of common stock to a non-employee director for an aggregate fair value of $75.

On May 12, 2014, the Company granted 141,337 restricted stock units to three LCA employees as part of their respective employment agreements related to the acquisition. These restricted shares have a purchase price of $0.01 per share and vest, and cease to be subject to the Company's right of repurchase, over a three-year period. The Company determined the fair value of the awards to be the fair value of the Company's common stock on the date of issuance less the value paid for the award. The aggregate fair value of these restricted stock issued was $1,936. The Company also granted an aggregate of 109,000 options to purchase common stock to a number of employees with a strike price of $13.70, which was higher than the quoted market value of our stock at the date of grants. The options vest over four years and expire ten years from the date of grant. The aggregate fair value of these options granted was $975.

On February 27, 2014, the Company granted an aggregate of 71,500 options to purchase common stock to a number of employees and consultants with a strike price of $14.80, which was higher than the quoted market value of our stock at the date of grants. The options vest over five years and expire ten years from the date of grant. The aggregate fair value of the options granted was $718.

Total stock based compensation expense was $3,944 and $3,795 for the nine months ended September 30, 2014 and 2013, including amounts relating to consultants.

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Note 14

Business Segments and Geographic Data:

Following the acquisition of LCA-Vision, the Company's business was aligned into four operating segments based upon the Company's management structure, products and services offered, markets served and types of customers, as follows: The Consumer segment derives its revenues from the design, development, manufacturing and selling of long-term hair reduction and acne consumer products. The Physician Recurring segment derives its revenues from the XTRAC procedures performed by dermatologists, the sales of skincare products, the sales of surgical disposables and accessories to hospitals and surgery centers and on the repair, maintenance and replacement parts on our various products. The Professional segment generates revenues from the sale of equipment, such as lasers, medical and esthetic light and heat-based products and LED products. The Clinics segment generates revenues from services performed and products sold in our vision centers. Management reviews financial information presented on an operating segment basis for the purposes of making certain operating decisions and assessing financial performance.

Unallocated operating expenses include costs that are not specific to a particular segment but are general to the group; included are expenses incurred for administrative and accounting staff, general liability and other insurance, professional fees and other similar corporate expenses. Unallocated assets include cash and cash equivalents, prepaid expenses and deposits.

The following tables reflect results of operations from our business segments for the periods indicated below:

Three Months Ended September 30, 2014 (unaudited)

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Three Months Ended September 30, 2013 (unaudited)

Nine Months Ended September 30, 2014 (unaudited)

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Nine Months Ended September 30, 2013 (unaudited)

For the three and nine months ended September 30, 2014 and 2013 (unaudited), net revenues by geographic area were as follows: