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

form_10-q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10 - Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to ___________

Commission File Number 0-11365

PHOTOMEDEX, INC.

(Exact name of registrant as specified in its charter)

Nevada

(State or other jurisdiction

of incorporation or organization)

59-2058100

(I.R.S. Employer

Identification No.)

100 Lakeside Drive, Suite 100, Horsham, Pennsylvania 19044

(Address of principal executive offices, including zip code)

(215) 619-3600

(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 ý 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 ý No ¨

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

Large accelerated filer ¨ Accelerated filer ý

Non-accelerated filer ¨ Smaller reporting company ¨

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

Yes ¨ No ý

The number of shares outstanding of the issuer's common stock as of August 11, 2014 was 19,049,582 shares.

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PHOTOMEDEX, INC.

INDEX TO FORM 10-Q

Part I. Financial Information:			PAGE

	ITEM 1. Financial Statements:
		a. Condensed Consolidated Balance Sheets as of June 30, 2014 (unaudited) and December 31, 2013	3

		b. Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended June 30, 2014 and 2013 (unaudited)	4

		c. Condensed Consolidated Statements of Comprehensive Income (Loss) for the six months ended June 30, 2014 and 2013 (unaudited)	5

		d. Condensed Consolidated Statement of Changes in Equity for the six months ended June 30, 2014 (unaudited)	6

		e. Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013 (unaudited)	7

		f. Notes to Condensed Consolidated Financial Statements (unaudited)	8

	ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		31

	ITEM 3. Quantitative and Qualitative Disclosure about Market Risk		48

	ITEM 4. Controls and Procedures		49

Part II. Other Information:

	ITEM 1. Legal Proceedings		49

	ITEM 1A. Risk Factors		51

	ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds		51

	ITEM 3. Defaults Upon Senior Securities		52

	ITEM 4. Mine Safety Disclosures		52

	ITEM 5. Other Information		52

	ITEM 6. Exhibits		54

		Signatures	58

		Certifications	E-31.1

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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)

	June 30, 2014		December 31, 2013
	(Unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	36,662	$	45,388
Short term bank deposit		-		14,113
Accounts receivable, net of allowance for doubtful accounts of $12,020 and $10,734, respectively		21,374		27,218
Inventories, net		25,618		27,547
Deferred tax asset		14,085		13,041
Prepaid expenses and other current assets		15,296		12,597
Total current assets		113,035		139,904

Property and equipment, net		29,138		10,489
Patents and licensed technologies, net		9,960		10,832
Other intangible assets, net		48,085		9,701
Goodwill		75,010		24,930
Deferred tax asset		24,008		24,039
Other assets		3,322		213
Total assets	$	302,558	$	220,108

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current portion of notes payable	$	416	$	838
Current portion of debt		85,185		10,000
Accounts payable		17,461		14,785
Accrued compensation and related expenses		3,974		3,230
Other accrued liabilities		15,967		22,032
Deferred revenues		5,460		5,961
Total current liabilities		128,463		56,846
Long-term liabilities:
Long-term note payable, net of current maturities		53		82
Long-term debt, net of current portion		681		-
Deferred revenues		2,031		2,758
Deferred tax liability		8,909		-
Other liabilities		7,279		61
Total liabilities		147,416		59,747

Commitments and Contingencies (Note 12)

Stockholders’ equity:
Preferred Stock, $.01 par value, 5,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2014 and December 31, 2013		-		-
Common stock, $.01 par value, 50,000,000 shares authorized; 19,049,582 and 18,903,245 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively		190		189
Additional paid-in capital		106,529		104,954
Retained earnings		45,854		53,679
Accumulated other comprehensive income		2,569		1,539
Total stockholders’ equity		155,142		160,361
Total liabilities and stockholders’ equity	$	302,558	$	220,108

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 INCOME (LOSS)

(In thousands, except share and per share amounts)

(Unaudited)

	For the Three Months Ended June 30,
	2014			2013

Revenues:
Product sales	$	33,476		$	54,041
Services		5,501			4,024
Clinic services		13,143			-
		52,120			58,065

Cost of revenues:
Product sales		6,874			9,933
Services		1,895			1,457
Clinic services		8,883			-
		17,652			11,390

Gross profit		34,468			46,675

Operating expenses:
Engineering and product development		723			814
Selling and marketing		30,420			30,468
General and administrative		11,452			6,268
		42,595			37,550

Operating (loss) profit		(8,127	)		9,125

Other loss:
Interest and other financing expense, net		(175	)		(134	)

(Loss) Income before income tax benefit (expense)		(8,302	)		8,991

Income tax benefit (expense)		822			(1,897	)

Net (loss) income	$	(7,480	)	$	7,094

Net (loss) income per share:
Basic	$	( 0.40	)	$	0.34
Diluted	$	( 0.40	)	$	0.34

Shares used in computing net (loss) income per share:
Basic		18,723,484			20,573,048
Diluted		18,723,484			21,033,349

Other comprehensive income :
Foreign currency translation adjustments		693			21

Comprehensive (loss) income	$	(6,787	)	$	7,115

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 INCOME (LOSS)

(In thousands, except share and per share amounts)

(Unaudited)

	For the Six Months Ended June 30,
	2014			2013

Revenues
Product sales	$	79,141		$	108,688
Services		9,911			6,593
Clinic services		13,143			-
		102,195			115,281

Cost of revenues
Product sales		15,482			20,168
Services		3,632			3,088
Clinic services		8,883			-
		27,997			23,256

Gross profit		74,198			92,025

Operating expenses:
Engineering and product development		1,518			1,587
Selling and marketing		62,046			59,794
General and administrative		19,039			11,927
		82,603			73,308

Operating (loss) profit		(8,405	)		18,717

Other loss
Interest and other financing expense, net		(321	)		(3	)

(Loss) income before income tax benefit (expense)		(8,726	)		18,714

Income tax benefit (expense)		901			(4,408	)

Net (loss) income	$	(7,825	)	$	14,306

Net (loss) income per share:
Basic	$	( 0.42	)	$	0.69
Diluted	$	( 0.42	)	$	0.68

Shares used in computing net (loss) income per share:
Basic		18,721,463			20,624,588
Diluted		18,721,463			21,084,889

Other comprehensive income (loss):
Foreign currency translation adjustments		1,030			(1,792	)

Comprehensive (loss) income	$	(6,795	)	$	12,514

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 SIX MONTHS ENDED JUNE 30, 2014

(In thousands, except share and per share amounts)

(Unaudited)



	Common Stock				Additional Paid-In			Retained			Accumulated Other Comprehensive
	Shares		Amount		Capital			Earnings			Income		Total
BALANCE, JANUARY 1, 2014		18,903,245	$	189	$	104,954		$	53,679		$	1,539	$	160,361
Stock-based compensation related to stock options and restricted stock		-		-		2,486			-			-		2,486
Stock options issued to consultants for services		-		-		70			-			-		70
Restricted stock issued, net of payroll taxes paid		146,337		1		(981	)		-			-		(980	)
Other comprehensive income		-		-		-			-			1,030		1,030
Net loss for the six months ended June 30, 2014				-		-			(7,825	)		-		(7,825	)
BALANCE, June 30, 2014		19,049,582	$	190	$	106,529		$	45,854		$	2,569	$	155,142

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)

	For the Six Months Ended June 30,
	2014			2013
Cash Flows From Operating Activities:
Net (loss) income	$	(7,825	)	$	14,306
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization		4,186			2,959
Provision for doubtful accounts		3,442			2,125
Deferred income taxes		(31	)		1,982
Stock-based compensation		2,556			2,584
Insurance reserves		(240	)		-
Loss on disposal of property and equipment		(10	)		-
Changes in operating assets and liabilities:
Accounts receivable		6,012			(11,773	)
Inventories		2,050			(457	)
Prepaid expenses and other assets		(2,329	)		3,873
Accounts payable		(7,650	)		311
Accrued compensation and related expenses		(1,329	)		473
Other accrued liabilities		(12,620	)		(7,555	)
Deferred revenues		(1,371	)		592
Net cash (used in) provided by operating activities		(15,159	)		9,420

Cash Flows From Investing Activities:
Purchases of property and equipment		(154	)		(474	)
Investment in (sales of) short term bank deposits		14,113			(3,185	)
Acquisition, net of cash received		(77,510	)		-
Lasers placed in service		(3,624	)		(2,780	)
Proceeds from sales of property and equipment		20			-
Net cash used in investing activities		(67,155	)		(6,439	)

Cash Flows From Financing Activities:
Payments on notes payable		(451	)		(418	)
Repayments of term debt		(131	)		(14	)
Proceeds from credit facilities, net		75,000			-
Proceeds from option exercises		-			23
Repurchase of company stock		-			(5,381	)
Issuance of restricted stock, net of payroll taxes paid		(980	)		-
Net cash provided by (used in) financing activities		73,438			(5,790	)
Effect of exchange rate changes on cash		150			(239	)
Net decrease increase in cash and cash equivalents		(8,726	)		(3,048	)
Cash and cash equivalents, beginning of period		45,388			44,348

Cash and cash equivalents, end of period	$	36,662		$	41,300

Supplemental information:
Cash paid for income taxes	$	812		$	4,381

Cash paid for interest	$	108		$	11

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 May 12, 2014, PhotoMedex, Inc. (the “Company”) entered into an $85 million senior secured credit facilities (“the Facilities”) with the lenders that are parties thereto (collectively, the “Lenders”) and JP Morgan Chase (“Chase”) as Administrative Agent for the Lenders. The Facilities 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-Vision, Inc. 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 June 30, 2014, the Company failed to meet both financial covenants and is in default of the Facilities. On August 4, 2014, the Company received a notice of default and a reservation of rights from Chase and is engaging a third-party independent advisor to assist the Company in negotiating a longer term solution to the current default. As a result of the default, the Lenders may accelerate the $85 million outstanding under the Facilities. The Lenders also may increase the applicable interest on loans under the Facilities by 2%. As of the date of this report, the Lenders have neither accelerated the outstanding amount nor increased the applicable interest but may do so in the future.

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.

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 establishing XTRAC centers of excellence in key markets by acquiring a fully paid infrastructure of existing clinics with established high customer service standards and culture. 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.

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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”), 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 June 30, 2014 in the PhotoMedex consolidated financial statements. (See Note 2, Acquisition).

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 six months ended June 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- and majority-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.

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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 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.

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.

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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 $111 or less than 1% of the clinics revenues for the period of May 13, 2014 through June 30, 2014.

For patients that the Company internally finance, the Company charges interest at market rates. Finance and interest charges on patient receivables were $113 for the periods ended June 30, 2014.

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 so it is included in the Company’s consolidated financial statements. As of June 30, 2014, the insurance reserves were $6,111, 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, 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. Deferred taxes are not provided on translation adjustments as the earnings of the subsidiaries are considered to be permanently reinvested.

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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:

	•	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 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 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.

- 12 -

PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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

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

At June 30, 2014, the balance of such derivative instruments amounted to approximately $118 in assets and approximately $93 and $183 were recognized as financing income in the Statement of Comprehensive Income during the three and six months ended June 30, 2014, respectively.

The nominal amounts of foreign currency derivatives as of June 30, 2014 consist of forward transactions for the exchange of $5,200 into NIS as of June 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 six months ended June 30, 2014 and 2013 is summarized as follows:

	June 30,
	2014			2013
	(unaudited)			(unaudited)
Accrual at beginning of year	$	1,151		$	1,440
Additions charged to warranty expense		398			691
Expiring warranties		(116	)		(281	)
Claims satisfied		(497	)		(655	)
Total		936			1,195
Less: current portion		(864	)		(1,117	)
Accrued extended warranty	$	72		$	78

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

- 13 -

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:

	For the Three Months Ended June 30,		For the Six Months Ended June 30,
	2014	2013		2014	2013
Weighted-average number of common and common equivalent shares outstanding:
Basic number of common shares outstanding	18,723,484	20,573,048		18,721,463	20,624,588
Dilutive effect of stock options and warrants	-	460,301		-	460,301
Diluted number of common and common stock equivalent shares outstanding	18,723,484	21,033,349		18,721,463	21,084,889

Diluted earnings per share for the three and six months ended June 30, 2014, exclude the impact of common stock options and warrants, totaling 2,550,516 shares, as the effect of their inclusion would be anti-dilutive. Diluted earnings per share for the three and six months ended June 30, 2013, excluded the impact of common stock options and warrants, totaling 2,200,350 shares, as the effect of their inclusion would be anti-dilutive.

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").

- 14 -

PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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.

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:

Fair value LCA-Vision stock (A)	$	103,896
Fair value of LCA-Vision restricted stock units, including payroll taxes (B)		2,656
Total purchase price	$	106,552

A.	Based on 19,347,554 outstanding shares of LCA-Vision common stock at May 12, 2014.
B.	Based on 476,436 outstanding or deemed to be outstanding restricted stock units of LCA-Vision common stock at May 12, 2014.

- 15 -

PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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:

Cash and cash equivalents	$	29,042
Current assets, excluding cash and cash equivalents		6,114
Deferred tax asset, current		1,124
Property, plant and equipment		17,269
Identifiable intangible assets		39,050
Other assets		1,518
Total assets acquired at fair value		94,117

Current liabilities		(19,009	)
Long-term debt		(1,603	)
Deferred tax liability, long-term		(9,138	)
Other long-term liabilities		(7,397	)
Total liabilities assumed		(37,147	)

Net assets acquired	$	56,970

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

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 six months ended June 30, 2014 and 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:

	Three Months Ended June 30,					Six Months Ended June 30,
	2014			2013		2014			2013
	(unaudited)			(unaudited)		(unaudited)			(unaudited)

Net revenues	$	61,170		$	80,674	$	136,776		$	166,194
Net income (loss)		(14,734	)		5,762		(16,747	)		12,579
Net income (loss) per share:
Basic	$	(0.79	)	$	0.28	$	(0.89	)	$	0.61
Diluted	$	(0.79	)	$	0.27	$	(0.89	)	$	0.60
Shares used in calculating net income (loss) per share:
Basic		18,723,484			20,573,048		18,721,463			20,624,588
Diluted		18,723,484			21,033,349		18,721,463			21,084,889

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.

- 16 -

PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Note 3

Inventories, net:

	June 30, 2014		December 31, 2013
	(unaudited)
Raw materials and work in progress	$	10,252	$	12,631
Finished goods		15,366		14,916
Total inventories, net	$	25,618	$	27,547

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

Note 4

Property and Equipment, net:

	June 30, 2014			December 31, 2013
	(unaudited)
Lasers-in-service	$	23,540		$	12,599
Equipment, computer hardware and software		5,725			4,730
Furniture and fixtures		1,343			705
Land and building		2,905			-
Leasehold improvements		5,725			534
		39,238			18,568
Accumulated depreciation and amortization		(10,100	)		(8,079	)
Property and equipment, net	$	29,138		$	10,489

Depreciation and related amortization expense was $2,390 and $1,343 for the six months ended June 30, 2014 and 2013, respectively.

Note 5

Patents and Licensed Technologies, net:

	June 30, 2014			December 31, 2013
	(unaudited)
Gross Amount beginning of period	$	15,648		$	15,411
Additions		98			171
Translation differences		107			66
Gross Amount end of period		15,853			15,648

Accumulated amortization		(5,893	)		(4,816	)

Patents and licensed technologies, net	$	9,960		$	10,832

Related amortization expense was $1,040 and $1,020 for the six months ended June 30, 2014 and 2013, respectively.

- 17 -

PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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

Last six months of 2014	$	1,062
2015		2,049
2016		2,059
2017		909
2018		899
Thereafter		2,982
Total	$	9,960

Note 6

Goodwill and Other Intangible Assets, net:

As part of the purchase price allocation for the reverse acquisition in December 2011, the Company recorded goodwill in the amount of $24,005 and definite-lived intangibles in the amount of $12,000. As part of the provisional purchase price allocation for the LCA-Vision acquisition in May 2014, the Company recorded goodwill in the amount of $49,582, indefinite-lived intangibles in the amount of $29,850 and definite-lived intangibles in the amount of $9,200. Goodwill reflects the value or premium of the acquisition price in excess of the fair values assigned to specific tangible and intangible assets. The goodwill which was allocated to the activities of LCA-Vision was recognized as a new reportable segment (“Clinics”). Goodwill and the LCA-Vision trademark name have an indefinite useful life and therefore are not amortized as an expense, but is reviewed at least annually for impairment. The goodwill and other identifiable assets of LCA-Vision are subject to change based upon the final allocation of the purchase price. The purchase price intrinsically recognizes the benefits of leveraging under-utilized clinics by establishing XTRAC centers of excellence in key markets.

	Goodwill		Trademarks
Balance at January 1, 2014	$	24,930	$	-
Additions for LCA-Vision acquisition		49,582		29,850
Translation differences		498		-
Balance at June 30, 2014	$	75,010	$	29,850

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

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

	June 30, 2014
	(unaudited)
	Trademarks			Customer Relationships			Managed Care Network			Total
Gross Amount beginning of period	$	5,772		$	6,417		$	-		$	12,189
Additions		-			-			9,200			9,200
Translation differences		46			72			-			118
Gross Amount end of period		5,818			6,489			9,200			21,507

Accumulated amortization		(1,479	)		(1,649	)		(144	)		(3,272	)

Net Book Value	$	4,339		$	4,840		$	9,056		$	18,235

- 18 -

PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

	December 31, 2013

	Trademarks			Customer Relationships			Managed Care Network		Total
Gross Amount beginning of period	$	5,744		$	6,372		$	-	$	12,116
Translation differences		28			45			-		73
Gross Amount end of period		5772			6,417			-		12,189

Accumulated amortization		(1,178	)		(1,310	)		-		(2,488	)

Net Book Value	$	4,594		$	5,107		$	-	$	9,701

Related amortization expense was $756 and $600 for the periods ended June 30, 2014 and 2013, respectively. Customer Relationships embody the value to the Company of relationships that Pre-merged PhotoMedex had formed with its customers. 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:

Last six months of 2014	$	1,175
2015		2,350
2016		2,350
2017		2,350
2018		2,350
Thereafter		7,660
Total	$	18,235

Note 7

Accrued Compensation and related expenses:

	June 30, 2014		December 31, 2013
	(unaudited)
Accrued payroll and related taxes	$	1,932	$	707
Accrued vacation		442		290
Accrued commissions and bonus		1,600		2,233
Total accrued compensation and related expense	$	3,974	$	3,230

- 19 -

PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Note 8

Other Accrued Liabilities:

	June 30, 2014		December 31, 2013
	(unaudited)
Accrued warranty, current, see Note 1	$	864	$	1,094
Accrued taxes, net		1,753		1,023
Accrued sales returns (1)		6,547		16,046
Insurance liability reserves, current		805		-
Accrued enhancement expenses, current		836		-
Other accrued liabilities		5,162		3,869
Total other accrued liabilities	$	15,967	$	22,032

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

	Six Months Ended June 30,
	2014			2013
	(unaudited)			(unaudited)
Balance at beginning of year	$	16,046		$	11,901
Additions that reduce net sales		18,636			17,156
Deductions from reserves		(28,135	)		(21,117	)
Balance at end of period	$	6,547		$	7,940

Note 9

Long-Term Other Liabilities:

	June 30, 2014		December 31, 2013
	(unaudited)
Long-term insurance liability reserves, net of current portion	$	5,305	$	-
Accrued enhancement expenses, net of current portion		1,140		-
Other liabilities		834		61

Total long-term liabilities	$	7,279	$	61

Note 10

Long-term Debt:

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

	June 30, 2014		December 31, 2013
	(unaudited)
Senior-secured credit facilities, net of unamortized debt discount of $606	$	84,394	$	-
Term note		-		10,000
Third-party debt		1,472		-
Sub-total		85,866		10,000
Less: current portion		85,185		10,000
Long-term debt	$	681	$	-

- 20 -

PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Senior Secured Credit Facilities

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:

Last six months of 2014	$	7,892
2015		17,405
2016		19,025
2017		20,900
2018		21,250
Total minimum payments		86,472

Less: unamortized discount		(606	)

Present value of total minimum obligations	$	85,866

- 21 -

PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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 six month periods ended June 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%).

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 $19,456, with $5,910 due less than 1 year; $9,149 due between 1 to 3 years; $3,693 due 3 to 5 years and $704 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 Company’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 June 30, 2014 could differ from the amounts recorded. At June 30, 2014, the Company maintained insurance reserves of $6,111 of which $805 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 $4,383 to $12,758 at June 30, 2104. Any adjustments to these estimates are recorded in the period determined.

- 22 -

PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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.

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. As of August 9, 2014, the case remains in the discovery phase of the litigation. Radiancy, and PhotoMedex, had moved to dismiss PhotoMedex from the case, and to dismiss the counterclaims and affirmative defenses asserted by Viatek. 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. 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.

- 23 -

PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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 will 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.

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. 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.

- 24 -

PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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. 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 has 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 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. 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.

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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

	Number of Options			Weighted Average Exercise Price
Outstanding, January 1, 2014		1,132,678		$	16.51
Granted		180,500			14.11
Exercised		-			-
Cancelled		(4,999	)		58.63
Outstanding, June 30, 2014		1,308,179		$	16.02
Options exercisable at June 30, 2014		517,179		$	16.45

At June 30, 2014, there was $9,693 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 2.8 years. The intrinsic value of options outstanding and exercisable at June 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 six months ended June 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.

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

	Three Months Ended June 30, 2014	Six Months Ended June 30, 2014
Risk-free interest rate	2.21%	2.17%
Volatility	76.61%	78.41%
Expected dividend yield	0%	0%
Expected life	5.5 years	5.5 years
Estimated forfeiture rate	0%	0%

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 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 the options granted was $975.

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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 $2,556 and $2,584 for the six months ended June 30, 2014 and 2013, including amounts relating to consultants.

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.

- 27 -

PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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

Three Months Ended June 30, 2014 (unaudited)

	Consumer			Physician Recurring			Professional			Clinics			Total
Revenues	$	28,453		$	8,607		$	1,917		$	13,143		$	52,120
Costs of revenues		3,983			3,425			1,361			8,883			17,652
Gross profit		24,470			5,182			556			4,260			34,468
Gross profit %		86.0	%		60.2	%		29.0	%		32.4	%		66.1	%

Allocated operating expenses:
Engineering and product development		305			257			161			-			723
Selling and marketing expenses		23,223			4,268			274			2,655			30,420

Unallocated operating expenses		-			-			-			-			11,452
		23,528			4,525			435			2,655			42,595
Income (loss) from operations		942			657			121			1,605			(8,127	)

Interest and other financing expense, net		-			-			-			-			(175	)

Net income (loss) before taxes	$	942		$	657		$	121		$	1,605		$	( 8,302	)

Three Months Ended June 30, 2013 (unaudited)

	Consumer			Physician Recurring			Professional			Clinics		Total
Revenues	$	48,673		$	7,376		$	2,016		$	-	$	58,065
Costs of revenues		7,174			3,014			1,202			-		11,390
Gross profit		41,499			4,362			814			-		46,675
Gross profit %		85.3	%		59.1	%		40.4	%		N/A		80.4	%

Allocated operating expenses:
Engineering and product development		279			317			218			-		814
Selling and marketing expenses		26,703			3,233			532			-		30,468

Unallocated operating expenses		-			-			-			-		6,268
		26,982			3,550			750			-		37,550
Income from operations		14,517			812			64			-		9,125

Interest and other financing expense, net		-			-			-			-		(134	)

Net income before taxes	$	14,517		$	812		$	64		$	-	$	8,991

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Six Months Ended June 30, 2014 (unaudited)

	Consumer			Physician Recurring			Professional			Clinics			Total
Revenues	$	69,323		$	15,826		$	3,903		$	13,143		$	102,195
Costs of revenues		10,233			6,255			2,626			8,883			27,997
Gross profit		59,090			9,571			1,277			4,260			74,198
Gross profit %		85.2	%		60.5	%		32.7	%		32.4	%		72.6	%

Allocated operating expenses:
Engineering and product development		592			567			359			-			1,518
Selling and marketing expenses		50,381			8,279			731			2,655			62,046

Unallocated operating expenses		-			-			-			-			19,039
		50,973			8,846			1,090			2,655			82,603
Income from operations		8,117			725			187			1,605			(8,405	)

Interest and other financing expense, net		-			-			-			-			(321	)

Net income (loss)before taxes	$	8,117		$	725		$	187		$	1,605		$	(8,726	)

Six Months Ended June 30, 2013 (unaudited)

	Consumer			Physician Recurring			Professional			Clinics		Total
Revenues	$	97,733			13,331		$	4,217		$	-	$	115,281
Costs of revenues		14,691			5,945			2,620			-		23,256
Gross profit		83,042			7,386			1,597			-		92,025
Gross profit %		85.0	%		55.4	%		37.9	%		N/A		79.8	%

Allocated operating expenses:
Engineering and product development		497			641			449			-		1,587
Selling and marketing expenses		52,334			6,407			1,053			-		59,794

Unallocated operating expenses		-			-			-			-		11,927
		52,831			7,048			1,502			-		73,308
Income from operations		30,211			338			95			-		18,717

Interest and other financing expense, net		-			-			-			-		(3	)

Net income before taxes	$	30,211		$	338		$	95		$	-	$	18,714

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PHOTOMEDEX, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
North America 1	$	41,803	$	42,033	$	81,776	$	86,932
Asia Pacific 2		2,638		9,440		5,015		15,202
Europe (including Israel)		7,084		5,861		14,492		11,494
South America		595		731		912		1,653
	$	52,120	$	58,065	$	102,195	$	115,281

1 United States	$	38,612	$	37,329	$	73,379	$	75,336
1 Canada	$	3,191	$	4,704	$	8,397	$	11,596
2 Japan	$	290	$	7,452	$	988	$	11,715

As of June 30, 2014 and December 31, 2013, long-lived assets by geographic area were as follows:

	June 30, 2014		December 31, 2013
	(unaudited)
North America	$	27,859	$	9,119
Asia Pacific		4		-
Europe (including Israel)		1,270		1,370
South America		5		-
	$	29,138	$	10,489

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

Note 15

Significant Customer Concentration:

No customer was more than 10% of total company revenues for the three and six months ended June 30, 2014. For the three and six months ended June 30, 2013, there were two customers more than 10% of revenues.

	Three Months Ended June 30, 2013	Six Months Ended June 30, 2013
Customer A	11%	11%
Customer B	12%	9%

- 30 -

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and notes to condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. These forward-looking statements include, but are not limited to, statements about the plans, objectives, expectations and intentions of PhotoMedex, Inc., a Nevada corporation (referred to in this Report as “we,” “us,” “our,” “PhotoMedex,” or “registrant”) and other statements contained in this Report that are not historical facts. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that characterize our business. In particular, we encourage you to review the risks and uncertainties described in Item 1A “Risk Factors” included elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2013. These risks and uncertainties could cause actual results to differ materially from those projected in forward-looking statements contained in this report or implied by past results and trends. Forward-looking statements are statements that attempt to forecast or anticipate future developments in our business, financial condition or results of operations and statements — see “Cautionary Note Regarding Forward-Looking Statements” that appears at the end of this discussion. These statements, like all statements in this report, speak only as of their date (unless another date is indicated), and we undertake no obligation to update or revise these statements in light of future developments.

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

Introduction, Outlook and Overview of Business Operations

Our current strategic focus is built upon four key components:

	•	Skilled direct sales force to target Physician and Professional Segments;
	•	Expertise in global consumer marketing;
	•	A full product life cycle model representing the ability to develop and commercialize innovative products from concept through regulatory and physician acceptance, and ultimately marketed directly to the consumer as dictated by normal product life-cycle evolution; and
	•	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.

We believe that we are one of only a few aesthetic companies to have succeeded in taking professional technologies geared toward physicians and med spas and adapting them for the home-use market. Our professional- and consumer-use products are listed below, noting that this is not an exhaustive listing of our product portfolio but represents our current key areas of focus.

Key Technology Platforms and Brands

•

Thermicon® brand Heat Transfer Technology. In this technique, a patented thermodynamic wire gently singes and burns off the hair above the skin’s surface. It conducts heat pulses, which enable longer-lasting hair removal. This technology drives our home-use no!no! Hair Removal 8800™ device, which is designed to reduce hair growth. Product variations include devices designed for men and for sensitive, small areas such as the face, among other versions including the recently launched no!no! Hair Removal PRO which introduces patented pulsed Thermicon technology producing 35% more energy aimed at removing more hair in less time.

- 31 -

	•	LHE® brand Technology. LHE® combines direct heat and a full-spectrum light source to give a greater treatment advantage for psoriasis and acne care, skin tightening, skin rejuvenation, wrinkle reduction, collagen renewal, vascular and pigmented lesion treatments, and hair removal. Using LHE®, the Mistral intelligent phototherapy medical device can treat a larger spot size than a laser with less discomfort. In addition, our research finds that LHE offers meaningful results for thin, light hair. The technology is used in the no!no! Skin™, a handheld consumer product sold worldwide under the no!no!® brand. The no!no! Skin™ is a 510(k)-cleared product that has been clinically shown to reduce acne by 81% over 24 hours. The technology is also used in the no!no! Glow™, which is a 510(k)-cleared device and is a miniaturized LHE device also delivering anti-aging benefits for the at-home consumer in a hand-held size.
	•	Kyrobak®. Kyrobak uses clinically proven, proprietary technology to treat unspecified, lower back pain. The unique combination of Continuous Passive Motion (CPM) and Oscillation therapy is a non-invasive, relaxing method for long lasting relief of back pain. Used for better than 3 decades in professional rehabilitation and chiropractic settings, CPM has been proven to increase mobility of the joints, draw more oxygen and blood flow to the area, allowing the muscles to relax and release pressure between the vertebrae allowing the spine to open up and decompress.
	•	XTRAC® Excimer Laser. XTRAC received FDA clearance in 2000 and has since become a widely recognized treatment among dermatologists for psoriasis and other skin conditions for which there are no cures. The machine delivers narrow ultraviolet B (“UVB”) light to affected areas of skin, leading to psoriasis remission in an average of 8 to 12 treatments and of vitiligo after 48 treatments. XTRAC is endorsed by the National Psoriasis Foundation, and its use for psoriasis is covered by nearly all major insurance companies, including Medicare. More than half of all major insurance companies now offer reimbursement for vitiligo as well, a figure that is increasing.
	•	NEOVA®. This line of topical formulations is designed to prevent premature skin aging due to UV-induced DNA damage. The therapy seeks to repair photo-damaged skin using a novel combination of two key ingredients: DNA repair enzymes and our Copper Peptide Complex®. The NEOVA line includes DNA Damage Control SILC SHEER SPF 45, an award-winning tinted sunscreen. The DNA repair enzymes of this sunscreen are clinically shown to reduce UV damage by 45% and increase UV protection by 300% in one hour.
	•	Light-emitting Diode (LED) Technology. Our LED technology is used in both its Omnilux™ and Lumière™ Light Therapy systems. Omnilux is FDA cleared to treat wrinkles, acne, minor muscle pain and pigmented lesions, and is applicable to all skin types. Lumière is designed for use in non-medical applications and combines the LED light with a line of topical lotions to improve the appearance of fine lines, wrinkles, skin tone and blemishes, giving aesthetic professionals a complete non-invasive skin care solution.
	•	LASIK Plus®. We are a provider of fixed-site laser vision correction services at our LasikPlus® vision centers. Our vision centers provide the staff, facilities, equipment and support services for performing laser vision correction that employ advanced laser technologies to help correct nearsightedness, farsightedness and astigmatism. Our vision centers are supported by independent ophthalmologists and credentialed optometrists, as well as other healthcare professionals. The ophthalmologists perform the laser vision correction procedures in our vision centers, and ophthalmologists or optometrists conduct pre-procedure evaluations and post-operative follow-up care in-center. Most of our patients currently receive a procedure called laser-assisted in situ keratomileusis (“LASIK”), which we began performing in the United States in 1996. As of June 30, 2014, we operated 60 LasikPlus fixed-site laser vision correction centers, generally located in metropolitan markets in the United States consisting of 51 full-service LasikPlus fixed-site laser vision correction centers and nine pre- and post-operative LasikPlus satellite vision centers. Included in the 51 full-service vision centers are four vision centers owned and operated by ophthalmologists who license our trademarks. Beginning in 2011, we began offering refractive lens and cataract services in certain of our existing markets.

Our revenue generation is categorized as Consumer, Physician-Recurring, Professional or Clinics. Each segment benefits from the combination of our proprietary global consumer marketing engine with our direct sales force for U.S. physicians.

- 32 -

Consumer

The global consumer market is our largest business unit due to our success at bringing professional technologies into the home-use arena. Cumulatively, we have sold more than 5 million no!no!® products to consumers, the majority of whom have been in Japan and North America.

We continue to develop and add to our marketing programs (in types of creative, languages, and media formats – print, online, radio, and TV) to effectively reach the large population groups where we have expanded our sales efforts, including: the United States with approximately 318 million people; Japan with a population of approximately 127 million people; Brazil (pop.187 million); Germany (pop. 81 million); United Kingdom (pop. 64 million); Columbia (pop. 47 million); Canada (pop. 35 million); Australia (pop. 23 million) and Hong Kong (pop. 7 million).

Our consumer marketing platform is built upon a proprietary direct-to-consumer sales engine and creative marketing programs that drive brand awareness, in addition to presence in select retail and live Home Shopping Channels.

Sales Channels

Our multi-channel marketing and distribution model consists of television, online, print and radio direct-response advertising, as well as high-end retailers. We believe that this marketing and distribution model, through which each channel complements and supports the others, provides:

	•	greater brand awareness across channels;
	•	cost-effective consumer acquisition and education;
	•	premium brand building; and
	•	improved convenience for consumers.

Direct to Consumer. Our direct-to-consumer channel consists of sales generated through infomercials, commercials, websites and call centers. We utilize several forms of advertising to drive our direct-to-consumer sales and brand awareness, including print, online, television and radio.

Retailers and Home Shopping Channels. Our retailers and home shopping channels enable us to provide additional points of contact to educate consumers about our solutions, expand our presence beyond our direct to consumer activity and further strengthen and enhance our brand image.

Distributors. In some territories, we operate through exclusive distribution agreements with leading distribution companies that are dominant in their respective market and have the ability to promote our products through their existing retail and home shopping networks.

Markets

North America. Our consumer distribution segment in North America had sales of approximately $21 million and $35 million for the three months ended June 30, 2014 and 2013, respectively. Our consumer distribution segment in North America had sales of approximately $54 million and $74 million for the six months ended June 30, 2014 and 2013, respectively. We use a mix of direct-to-consumer advertising that includes infomercials, commercials, catalog, print, radio and internet-based marketing campaigns, coupled with select retail resellers, such as Neiman Marcus, Nordstrom, Henri Bendel, Planet Beauty, Bed, Bath & Beyond and others; home shopping channels such as HSN; and online retailers such as Dermadoctor.com and Drugstore.com. We believe these channels complement each other, as consumers that have seen our direct-to-consumer advertising may purchase at our retailers, and those who have seen our solutions demonstrated at our retailers may purchase solutions through our websites or call centers.

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International (excluding North America). In the international consumer segment, sales were approximately $8 million and $13 million for the three months ended June 30, 2014 and 2013, respectively. In the international consumer segment, sales were approximately $16 million and $23 million for the six months ended June 30, 2014 and 2013, respectively. We utilize various sales and marketing methods including those focused on direct-to-consumer sales, customers of retailers and home shopping channels as well as supporting our third-party distributor partners in certain countries. Our main international markets are Asia, Europe, Australia and South America.

Physician Recurring

Physician recurring sales primarily include those generated from two of our product lines: (1) XTRAC® lasers, a noninvasive, FDA-cleared solution for psoriasis and vitiligo, and (2) NEOVA® skin care, a topical therapy combining DNA repair enzymes and copper peptide complexes to prevent premature skin aging. Both XTRAC and NEOVA represent recurring revenue streams with significant market opportunities. In addition, our expertise in direct-to-consumer advertising and innovative marketing programs is anticipated to drive greater brand awareness and adoption for both XTRAC and NEOVA products.

XTRAC®

The XTRAC business is considered a recurring revenue stream given its pay-per-use model, where the machines are provided to professionals who then pay us based on the number of treatments administered with the device. We have historically employed a direct sales force marketing primarily to dermatologists to create awareness of the XTRAC therapy. Beginning in 2012 we initiated direct to patient XTRAC advertising in the United States targeted at psoriasis and vitiligo patients through testing a variety of media including television and radio. We continue to increase our advertising expenditures in this area to reach the more than 10 million patients in the United States afflicted with these diseases.

We intend to expand this business model outside North America. We have initiated this activity by setting up subsidiaries in India and Korea with the intent of commencing operations to develop recurring revenue opportunities using our phototherapy technologies including XTRAC and VTRAC.

NEOVA®

Sales of the NEOVA skin care products historically have been driven by physicians, who act as spokespersons to their patients in support of the NEOVA line. We have marketed to physicians in the dermatology and plastic surgery field, through a direct sales force but have begun to supplement these efforts with a direct-to-consumer approach to lead patients into those practices. NEOVA addresses a sizeable global market for anti-aging skin care products. In addition, we have increased marketing exposure to NEOVA by offering an introduction to the product line as an added-value purchase to consumers responding to our no!no! brand advertising.

Professional

Sales under the professional business segment are mainly generated from capital equipment, such as our XTRAC-Velocity and VTRAC equipment, our LHE® brand products and our Omnilux and Lumière Light Therapy systems.

We view this segment as an area of opportunity for us since the reverse acquisition with Radiancy, Inc., or Radiancy, completed on December 13, 2011. We now possess a greatly expanded product offering for the physician community. In addition, following the December 2011 reverse acquisition, we inherited from Pre-merged PhotoMedex a 48-person, experienced direct sales force that already reaches a network of approximately 3,000 physician locations in the U.S. We are now also distributing through this direct sales force the LHE-based professional products in addition to our other equipment to physicians, dermatologists, salons, spas, and other aesthetic practitioners. We view this fully trained sales staff as a significant opportunity, as well as a resource in expanding the Professional segment of our revenues.

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Clinics

Revenues generated in the Clinics segment is substantially derived from the delivery of laser vision correction procedures performed in our U.S. vision centers. With the acquisition of LCA-Vision, we operate 60 LasikPlus® vision centers in the U.S: 51 full-service LasikPlus® fixed-site laser vision corrections centers and nine LasikPlus® satellite centers. We included in the 60 vision centers four vision centers owned and operated by ophthalmologists who license our trademarks. The satellite vision centers perform pre-operative and post-operative exams, providing added convenience for patients who live considerable distances from our full-service LasikPlus® vision centers in that market. We have also been working to establish and expand a partner network of eye care professionals to share patients who desire to have laser vision correction and other refractive surgeries.

These revenues are dependent on the volume of procedures and the mix of procedures among the different types of laser technology. The procedures are impacted by a number of factors, including the following:

	•	General economic conditions and consumer confidence and discretionary spending levels;
	•	Our ability to generate customers through our arrangements with vision plans, direct-to-consumer advertising, word-of-mouth referrals, and our partner network relationships;
	•	The availability of patient financing;
	•	Government mandated limits on flexible spending accounts
	•	Our ability to manage equipment and operating costs; and
	•	The impact of competitors and discounting practices in our industry.

Sales and Marketing

As of June 30, 2014, our sales and marketing personnel consisted of 97 full-time positions.

Critical Accounting Policies and Estimates

LCA-Vision Patient Receivables and Allowance for Doubtful Accounts

We, through our subsidiary LCA-Vision, provide financing to some of our 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. We record an allowance for doubtful accounts based on 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. We charges-off receivables against the allowance for doubtful accounts when it is probable that a receivable will not be recovered. Our 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.

For our patients that we internally finance, we charges interest at market rates.

Accrued Enhancement Expense

We include participation in our LasikPlus Advantage Plan® (acuity program) in the base surgical price for substantially all of our patients. Under the acuity program, if determined to be medically appropriate, we provide post-surgical enhancements free of charge should the patient not achieve the desired visual correction during the initial procedure. Under this pricing structure, we account for the acuity program as a warranty obligation. Accordingly, we accrue the costs expected to be incurred to satisfy the obligation as a liability and direct cost of service at the point of sale given our ability to estimate reasonably such costs based on historical trends and the satisfaction of all other revenue recognition criteria.

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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.

Insurance Reserves

We, through our subsidiary LCA-Vision, maintain a captive insurance company to provide professional liability insurance coverage for claims brought against us and our optometrists. In addition, the captive insurance company’s charter allows it to provide professional liability insurance for our ophthalmologists, none of whom are currently insured by the captive. We use 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 so it is included in our consolidated financial statements. Our actuaries determine loss reserves by comparing our historical claim experience to comparable insurance industry experience.

Other than those noted above, there have been no additional changes to our critical accounting policies and estimates in the three and six months ended June 30, 2014. Critical accounting policies and the significant estimates made in accordance with them are regularly discussed with our Audit Committee. Those policies are discussed under “Critical Accounting Policies” in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2013.

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

Revenues

The following table presents revenues from our four business segments for the periods indicated below:

	For the Three Months Ended June 30, 2014								For the Three Months Ended June 30, 2013
	Product Sales		Services		Clinic Services		Total		Product Sales		Services		Clinic Services		Total
Consumer	$	28,453	$	-	$	-	$	28,453	$	48,673	$	-	$	-	$	48,673
Physician Recurring		3,106		5,501		-		8,607		3,352		4,024		-		7,376
Professional		1,917		-		-		1,917		2,016		-		-		2,016
Clinics		-		-		13,143		13,143		-		-		-		-

Total Revenues	$	33,476	$	5,501	$	13,143	$	52,120	$	54,041	$	4,024	$	-	$	58,065

	For the Six Months Ended June 30, 2014								For the Six Months Ended June 30, 2013
	Product Sales		Services		Clinic Services		Total		Product Sales		Services		Clinic Services		Total
Consumer	$	69,323	$	-	$	-	$	69,323	$	97,733	$	-	$	-	$	97,733
Physician Recurring		5,915		9,911		-		15,826		6,738		6,593		-		13,331
Professional		3,903		-		-		3,903		4,217		-		-		4,217
Clinics		-		-		13,143		13,143		-		-		-		-

Total Revenues	$	79,141	$	9,911	$	13,143	$	102,195	$	108,688	$	6,593	$	-	$	115,281

We completed the acquisition of LCA-Vision on May 12, 2014 and as such, these revenues are included only for the period of May 13, 2014 through June 30, 2014. There are no corresponding revenues for the three and six months ended June 30, 2013.

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Consumer Segment

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

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2014		2013		2014		2013
Direct-to-consumer	$	21,846	$	30,320	$	52,632	$	62,042
Distributors		711		8,435		1,339		13,726
Retailers and home shopping channels		5,896		9,918		15,352		21,965

Total Consumer Revenues	$	28,453	$	48,673	$	69,323	$	97,733

For the three months ended June 30, 2014, consumer products revenues were $28,453 compared to $48,673 in the three months ended June 30, 2013. For the six months ended June 30, 2014, consumer products revenues were $69,323 compared to $97,733 in the six months ended June 30, 2013. The decreases of 41.5% and 29.1% during the periods, respectively was mainly due to the following reasons:

	•	Direct to Consumer. Revenues for the three months ended June 30, 2014 were $21,846 compared to $30,320 for the same period in 2013. Revenues for the six months ended June 30, 2014 were $52,632 compared to $62,042 for the same period in 2013. The decreases in revenues of 28% and 15%, respectively, were due to management’s decision to significantly reduce amounts spent on short-form TV advertising during the period due to highly irregular response rates from this format. The decrease in revenue also has an impact on the total amount of sales returns liability as reflected in Note 8 of the financial statement footnotes. The methodology used to determine both the expense and the accrued liability has been consistently applied across all periods presented.
	•	Retailers and Home Shopping Channels. Revenues for the three months ended June 30, 2014 were $5,896 compared to $9,918 for the same period in 2013. Revenues for the six months ended June 30, 2014 were $15,352 compared to $21,965 for the same period in 2013. The decreases of 41% and 30%, respectively, were mainly due to the timing of specials on the various home shopping channel customers, mainly in the United States (“US”) and the UK.
	•	Distributors Channels. Revenues for the three months ended June 30, 2014 were $711 compared to $8,435 for the same period in 2013. Revenues for the six months ended June 30, 2014 were $1,339 compared to $13,726 for the same period in 2013. The decreases in revenues of 92% and 90% were due to our distributor in Japan who modified its business model during 2013, affecting its role in the supply chain between its manufacturers and the Japan retailers they supply and causing revenues from our Japan distributor to decrease to $11 and $161 for the three and six months ended June 30, 2014, respectively. For the three and six months ended June 30, 2013, the revenues from our Japan distributor were $6,983 and $10,868, respectively. During the fourth quarter of 2013, we terminated our distribution agreement with the Japan distributor.

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

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2014		2013		2014		2013
North America	$	20,564	$	35,042	$	53,734	$	74,267
International		7,889		13,631		15,589		23,466

Total Consumer Revenues	$	28,453	$	48,673	$	69,323	$	97,733

•

International revenues, excluding the decrease in Japan, increased by $1,241 and $2,991 for the three and six month periods, which was partially due to our expansion in new international markets including Brazil, Germany, Hong Kong and Columbia.

Physician Recurring Segment

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

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2014		2013		2014		2013
XTRAC Treatments	$	5,501	$	4,024	$	9,911	$	6,593
Neova skincare		1,888		2,142		3,815		4,368
Surgical products		489		482		885		1,002
Other		729		728		1,215		1,368

Total Physician Recurring Revenues	$	8,607	$	7,376	$	15,826	$	13,331

XTRAC Treatments

Recognized treatment revenue for the three months ended June 30, 2014 was $5,501, which approximates 79,000 treatments, with prices between $65 to $95 per treatment, compared to recognized treatment revenues for the three months ended June 30, 2013 was $4,024, which approximates 57,000 treatments with prices between $65 to $85 per treatment. Recognized treatment revenue for the six months ended June 30, 2014 was $9,911, which approximates 142,000 treatments, with prices between $65 to $95 per treatment, compared to recognized treatment revenues for the three months ended June 30, 2013 was $6,593, which approximates 94,000 treatments with prices between $65 to $85 per treatment. Increases in procedures are dependent upon building market acceptance through marketing programs with our physician partners and their patients to show that the XTRAC procedures will be of clinical benefit and will be generally reimbursed by insurers. We have historically employed a direct sales force marketing primarily to dermatologists to create awareness of the XTRAC therapy. Beginning in 2012 we initiated direct to patient XTRAC advertising in the United States targeted at psoriasis and vitiligo patients through testing a variety of media including television and radio. We continue to increase our advertising expenditures in this area to reach the more than 10 million patients in the United States afflicted with these diseases.

We defer substantially all sales of treatment codes ordered by and delivered to the customer within the last two weeks of the period in determining the amount of procedures performed by our physician-customers. Management believes this approach closely approximates the actual amount of unused treatments that existed at the end of a period. For the three months ended June 30, 2014, we recognized net revenues of $26 under this approach compared to deferred net revenues of $72 for the three months ended June 30, 2013. For the six months ended June 30, 2014, we deferred net revenues of $55 under this approach compared to deferred net revenues of $217 for the six months ended June 30, 2013.

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NEOVA skincare

For the three months ended June 30, 2014, revenues were $1,888 compared to $2,142 for the three months ended June 30, 2013. For the six months ended June 30, 2014, revenues were $3,815 compared to 4,368 for the six months ended June 30, 2013. These revenues are generated from the sale of various skin, hair, and wound care products to physicians in both the domestic and international markets.

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

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2014		2013		2014		2013
North America	$	7,695	$	6,599	$	14,084	$	11,761
International		912		777		1,742		1,570

Total Physicians Recurring Revenues	$	8,607	$	7,376	$	15,826	$	13,331

Professional Segment

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

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2014		2013		2014		2013
Dermatology equipment	$	978	$	1,042	$	2,193	$	2,119
LHE equipment		486		624		956		1,402
Other equipment		453		350		754		696

Total Professional Revenues	$	1,917	$	2,016	$	3,903	$	4,217

Dermatology equipment

For the three months ended June 30, 2014 and 2013, dermatology equipment revenues were $978 and $1,042, respectively. For the six months ended June 30, 2014 and 2013, dermatology equipment revenues were $2,193 and $2,119, respectively. There were no domestic XTRAC laser sales for the three and six months ended June 30, 2014 and 2013. We sell the laser directly to the customer only for certain reasons, including the costs of logistical support and customer preference. Our preference is to consign lasers to customers which will thrive under the per-procedure model. Internationally, we sold nineteen systems for the three months ended June 30, 2014, six of which were VTRAC systems, a lamp-based alternative UVB light source that has a wholesale sales price that is below our competitors’ international dermatology equipment and below our XTRAC laser. We sold thirty-one systems for the three months ended June 30, 2013, eighteen of which were VTRAC systems. We sold fifty-two systems for the six months ended June 30, 2014, twenty-six of which were VTRAC systems. We sold sixty-four systems for the six months ended June 30, 2013, thirty-eight of which were VTRAC systems.

LHE® brand products

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

For the three months ended June 30, 2014 and 2013, LHE® brand products revenues were $486 and $624, respectively. For the six months ended June 30, 2014 and 2013, LHE® brand products revenues were $956 and $1,402, respectively.

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

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2014		2013		2014		2013
North America	$	421	$	465	$	834	$	985
International		1,496		1,551		3,069		3,232

Total Professional Revenues	$	1,917	$	2,016	$	3,903	$	4,217

Clinics Segment

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

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2014		2013		2014		2013
Clinics revenues	$	13,143	$	-	$	13,143	$	-
Amortization of prior deferred revenues		-		-		-		-

Total Clinics Revenues	$	13,143	$	-	$	13,143	$	-

The procedure volume for the period ended June 30 2014 was 7,549. All revenues in this segment are generated through the LCA-Vision products and services. Since we completed the acquisition on May 12, 2014 and in accordance with generally accepted accounting principles these revenues are included only for the period of May 13, 2014 through June 30, 2014. There are no corresponding revenues for the three and six months ended June 30, 2013.

Cost of Revenues: all segments

The following table presents revenues from our four business segments for the periods indicated below:

	For the Three Months Ended June 30, 2014								For the Three Months Ended June 30, 2013
	Product Sales		Services		Clinic Services		Total		Product Sales		Services		Clinic Services		Total
Consumer	$	3,983	$	-	$	-	$	3,983	$	7,174	$	-	$	-	$	7,174
Physician Recurring		1,530		1,895		-		3,425		1,557		1,457		-		3,014
Professional		1,361		-		-		1,361		1,202		-		-		1,202
Clinics		-		-		8,883		8,883		-		-		-		-

Total Revenues	$	6,874	$	1,895	$	8,883	$	17,652	$	9,933	$	1,457	$	-	$	11,390

	For the Six Months Ended June 30, 2014								For the Six Months Ended June 30, 2013
	Product Sales		Services		Clinic Services		Total		Product Sales		Services		Clinic Services		Total
Consumer	$	10,233	$	-	$	-	$	10,233	$	14,691	$	-	$	-	$	14,691
Physician Recurring		2,623		3,632		-		6,255		2,857		3,088		-		5,945
Professional		2,626		-		-		2,626		2,620		-		-		2,620
Clinics		-		-		8,883		8,883		-		-		-		-

Total Revenues	$	15,482	$	3,632	$	8,883	$	27,997	$	20,168	$	3,088	$	-	$	23,256

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Overall, excluding the clinics cost of revenues, cost of revenues has decreased due to the related decreases in the consumer and professional revenues. We completed the acquisition of LCA-Vision on May 12, 2014 and as such, these cost of revenues are included only for the period of May 13, 2014 through June 30, 2014. There are no corresponding cost of revenues for the three and six months ended June 30, 2013.

Gross Profit Analysis

Gross profit decreased to $34,468 for the three months ended June 30, 2014 from $46,675 during the same period in 2013. As a percentage of revenues, the gross margin was 66.1% for the three months ended June 30, 2014 and from 80.4% for the same period in 2013.

Gross profit decreased to $74,198 for the six months ended June 30, 2014 from 92,025 during the same period in 2013. As a percentage of revenues, the gross margin was 72.6% for the six months ended June 30, 2014 and from 79.8% for the same period in 2013.

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

Company Profit Analysis	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
Revenues	$	52,120		$	58,065		$	102,195		$	115,281
Percent decrease		(10.2	%)					(11.4	%)
Cost of revenues		17,652			11,390			27,997			23,256
Percent increase		55.0	%					20.4	%
Gross profit	$	34,468		$	46,675		$	74,198		$	92,025
Gross margin percentage		66.1	%		80.4	%		72.6	%		79.8	%

The primary reasons for the changes in gross profit for the three and six months ended June 30, 2014, compared to the same period in 2013, were due mainly to decreases in consumer revenues. Offsetting this, the Physician Recurring segment, which has a lower margin than the Consumer segment, had 37% and 50% greater revenues than the prior year periods, respectively, with a greater gross margin percentage driven by greater utilization of our installed base of XTRAC equipment. In addition, with the completion of the acquisition of LCA-Vision, we now have the Clinics segment which has typically lower gross margin percentages than our other segments due to the fixed costs associated with operating 60 facilities. The activities of LCA-Vision are included for the period of May 13, 2014 through June 30, 2014. There is no corresponding activity in the three and six months ended June 30, 2013.

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

Consumer Segment	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
Revenues	$	28,453		$	48,673		$	69,323		$	97,733
Percent decrease		(41.5	%)					(29.1	%)
Cost of revenues		3,983			7,174			10,233			14,691
Percent decrease		(44.5	%)					(30.3	%)
Gross profit	$	24,470		$	41,499		$	59,090		$	83,042
Gross margin percentage		86.0	%		85.3	%		85.2	%		85.0	%

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Gross profit for the three and six months ended June 30, 2014 decreased by $17,029 and $23,952, respectively, from the comparable periods in 2013. The key factors for these decreases were due to the following:

•

The Consumer segment had decreases in revenues in the three and six months ended June 30, 2014 compared to the prior year periods. This segment provides the highest gross margin of our segments, so changes to these revenues significantly impact our overall gross margin.

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

Physician Recurring Segment	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
Revenues	$	8,607		$	7,376		$	15,826		$	13,331
Percent increase		16.7	%					18.7	%
Cost of revenues		3,425			3,014			6,255			5,945
Percent increase		13.6	%					5.2	%
Gross profit	$	5,182		$	4,362		$	9,571		$	7,386
Gross margin percentage		60.2	%		59.1	%		60.5	%		55.4	%

Gross profit for the three and six months ended June 30, 2014 increased by $820 and $2,185, respectively, from the comparable periods in 2013. The primary reason for the increased gross margins is the increase in number of XTRAC treatments on the existing installed laser base of equipment. Incremental treatments delivered on existing equipment incur negligible incremental costs.

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

Professional Segment	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
Revenues	$	1,917		$	2,016		$	3,903		$	4,217
Percent decrease		(4.9	%)					(7.4	%)
Cost of revenues		1,361			1,202			2,626			2,620
Percent increase		13.2	%					(0.2	%)
Gross profit	$	556		$	814		$	1,277		$	1,597
Gross margin percentage		29.0	%		40.4	%		32.7	%		37.9	%

Gross profit for the three and six months ended June 30, 2014 decreased by $258 and $320, respectively, from the comparable periods in 2013. The key factor for the decreases was the decreases in revenues for each product type.

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

Clinics Segment	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2014			2013		2014			2013
Revenues	$	13,143		$	-	$	13,143		$	-
Percent decrease		100.0	%				100.0	%
Cost of revenues		8,883			-		8,883			-
Percent increase		100.0	%				100.0	%
Gross profit	$	4,260		$	-	$	4,260		$	-
Gross margin percentage		32.4	%		N/A		32.4	%		N/A

The Clinics segment consists of the activities of LCA-Vision which have been included after the completion of the acquisition on May 12, 2014, or the period of May 13, 2014 through June 30, 2014. There is no corresponding activities in the three and six months ended June 30, 2013.

The costs of revenues for the Clinics segment consist of:

	•	Medical professional and license fees, including per procedure fees for the ophthalmologists performing laser vision correction and other services, and per procedure license fees paid to the equipment suppliers of our excimer and femtosecond lasers;
	•	Direct costs of services, including the salary component of physician compensation for certain physicians employed by us, staff compensation, facility costs of operating laser vision correction centers, equipment lease and maintenance costs, medical malpractice insurance costs, surgical supplies, financing charges for third-party patient financing, and other costs related to revenues; and
	•	Depreciation of equipment and leasehold improvements.

Engineering and Product Development

Engineering and product development expenses for the three months ended June 30, 2014 decreased to $723 from $814 for the three months ended June 30, 2013. Engineering and product development expenses for the six months ended June 30, 2014 decreased to $1,518 from $1,587 for the six months ended June 30, 2013. The majority of this expense relates to the salaries of our worldwide engineering and product development team and is in line with the prior year.

Selling and Marketing Expenses

For the three months ended June 30, 2014, selling and marketing expenses decreased to $30,420 from $30,468 for the three months ended June 30, 2013. The decrease was primarily for the following reasons:

•

We decreased no!no! Hair Removal direct to consumer advertising by approximately $3,775 in North America due to management’s decision to significantly reduce amounts spent on short-form TV advertising during the period as a result of highly irregular response rates from this format. We continuously monitor the performance on all of our media avenues and when results are not as expected, we reduce and/or change the affected areas of our media.

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•

Offsetting the above decrease, media buying and advertising expenses in the three months ended June 30, 2014 were 36.3% of total revenues compared to 29.5% of total revenues in the three months ended June 30, 2013. There was change in mix of revenues particularly as a result of the decrease in revenues from our Japan distributor. These distributor revenues require substantially less sales and marketing costs than what is required in the direct channel. Direct to consumer revenues are 41.9% of total revenues for the three months ended June 30, 2014 compared to 52.2% of total revenues for the three months ended June 30, 2013. In addition, we added new initiatives to support Neova, Kyrobak, XTRAC therapy, as well as no!no! hair in Brazil and Germany spending approximately $2,930 compared to $1,131 for the three months ended June 30, 2013.

•

In addition, there was an increase of approximately $2,655 in costs from LCA-Vision reflecting activities from the acquisition date thru June 30, 2014. Consequently, there were no corresponding sales and marketing expenses related to LCA-Vision for the period ended June 30, 2013.

For the six months ended June 30, 2014, selling and marketing expenses increased to $62,046 from $59,794 for the six months ended June 30, 2013. The increase was primarily for the following reasons:

•

We increased no!no! Hair Removal, Neova, no!no! skin and Kyrobak direct to consumer activities in North America, the UK, Brazil and Germany via commercials, infomercial, online campaigns, radio and print media, which resulted in an increase in advertising, media buying, and other related selling and marketing expenses. Additionally we have increased the marketing activities of the XTRAC laser system in the US market.

•

Media buying and advertising expenses in the six months ended June 30, 2014 were 36.9% of total revenues compared to 27.9% of total revenues in the six months ended June 30, 2013. The factors listed above as well as the change in mix of revenues particularly as a result of the decrease in revenues from our Japan distributor. These distributor revenues require substantially less sales and marketing costs than what is required in the direct channel. Direct to consumer revenues 51.5% of total revenues for the six months ended June 30, 2014 compared to 53.8% of total revenues for the six months ended June 30, 2013. In addition, we added new initiatives to support Neova, Kyrobak, XTRAC therapy, as well as no!no! hair in Brazil and Germany spending approximately $5,268 compared to $1,664 for the six months ended June 30, 2013.

•

General and Administrative Expenses

For the three months ended June 30, 2014, general and administrative expenses increased to $11,452 from $6,268 for the three months ended June 30, 2013. The increase was due to the following reasons:

		•	We have recorded $1,959 in costs related to the acquisition of LCA Vision.
		•	We have had an increase in bad debt expenses related to both the Canada and Germany markets of approximately $1,632.
		•	We have recorded $501 in costs related to the various litigations.
		•	There was an increase of $1,382 in costs related to LCA-Vision. As we completed the acquisition on May 12, 2014 these expenses were included only for the period of May 13, 2014 through June 30, 2014. There were no corresponding expenses in our financial statements for the three months ended June 30, 2104.

- 44 -

For the six months ended June 30, 2014, general and administrative expenses increased to $19,039 from $11,927 for the six months ended June 30, 2013. The increase was due to the following reasons:

		•	We have recorded $2,865 in costs related to the acquisition of LCA Vision.
		•	We have had an increase in bad debt expenses related to both the Canada and Germany markets of approximately $1,632.
		•	We have recorded $1,394 in costs related to the various litigations.
		•	There was an increase of $1,382 in costs related to LCA-Vision. As we completed the acquisition on May 12, 2014 these expenses were included only for the period of May 13, 2014 through June 30, 2014. There were no corresponding expenses in our financial statements for the three months ended June 30, 2104.

Interest and Other Financing Expense, Net

Net interest and other financing expense for the three months ended June 30, 2014 increased to $175, as compared to $134 for the three months ended June 30, 2013. Net interest and other financing expense for the six months ended June 30, 2014 increased to $321, as compared to $3 for the six months ended June 30, 2013. The increase is partially due to an increase in interest expense of $505 and $547, respectively, for the three and six months ended June 30, 2014. The interest expense related to the long term debt and the amortization of the related debt costs that was entered into in May 2014. The remaining change was due to currency fluctuation of the U.S. Dollar versus the New Israeli Shekel, the Euro, the GBP and the Australian Dollar. The functional currency of all U.S. members of the group, as well as Radiancy Ltd. (Israel), is the U.S. Dollar. The other foreign subsidiaries’ functional currency is the each subsidiaries’ respective local currency.

Taxes on Income, Net

For the three months ended June 30, 2014, the net taxes on income amounted to a benefit of $822 as compared to an expense of $1,897 for the three months ended June 30, 2013. For the six months ended June 30, 2014, the net taxes on income amounted to a benefit of $901 as compared to an expense of $4,408 for the six months ended June 30, 2013.

Net Income

The factors described above resulted in net loss of $7,480 during the three months ended June 30, 2014, as compared to net income of $7,094 during the three months ended June 30, 2013, a decrease of 205%. The factors described above resulted in net loss of $7,825 during the six months ended June 30, 2014, as compared to net income of $14,306 during the six months ended June 30, 2013, a decrease of 155%.

To supplement our consolidated financial statements presented elsewhere within this report, in accordance with GAAP, management provides certain non-GAAP measures of financial performance. These non-GAAP measures include non-GAAP adjusted income.

Management’s reference to these non-GAAP measures should be considered in addition to results prepared under current accounting standards, but are not a substitute for, nor superior to, GAAP measures. These non-GAAP measures are provided to enhance readers’ overall understanding of our current financial performance and to provide further information for comparative purposes.

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Specifically, management believes the non-GAAP measures provide useful information to management and investors by isolating certain expenses, gains and losses that may not be indicative of our core operating results and business outlook. In addition, management believes non-GAAP measures enhance the comparability of results against prior periods. Reconciliation to the most directly comparable GAAP measure of all non-GAAP measures included in this report is as follows:

	For the Three Months ended June 30,
	2014			2013		Change

Net income	$	( 7,480	)	$	7,094	$	(14,574	)

Adjustments:
Depreciation and amortization		2,550			1,516		1,034
Interest expense, net		509			4		505
Income tax expense (benefit)		(822	)		1,897		(2,719	)

EBITDA		(5,243	)		10,511		(15,754	)

Stock-based compensation expense		1,294			1,294		-
Acquisition costs		1,959			-		1,959
Major litigation		501			-		501
Extraordinary items		1,632			-		1,632

Non-GAAP adjusted income	$	143		$	11,805	$	( 11,662	)

	For the Six Months ended June 30,
	2014			2013		Change

Net income	$	( 7,825	)	$	14,306	$	(22,131	)

Adjustments:
Depreciation and amortization		4,186			2,959		1,227
Interest expense, net		556			9		547
Income tax expense (benefit)		(901	)		4,408		(5,309	)

EBITDA		(3,984	)		21,682		(25,666	)

Stock-based compensation expense		2,556			2,584		(28	)
Acquisition costs		2.865			-		2,865
Major litigation		1,394			-		1,394

Non-GAAP adjusted income	$	2,831		$	24,266	$	( 21,435	)

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Liquidity and Capital Resources

At June 30, 2014, our current ratio was 0.88 compared to 2.46 at December 31, 2013. As of June 30, 2014 we had ($15,428) of working capital compared to $83,058 as of December 31, 2013. Cash and cash equivalents were $36,662 as of June 30, 2014, as compared to $45,388 as of December 31, 2013. In addition, we had $14,113 in short term bank deposits as of December 31, 2013.

On August 18, 2012, the Board of Directors approved a stock repurchase program up to a maximum to $25 million. In August 2013, the Board of Directors has authorized an additional $30 million share re-purchase program of its common shares in the open market over the next twelve months, at such times and prices as determined appropriate by the Company's management in collaboration with the Board of Directors. To date, we have repurchased 2,987,413 shares at an average price of $13.98 per share for a total of $41,757. The shares will be purchased with cash on hand, subject to certain limitations and covenants in connection with the acquisition debt financing provided for the LCA Vision, Inc. acquisition on May 12, 2014.

We believe our existing balances of cash and cash equivalents will be sufficient to satisfy our working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with our existing operations through and beyond the third quarter of 2015.

Net cash and cash equivalents used in operating activities was $15,159 for the six months ended June 30, 2014 compared to cash provided by of $9,521 for the six months ended June 30, 2013.

Net cash and cash equivalents used in investing activities was $67,155 for the six months ended June 30, 2014 compared to $6,539 for the six months ended June 30, 2013. This was primarily due to the acquisition of LCA-Vision, net of cash received and the increase in the placement of lasers into service for the six months ended June 30, 2014. These decreases were partially offset by the sales of short-term investments.

When we retire a laser from service that is no longer useable, we write off the net book value of the laser, which is typically negligible. Over the last few years, such retirements of lasers from service have been immaterial.

Net cash and cash equivalents used by financing activities was $73,439 for the six months ended June 30, 2014 compared to $5,790 for the six months ended June 30, 2013. In the six months ended June 30, 2014, we had net receipts on credit facilities of $75,000 on term debt and $451 for certain notes payable.

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Commitments and Contingencies

With the LCA-Vision acquisition, we have acquired additional operating lease obligations. See the following table:

		Total				Less than 1 year				1 -3 years				3 – 5 years				More than 5 years
Operating lease obligations		$	19,456			$	5,910			$	9,149			$	3,693			$	704

There were no additional items, then noted above, that significantly impacted our commitments and contingencies as discussed in the notes to our 2013 annual financial statements included in our Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

At June 30, 2014, we had no off-balance sheet arrangements.

Impact of Inflation

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

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “intend,” “potential” and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in our Annual Report on Form 10-K for the year ended December 31, 2013, and in this Quarterly Report on Form 10-Q in greater detail under Item 1A. “Risk Factors.” Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by our cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

ITEM 3. Quantitative and Qualitative Disclosure about Market Risk

Foreign Exchange Risk

During the three and six months ended June 30, 2014, there were no material changes to our market risk disclosures as set forth in Part II Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” in the Annual Report on Form 10-K that we filed for the year ended December 31, 2013.

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ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures, (as such term is defined in Rules 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)), as of June 30, 2014. Based on that evaluation, management has concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level described below.

Limitations on the Effectiveness of Controls.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within an organization have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were effective to provide reasonable assurance that the objectives of our disclosure control system were met.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting in our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - Other Information

ITEM 1. Legal Proceedings

As of May 12, 2014, the case remains in the discovery phase of the litigation. 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 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. 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.

- 49 -

- 50 -

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. 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.

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.

ITEM 1A. Risk Factors

Due to the completion of our acquisition of LCA-Vision on May 12, 2014, the risk factors described in Item 1A of the Form 10-K filed by LCA-Vision on March 12, 2014 are incorporated into this 10-Q by reference.

As of June 30, 2014, our other risk factors have not changed materially from the risk factors previously disclosed on our Annual Report on Form 10-K for the year ended December 31, 2013, with the exception identified in ITEM 3 below.

ITEM 2. Unregistered sales of equity securities and use of proceeds

None.

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ITEM 3. Defaults upon senior securities.

ITEM 4. Mine Safety Disclosures

None.

ITEM 5. Other Information

On August 5, 2014, each of Dr. Dolev Rafaeli, Chief Executive Officer, and Dennis M. McGrath, President and Chief Financial Officer, entered into Amended and Restated Employment Agreements with the Company. The previous amended and restated employment agreements for both executives were due to expire on December 13, 2014 and required the Board to provide notice to the executives on or before October 1, 2014 of its intent in dealing with the expiring contracts. The new Agreements, which are restatements of the 2011 employment agreements, take effect on the date of signing and expire December 31, 2018.

Under the new Agreements, the annual base salaries for Dr. Rafaeli and Mr. McGrath will be $495,000 and $395,000, respectively.

During his employment, Dr. Rafaeli will be eligible to receive a quarterly cash bonus (the “1st Tier Cash Bonus”) equal to 1% of the Company’s sales during that quarter, provided that the total 1st Tier Cash Bonuses payable to Dr. Rafaeli for any year may not exceed $1,000,000 less any other “applicable employee remuneration” within the meaning of Internal Revenue Section 162(m)(4)(C) payable to Dr. Rafaeli for such year. Dr. Rafaeli will also continue to be eligible to receive a quarterly cash bonus (the “2nd Tier Cash Bonus”) equal to 1% of the Company’s U.S. GAAP sales for that quarter in excess of a target threshold amount set by the Compensation Committee of the Board. The 2nd Tier Cash Bonus program for Dr. Rafaeli was approved by the Company’s shareholders in 2011 at the December 12, 2011 annual meeting of stockholders. Under the new Agreements, the Compensation Committee may elect to pay all or a portion of Dr. Rafaeli’s 2nd Tier Cash Bonus in the form of Company common stock.

During his employment, Mr. McGrath will be eligible to receive an annual bonus for each fiscal year of the Company up to eighty percent (80%) of his base salary, based on the attainment of certain individual and corporate performance goals and targets determined by the Board at the beginning of each fiscal year.

Both executives will also be eligible to participate in the Company’s annual and long-term equity incentive plans and programs as well as the Company’s (or Radiancy’s if applicable) benefits programs.

- 52 -

Pursuant to the terms of their employment agreements, should (1) the Company terminate Dr, Rafaeli’s or Mr. McGrath’s employment without cause (as defined in the respective agreement), including as a result of the failure to renew or extend the employment agreements upon the expiration of the scheduled term, or (2) Dr. Rafaeli or Mr. McGrath resigns for good reason (as defined in the respective agreement), then the executive will become entitled to the following benefits upon his timely execution and delivery (without revocation) of a release to the Company in the form attached to his respective employment agreement:

(i)

continued payment of his annual base salary in effect at the time of such termination for the remainder of the scheduled employment term, payable in installments in accordance with the Company’s payroll practices;

(ii)

for Dr. Rafaeli, continued payment of his quarterly bonuses based on actual sales, for the remainder of the scheduled employment term, and for Mr. McGrath, continued payment of bonuses for the remainder of the scheduled employment term based on the highest annual bonus paid during his employment;

(iii)

a pro-rated annual bonus for the year in which such termination occurs based on actual performance;

(iv)

payment or reimbursement of COBRA premiums for an 18-month period following such termination;

(v)

a monthly payment equal to the monthly premiums for long-term and short-term disability coverage and life insurance coverage in effect on the date of termination for the remainder of the scheduled employment term; and

(vi)

full acceleration of all outstanding equity awards held by the executive at the time of such termination, with any outstanding options remaining exercisable until the earlier of the 60-month anniversary of termination and the applicable option expiration date.

If the executive does not timely execute and deliver a release, then in lieu of the foregoing payments and benefits, he will only be entitled to any payments and benefits then available under the Company’s then current severance pay plan or arrangement for employees which are not conditioned upon his execution and delivery of a release.

In addition, the event the Agreement with Dr. Rafaeli is terminated for any reason other than cause, the Company will pay for certain expenses for Dr. Rafaeli’s relocation back to Israel.

Under the new employment agreements, the amount of payments or benefits that the executive has a right to receive that would constitute parachute payments subject to the excise tax under Internal Revenue Code Section 49999 will be reduced to the maximum amount that the executive could receive without being subject to the tax, unless the executive would be placed in a better after-tax position without such reduction. In that case, the executive would be permitted to retain all payments.

Each of the executives is subject to certain non-competition, non-solicitation and other restrictions during their employment and for a period of one year thereafter (or two years in the case of a termination by the Company for cause or by the executive without good reason).

Copies of the new employment agreements are attached as exhibits to this quarterly report.

- 53 -

ITEM 6. Exhibits

	2.1		Amended and Restated Agreement and Plan of Merger, dated as of October 31, 2011, by and among Radiancy, Inc., PhotoMedex, Inc. and PHMD Merger Sub, Inc., including the Form of Warrant. (23)
	2.2		Agreement and Plan of Merger by and among PhotoMedex, Inc., Gatorade Acquisition Corp. and LCA-Vision Inc., dated as of February 13, 2014 (34)
	3.1		Amended and Restated Articles of Incorporation of PhotoMedex, Inc. a Nevada corporation, filed on December 12, 2011 with the Secretary of State for the State of Nevada. (23)
	3.2		Bylaws of PhotoMedex, Inc. (a Nevada corporation), adopted December 28, 2010 (18)
	4.1		Form of Warrant to Purchase Shares of Common Stock of PhotoMedex (19)
	4.2		Term Loan and Security Agreement, dated as of March 19, 2010 between PhotoMedex, Inc. and Clutterbuck Funds LLC (26) (Exhibit 4.12 therein)
	4.3		Term Note, dated March 19, 2010, between PhotoMedex, Inc. and Clutterbuck Funds, LLC (26) (Exhibit 4.13 therein)
	4.4		Amendment No. 1 to Term Loan and Security Agreement, dated April 30, 2010 (27) (Exhibit 4.20 therein)
	4.5		Amendment No. 2 to Term Loan and Security Agreement, dated March 28, 2011 (27) (Exhibit 4.21 therein)
	4.6		Credit Agreement, dated December 27, 2013, between Radiancy, Inc. and JP Morgan Chase Bank, N.A. (35)
	10.1		Lease Agreement dated May 29, 1996, between Surgical Laser Technologies, Inc. and Nappen & Associates (Montgomeryville, Pennsylvania) (2)
	10.2		Lease Renewal Agreement, dated January 18, 2001, between Surgical Laser Technologies, Inc. and Nappen & Associates (2)
	10.3		Lease Agreement, dated July 10, 2006, PhotoMedex, Inc. and Nappen & Associates (3)
	10.4		Standard Industrial/Commercial Multi-Tenant Lease - Net, dated July 30, 2008 (additional facility at Carlsbad, California) (15)
	10.5		Standard Industrial/Commercial Multi-Tenant Lease Net, dated March 17, 2005 (Carlsbad, California) (5)
	10.6		License and Development Agreement, dated May 22, 2002, between Surgical Laser Technologies, Inc. and Reliant Technologies, Inc. (2)
	10.7		Settlement Agreement and Release, dated November 11, 2008, by and among Allergan, Inc., Murray A. Johnstone, MD, PhotoMedex, Inc. and ProCyte Corporation. (15)
	10.8		Master Asset Purchase Agreement, dated September 7, 2004, between PhotoMedex, Inc. and Stern Laser, srl (6)
	10.9		License Agreement, dated March 31, 2006, and effective April 1, 2006, between the Mount Sinai School of Medicine and PhotoMedex, Inc. (7)
	10.10		2005 Equity Compensation Plan, approved December 28, 2005 (8)
	10.11		Amended and Restated 2000 Non-Employee Director Stock Option Plan (1)
	10.12		Amended and Restated 2000 Stock Option Plan (1)
	10.13		1996 Stock Option Plan, assumed from ProCyte (9)
	10.14		Amended and Restated Employment Agreement with Dennis M. McGrath, dated September 1, 2007 (12)
	10.15		Amended and Restated Employment Agreement of Michael R. Stewart, dated September 1, 2007 (12)
	10.16		Restricted Stock Purchase Agreement of Dennis M. McGrath, dated January 15, 2006 (5)
	10.17		Consulting Agreement dated January 21, 1998 between the Company and R. Rox Anderson, M.D. (4)
	10.18		Restricted Stock Purchase Agreement of Dennis M. McGrath, dated May 1, 2007 (10)
	10.19		Restricted Stock Purchase Agreement of Michael R. Stewart, dated May 1, 2007 (10)
	10.20		Restricted Stock Purchase Agreement of Michael R. Stewart, dated August 13, 2007 (11)
	10.21		Amended and Restated 2000 Non-Employee Director Stock Option Plan, dated as of June 26, 2007 (24)
	10.22		Amended and Restated 2005 Equity Compensation Plan, dated as of June 26, 2007, as amended on October 28, 2008 (14)
	10.23		Form of Indemnification Agreement for directors and executive officers of PhotoMedex, Inc. (13)
	10.24		Restricted Stock Purchase Agreement of Dennis M. McGrath, dated June 15, 2009 (16)
	10.25		Restricted Stock Purchase Agreement of Michael R. Stewart, dated June 15, 2009 (16)

- 54 -

	10.26		Co-Promotion Agreement, dated as of January 7, 2010, between PhotoMedex, Inc. and Galderma Laboratories, L.P. (17)
	10.27		Amended and Restated 2000 Non-Employee Director Stock Option Plan, dated as of August 3, 2010 (18)
	10.28		Amended and Restated 2005 Equity Compensation Plan, dated as of August 3, 2010. (18)
	10.29		Restricted Stock Agreement of Dennis M. McGrath, dated March 30, 2011 (18)
	10.32		Amended and Restated Employment agreement, entered into by and between PhotoMedex, Inc. and Dennis McGrath on July 4, 2011. (19)
	10.33		Amended and Restated Restricted Stock Agreement, entered into as of August 11, 2011, by and between PhotoMedex, Inc. and Dennis McGrath. (20)
	10.34		Restricted Stock Agreement, entered into as of July 4, 2011, by and between PhotoMedex, Inc. and Dennis McGrath. (19)
	10.35		Non-Qualified Stock Option Agreement, entered into as of July 4, 2011, by and between PhotoMedex, Inc. and Dennis McGrath. (19)
	10.40		Amended and Restated Employment Agreement entered into by and between PhotoMedex, Inc. and Dolev Rafaeli on August 9, 2011. (21)
	10.41		Distribution Agreement by and between Radiancy, Inc. and Ya-Man Ltd., dated October 17, 2008. (21)
	10.42		Distribution Agreement Extension by and between Radiancy, Inc. and Ya-Man Ltd., dated August 12, 2010. (21)
	10.43		First Amendment to the Nonqualified Stock Option Agreement, dated as of October 31, 2011, by and between PhotoMedex, Inc. and Dennis McGrath (22)
	10.45		Lease Renewal Agreement, dated February 22, 2012, PhotoMedex, Inc. and FR National Life LLC (28)
	10.46		Lease Agreement dated September 1, 2010, by and between 30 Ramland Road, LLC and Radiancy, Inc. (Orangeburg). (25)
	10.47		Unprotected Tenancy Agreement dated September 7, 2008 by and between S.A.I. Yarak Buildings and Investments Ltd. and Radiancy (Israel) Ltd. (Hod Hasharon) (25)
	10.48		Annex to S.A.I. Radiancy Unprotected Tenancy Lease, dated as of January 20, 2008, by and between S.A.I. Yarak Buildings and Investments Ltd. and Radiancy (Israel) Ltd. (25)
	10.49		Exclusive License Agreement for Methods of Treating Diseased Tissue, dated April 1, 2012, by and between the Regents of the University of California and PhotoMedex, Inc. (25)
	10.50		Non-Qualified Stock Option Agreement dated March 18, 2012 between PhotoMedex, Inc. and Dolev Rafaeli (25)
	10.51		Non-Qualified Stock Option Agreement dated March 18, 2012 between PhotoMedex, Inc. and Dennis McGrath (25)
	10.52		Warrant issued March 1, 2012 to Crystal Research Associates LLC. (29)
	10.53		Lease Agreement dated August 24, 2012, by and between 30 Ramland Road, LLC and Radiancy, Inc. (Orangeburg). (30)
	10.54		Non-Qualified Stock Option Agreement dated February 28, 2013 between PhotoMedex, Inc. and Dolev Rafaeli (31)
	10.55		Non-Qualified Stock Option Agreement dated February 28, 2013 between PhotoMedex, Inc. and Dennis McGrath (31)
	10.56		Quota Purchase and Sale Agreement dated May 7, 2013 by and Among Radiancy, Inc., Leo Klinger and Intervening Parties (32)
	10.57		Lease Agreement dated June 3, 2013 by and between Maestro Properties Limited and Photo Therapeutics, Ltd. (UK) (32)
	10.58		Lease Agreement dated September 23, 2013 by and between Liberty Property Limited Partnership and PhotoMedex, Inc. (33)
	10.59		Credit Agreement, dated as of May 12, 2014, by and among PhotoMedex, Inc., JPMorgan Chase Bank, N.A. as Administrative Agent, First Niagara Bank, N.A. and PNC Bank, National Association as Co-Syndication Agents; J.P. Morgan Securities LLC, as Lead Arranger and book runner, and the Lenders (36)
	10.60		Amended and Restated Employment Agreement entered into by and between PhotoMedex, Inc. and Dolev Rafaeli on August 5, 2014. (37)
	10.61		Amended and Restated Employment agreement, entered into by and between PhotoMedex, Inc. and Dennis McGrath on August 5, 2014. (37)
	31.1		Rule 13a-14(a) Certificate of Chief Executive Officer

- 55 -

	31.2		Rule 13a-14(a) Certificate of Chief Financial Officer
	32.1*		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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	101.LAB†		XBRL Taxonomy Label Linkbase
	101.PRE†		XBRL Taxonomy Presentation Linkbase

(1)	Filed as part of our Registration Statement on Form S-4, on October 18, 2002, and as amended.

(2)	Filed as part of our Annual Report on Form 10-K for the year ended December 31, 2002.

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

(4)	Filed as part of our Registration Statement on Form S-1/A, on August 5, 1999.

(5)	Filed as part of our Annual Report on Form 10-K for the year ended December 31, 2005.

(6)	Filed as part of our Current Report on Form 8-K, on September 13, 2004.

(7)	Filed as part of our Current Report on Form 8-K, on April 10, 2006.

(8)	Filed as part of our Definitive Proxy Statement on Schedule 14A, on November 15, 2005.

(9)	Filed as part of our Registration Statement on Form S-8, on April 13, 2005.

(10)	Filed as part of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.

(11)	Filed as part of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2007.

(12)	Filed as part of our Annual Report on Form 10-K for the year ended December 31, 2007.

(13)	Filed as part of our Current Report on Form 8-K on March 5, 2009.

(14)	Filed as part of our Definitive Proxy Statement on Schedule 14A on December 18, 2008.

(15)	Filed as part of our Annual Report on Form 10-K for the year ended December 31, 2008.

(16)	Filed as part of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2009.

(17)	Filed as part of our Current Report on Form 8-K on January 11, 2010.

(18)	Filed as part of our Annual Report on Form 10-K for the year ended December 31, 2010.

(19)	Filed as part of our Current Report on Form 8-K on July 8, 2011.

(20)	Filed as part of our Registration Statement on Form S-4, on August 12, 2011.

(21)	Filed as part of our Registration Statement on Form S-4/A, on October 5, 2011.

(22)	Filed as part of our Registration Statement on Form S-4/A, on November 2, 2011.

(23)	Filed as part of our Current Report on Form 8-K on December 16, 2011.

(24)	Filed as part of our Current Report on Form 8-K on July 2, 2007.

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(25)	Filed as part of our Annual Report on Form 10-K for the year ended December 31, 2011.

(26)	Filed as part of our Current Report on form 8-K on March 23, 2010.

(27)	Filed as part of our Annual Report on Form 10-K for the year ended December 31, 2010.

(28)	Filed as part of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012.

(29)	Filed as part of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012.

(30)	Filed as part of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2012.

(31)	Filed as part of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013.

(32)	Filed as part of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013.

(33)	Filed as part of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013.

(34)	Filed as part of LCA Vision, Inc.’s Current Report on Form 8-K on February 13, 2014.

(35)	Filed as part of our Annual Report on Form 10-K for the year ended December 31, 2013.

(36)	Filed as part of our Current Report on Form 8-K on May 12, 2014.

(37)	Filed as part of this Form 10-Q filing.

The certifications attached as Exhibit 32.1 accompany this Quarterly Report on Form 10-Q pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

†

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended (the “Securities Act”), are deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise not subject to liability under those sections. This exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates this exhibit by reference.

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SIGNATURES

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

	PHOTOMEDEX, INC.

Date August 11, 2014	By:	/s/ Dolev Rafaeli
		Name Dolev Rafaeli
		Title Chief Executive Officer

Date August 11, 2014	By:	/s/ Dennis M. McGrath
		Name Dennis M. McGrath
		Title President & Chief Financial Officer

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