Gadsden Properties, Inc. - Quarter Report: 2016 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 - Q

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

For the quarterly period ended September 30, 2016

OR

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

For the transition period from _________ to ___________

Commission File Number 0-11365

PHOTOMEDEX, INC.

(Exact name of registrant as specified in its charter)

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 x 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 x No ¨

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

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

Yes ¨ No x

The number of shares outstanding of the issuer's common stock as of November 11, 2016 was 4,361,094 shares.

PHOTOMEDEX, INC.

INDEX TO FORM 10-Q

PART I – Financial Information

ITEM 1. Financial Statements

PHOTOMEDEX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

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

PHOTOMEDEX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands, except share and per share amounts)

(unaudited)

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

PHOTOMEDEX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands, except share and per share amounts)

(unaudited)

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

PHOTOMEDEX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN (DEFICIT) EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016

(In thousands, except share and per share amounts)

(Unaudited)

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

PHOTOMEDEX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

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

PHOTOMEDEX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

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

Note 1

The Company:

Background

PhotoMedex, Inc. (and its subsidiaries) (the “Company”) is a Global Skin Health company providing integrated disease management and aesthetic solutions to dermatologists, professional aestheticians and consumers. The Company provides proprietary products and services that address skin diseases and conditions including acne, photo damage and unwanted hair. Our experience in the physician market provides the platform to expand our skin health solutions to spa markets, as well as traditional retail, online and infomercial outlets for home-use products. Through our subsidiary Radiancy, Inc., which was merged into PhotoMedex in 2011, we added a range of home-use devices under the no!no!® brand for various indications including hair removal, acne treatment, skin rejuvenation, and lower back pain. In addition, our professional product line increased its offerings for acne clearance, skin tightening, psoriasis care and hair removal sold to physician clinics and spas.

Starting in August 2014, the Company began to restructure its operations and redirect its efforts in a manner that management expected would result in improved results of operations and address certain defaults in its commercial bank loan covenants. As part of such redirected efforts, management continues its comprehensive efforts to minimize the Company’s operational costs and capital expenditures. During this time the Company has also sold off certain business units and product lines to support this restructuring and has agreed to sell its Consumer product division (See Acquisitions and Dispositions – Pending Transaction below and Note 16 – Subsequent Event).

Liquidity and Going Concern

As of September 30, 2016, the Company had an accumulated deficit of $117,023 and shareholders deficit of $1,392. To date, the Company has dedicated most of its financial resources to sales and marketing, general and administrative expenses and research and development.

Cash and cash equivalents as of September 30, 2016 were $1,636, including restricted cash of $342. The Company has historically financed its activities with cash from operations, the private placement of equity and debt securities, borrowings under lines of credit and, in the most recent periods with sale of certain assets and business units. The Company will be required to obtain additional liquidity resources in order to support its operations. The Company is addressing its liquidity needs by seeking additional funding from lenders as well as selling certain of its product lines to a third party. There are no assurances, however, that the Company will be able to obtain an adequate level of financial resources required for the short and long-term support of its operations. In light of the Company’s recent operating losses and negative cash flows, the termination of a pending merger agreement (see Acquisitions and Dispositions below) and the uncertainty of completing further sales of its product lines, there is no assurance that the Company will be able to continue as a going concern.

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

On January 6, 2016, PhotoMedex, Inc. received an advance of $4 million, less a $40 financing fee (the “January 2016 Advance”), from CC Funding, a division of Credit Cash NJ, LLC, (the "Lender"), pursuant to a Credit Card Receivables Advance Agreement (the "Advance Agreement"), dated December 21, 2015.  The Company’s domestic subsidiaries, Radiancy, Inc.; PTECH; and Lumiere, Inc., were also parties to the Advance Agreement (collectively with the Company, the “Borrowers”). Each Advance was secured by security interest in defined collateral representing substantially all the assets of the Company. Concurrent with the funding of the loan agreement, the Company established a $500 cash reserve account in favor of the lender to be used to make loan payments in the event that weekly remittances, net of sales return credits and other bank charges or offsets, were insufficient to cover the weekly repayment amount due the lender.

Subject to the terms and conditions of the Advance Agreement, the Lender was to make periodic advances to the Company (collectively with the January 2016 Advance and the April 2016 Advance described below, the “Advances”). The proceeds were used for general corporate purposes.

All outstanding Advances were repaid through the Company’s existing and future credit card receivables and other rights to payment arising out of our acceptance or other use of any credit or charge card (collectively, “Credit Card Receivables”) generated by activities based in the United States.

On April 29, 2016, the Company received an advance of $1 million, less a $10 financing fee (the “April 2016 Advance”), from the Lender pursuant to the Advance Agreement.

On June 17, 2016, the Company received an advance of $550, less a $50 financing fee (the “June 2016 Advance”), from the Lender pursuant to the Advance Agreement.

The above described advances were paid in full on July 29, 2016 and the security interest in the defined collateral was released from lien.

The restricted cash account includes $250 from the Neova Escrow Agreement (see Acquisitions and Dispositions below). Restricted cash also includes $92 reflecting certain commitments connected to our leased office facilities in Israel. Additionally the Company gained access to previously restricted cash amounts of $724 that were held in escrow as of the one year anniversary of the sale of the XTRAC and VTRAC business on June 22, 2015, from which $125 was paid to MELA Science, the purchaser of that business which amount was reflected within the loss from discontinued operations.

On August 30, 2016, the Company entered into an Asset Purchase Agreement for the sale of its Neova product line. The sale was completed on September 15, 2016 resulting immediate proceeds to the company of $1.5 million and the Company recorded a loss of $1,731 from the transaction during the three months ended September 30, 2016. (see Acquisitions and Dispositions below)

On October 4, 2016, the Company entered into an Asset Purchase Agreement for the sale of its Consumer Division for $9.5 million, including $5 million in cash plus a $4.5 million royalty agreement. (see Note 16 Subsequent Event and Acquisitions and Dispositions below).

Acquisitions and Dispositions (See also Note 2, Discontinued Operations)

On May 12, 2014, PhotoMedex acquired 100% of the shares of LCA-Vision Inc. ("LCA-Vision" or "LCA"); the Company then sold 100% of the shares of LCA for $40 million in cash effective January 31, 2015. The results of operations of LCA-Vision have been included into the Company's consolidated financial statements for the three and nine months periods ended September 30, 2015 as a discontinued operation.

On June 22, 2015, the Company, sold the assets, and related liabilities, of the XTRAC and VTRAC business for $42.5 million in cash, including restricted cash of $750 to be held in escrow for twelve months.

See Note 2, Discontinued Operations, in the Company’s Form 10-K for the year ending December 31, 2015 for information regarding the LCA and XTRAC/VTRAC transactions as well as the $85 million senior secured credit facilities entered into with JP Morgan Chase as part of the acquisition of LCA.

On March 31, 2016 we completed the sale to The Lotus Global Group, Inc. of all of the tangible and intangible assets of the Omnilux product line for $220 ($110 was received as a refundable deposit during December 2015 in advance and $110 was received in April 2015), pursuant to the Agreement for Sale of Assets dated March 31, 2016. Management does not believe that the sale of the Omnilux product line represented a strategic shift for the Company. As a result, the above transaction has not been reflected in the accompanying consolidated financial statements as discontinued operations. The Company recorded a loss on the disposal of those assets in the amount of $843 for the nine months ended September 30, 2016.

On August 30, 2016, PhotoMedex and its subsidiary PhotoMedex Technology, Inc. (“PTECH”) entered into an Asset Purchase Agreement (the “Neova Asset Purchase Agreement”) with Pharma Cosmetics Laboratories Ltd., an Israeli corporation, and its subsidiary Pharma Cosmetics Inc., a Delaware corporation (together “PHARMA”) to acquire the Neova® skincare business (the “Transferred Business”) from PTECH, for a total purchase price of $1.8 million (the “Neova Purchase Price”). This transaction was completed on September 15, 2016, (the “Closing Date”). On that date, pursuant to the terms of the Neova Asset Purchase Agreement, PHARMA acquired all of the assets related to and associated with the Transferred Business, including but not limited to intellectual property, product inventory, accounts receivable and payable, and other tangible and intangible assets connected with the conduct of that Transferred Business. In exchange for these assets, the Company received a net payment from PHARMA of $1.5 million, subject to a post-closing working capital adjustment.

Also on that date, the parties entered into a First Amendment (the “First Neova APA Amendment”) to the Neova Asset Purchase Agreement, which provided that PHARMA would hold in trust the sum of $50 until such time as PhotoMedex and PTECH obtain a signed Worldwide Trademark Co-existence Agreement and Consent to Assignment from Singer-Kosmetik GmbH, a German company formed under the laws of Germany, (“Singer”) regarding the use by both Singer and the Transferred Business of their respective trademarks. That agreement was obtained from the relevant parties, and the $50 held in trust by Pharma was released to PhotoMedex on October 28, 2016.

Management does not believe that the sale of the Neova product line represents a strategic shift for the company. As a result, the above transaction has not been reflected in the accompanying consolidated financial statements as discontinued operations. The Company recorded a loss on the disposal of those assets in the amount of $1,731 for the three and nine months period ended September 30, 2016.

The Neova Purchase Price is subject to a post-closing working capital adjustment, pursuant to which the Neova Purchase Price paid to the Company at closing will be adjusted up or down by an amount equal to the difference between the defined actual working capital and the target net working capital of $200. Target working capital is defined as the net Accounts Receivable less trade Accounts Payable related to the Transferred Business as of the closing date. The Neova Asset Purchase Agreement also contains customary representations, warranties and covenants by each of the Company, PTECH and PHARMA, as well customary indemnification provisions among the parties.

The parties entered into several ancillary agreements as part of this transaction, including a Neova Escrow Agreement and a Neova Transition Services Agreement. Under the Neova Escrow Agreement, $250 of the Purchase Price (the "Escrow Amount") was placed into an escrow account held by U.S. Bank National Association as Escrow Agent.  The funds will remain in escrow for one year following the closing of the transaction. 

Under the Neova Transition Services Agreement, PHMD will continue to provide certain accounting, benefit, payroll, regulatory, IT support and other services to PHARMA for periods ranging from approximately three to up to nine months following the closing. During those periods, PHARMA will arrange to transition the services it receives to its own personnel.  PHARMA shall also have the right to continue occupying certain portions of PHMD’s Willow Grove, Pennsylvania facility and the Orangeburg, New York facility of PHMD’s Radiancy, Inc. subsidiary for a period of time. The amounts of compensation to be received by the Company for these services will be reflected in the accompanying consolidated statements of comprehensive loss as a reduction of the related expenses that the Company will incur to provide these services.

PENDING TRANSACTION (see also Note 16, Subsequent Event)

On October 4, 2016, PhotoMedex and its subsidiaries Radiancy, Inc., a Delaware corporation (“Radiancy US”), Photo Therapeutics Ltd., a private limited company incorporated under the laws of England and Wales (“PHMD UK”), and Radiancy (Israel) Limited, an Israel corporation (“Radiancy Israel” and, together with the Company, Radiancy, and PHMD UK, “PHMD”) entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with ICTV Brands, Inc., a Nevada corporation (“ICTV Parent”), and its subsidiary ICTV Holdings, Inc. a Nevada corporation (the “Purchaser” and together with together with ICTV Parent, “ICTV”) pursuant to which ICTV will acquire PHMD’s consumer products division, including its no!no!® hair and skin products and the Kyrobak back pain management products (all such consumer products, the “Consumer Products”) and the shares of capital stock of Radiancy (HK) Limited, a private limited company incorporated under the laws of Hong Kong (the “Hong Kong Foreign Subsidiary”), and LK Technology Importaçăo E Exportaçăo LTDA, a private Sociedade limitada formed under the laws of Brazil (the “Brazilian Foreign Subsidiary” and together with the Hong Kong Foreign Subsidiary, the “Foreign Subsidiaries”) (collectively, the “Transferred Business”) from PHMD, for a total purchase price of $9.5 million (the “Purchase Price”) including $3 million in cash at closing, $2 million of cash 90 days after closing collateralized by a letter of credit, and a $4.5 million royalty on future sales of the product line.  The closing (“Closing”) is anticipated to occur no later than 120 days from the date of the Agreement, or by February 1, 2017 (the date of Closing, the “Closing Date”). Following the impairment of the consumer segment’s goodwill and intangible asset during the three months period ended September 30,2016 , as discussed below, which, the company is not expected to record significant gain or loss from the transaction contemplated under the Asset Purchase Agreement (see Note 16 Subsequent Event and Acquisitions and Dispositions).

TERMINATION of PENDING TRANSACTION

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

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

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

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

On May 27, 2016, PHMD, Radiancy, and P-Tech, terminated both Agreements and Plans of Merger and Reorganization among PhotoMedex and its affiliates and DS Healthcare Group. Given the material breaches identified in PHMD’s notice to DSKX, PHMD has initiated litigation seeking to recover a termination fee of $3.0 million, an expense reimbursement of up to $750 and its liabilities and damages suffered as a result of DSKX’s failures and breaches in connection with each of the Merger Agreements. On May 27, 2016, PHMD, Radiancy and P-Tech filed a complaint in the U.S. District Court for the Southern District of New York alleging breaches of the Merger Agreements by DSKX and seeking the damages described in the foregoing sentence. See Note 1, Pending Transactions in the Company’s Form 10-K for the year ending December 31, 2015 for additional information.

Reverse Split and Number of Shares Adjustment

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

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

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

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

Basis of Presentation:

Accounting Principles

The accompanying condensed consolidated financial statements and related notes should be read in conjunction with our consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (“fiscal 2015”). 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 nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016 or for any other interim period or for any future period.

Principles of Consolidation

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

Held for Sale Classification and Discontinued Operations

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

Assets and liabilities related to a disposal group classified as held for sale are segregated in the consolidated balance sheet in the period in which the disposal group is classified as held for sale.

Until December 31, 2014, in accordance with previous US GAAP, operations of a disposal group were reported as discontinued operations if the disposal group is classified as held for sale, the operations and cash flows of the business have been or will be eliminated from the ongoing operations as a result of a disposal transaction and when the Company will not have any significant continuing involvement in the operations of the disposal group after the disposal transaction. See below regarding change to the criteria for reporting discontinued operations.

Accordingly, the disposal of LCA-Vision was presented as discontinued operations, commencing with the financial statements for the year ended December 31, 2014.

Commencing January 1, 2015 (the effective date of the ASU 2014-08), only disposal of a component of an entity or a group of components of an entity that represents a strategic shift that has or will have a major effect on an entity's operations and financial results shall be reported as discontinued operations. The revised guidance did not change the criteria required to qualify for held for sale presentation. The revised guidance includes several new disclosures and among others, required a reporting company to reclassify the assets and liabilities of discontinued operations to separate line items in the balance sheets for all periods presented (including comparatives). Accordingly, following the sale of the XTRAC and VTRAC business which were determined to represent a strategic shift that will have a major effect on the Company, the assets and liabilities of the XTRAC and VTRAC business as of December 31, 2014 were reclassified and presented as assets and liabilities held for sale (without changing their classification as current or non-current). Also, the results of the operations of the LCA operating segment and the XTRAC and VTRAC business were presented as discontinued operations in the consolidated statements of comprehensive loss (see also Note 2, Discontinued operations).

The results of discontinued operations are reported in discontinued operations in the consolidated statement of comprehensive loss for current and prior periods commencing in the period in which the business meets the criteria of a discontinued operation, and include any gain or loss recognized on closing or adjustment of the carrying amount to fair value less cost to sell. Depreciation is not recorded on assets of a business while it is classified as held for sale.

Revenue Recognition

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

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

For revenue arrangements with multiple deliverables within a single, contractually binding arrangement (usually sales of products with separately priced extended warranty), each element of the contract is accounted for as a separate unit of accounting when it provides the customer value on a stand-alone basis 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 9).

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

Functional Currency

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

Balances denominated in, or linked to, foreign currencies are stated on the basis of the exchange rates prevailing at the balance sheet date. For foreign currency transactions included in the statement of comprehensive income (loss), the exchange rates applicable to the relevant transaction dates are used. Transaction gains or losses arising from changes in the exchange rates used in the translation of such balances are carried to financing income or expenses.

Assets and liabilities of foreign subsidiaries, whose functional currency is their local currency, are translated from their respective functional currency to U.S. dollars at the balance sheet date exchange rates. Income and expense items are translated at the average rates of exchange prevailing during the year. Translation adjustments are reflected in the consolidated balance sheets as a component of accumulated other comprehensive income (loss). Deferred taxes are not provided on translation adjustments as the earnings of the subsidiaries are considered to be permanently reinvested.

Fair Value Measurements

The Company measures and discloses fair value in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 820, Fair Value Measurements and Disclosures (“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:

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

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

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

Derivatives

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

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

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

At September 30, 2016, the balance of such derivative instruments amounted to approximately $0 in liabilities and approximately $0 were recognized as financing expense in the Statement of Comprehensive (Loss) Income during the nine months ended that date.

The nominal amounts of foreign currency derivatives as of September 30, 2016 consist of forward transactions for the exchange of $0 into NIS as of September 30, 2016.

Accounting for the Impairment of Goodwill and Other Intangibles

The Company evaluates the carrying value of goodwill annually at the end of the calendar year and also between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit to which goodwill was allocated to below its carrying amount. Such circumstances could include, but are not limited to: (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. Goodwill impairment evaluation is performed subsequent to Impairment evaluation of long-lived assets and intangibles (see Notes 6 and 7). Goodwill impairment testing involves a two-step process. Step 1 compares the fair value of the Group’s reporting units to which goodwill was allocated to their carrying values. If the fair value of the reporting unit exceeds its carrying value, no further analysis is necessary. The reporting unit fair value is based upon consideration of various valuation methodologies, including guideline transaction multiples, multiples of current earnings, and projected future cash flows discounted at rates commensurate with the risk involved. If the carrying amount of the reporting unit exceeds its fair value, Step 2 must be completed to quantify the amount of impairment. Step 2 calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit, from the fair value of the reporting unit as determined in Step 1. The implied fair value of goodwill determined in this step is compared to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss, equal to the difference, is recognized. . The fair value of Goodwill associated with the operating and reporting units were estimated using a combination of Income and Market Approach methodologies to valuation. The Income method of valuation explicitly recognizes the current value of future economic benefits developed by discounting future net cash flows to their present value at a rate the reflects both the current return requirements of the market and the risks inherent in the market. The Market approach measures the value of an asset through the analysis of recent sales or offerings of comparable property. Our business is organized into three operating and reporting units which are defined as Consumer, Physician Recurring, and Professional Equipment. The fair value of goodwill associated with the operating and reporting units took into consideration the sale price of the consumer business in connection with the pending transaction with ICTV Brands, Inc. (see Note 1 The Company and Note 16 Subsequent Event). Upon completion of our goodwill impairment analysis in connection with the pending transaction with ICTV Brands, as of September 30, 2016 the Company recorded an impairment of Consumer segment goodwill in the amount of $2,257.

Also in connection with the pending transaction with ICTV Brands, as of September 30, 2016, the Company recorded an impairment of the Consumer segment intangibles for its Licensed Technology in the amount of $1,261.

Accrued Warranty Costs

The Company offers a standard warranty on product sales generally for a one to two-year period. The Company provides for the estimated cost of the future warranty claims on the date the product is sold. Total accrued warranty is included in Other Accrued Liabilities on the balance sheet. The activity in the warranty accrual during the nine months ended September 30, 2016 and 2015 (with respect to the continuing operations) is summarized as follows:

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

Earnings Per Share

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

Diluted earnings per share for the three and nine months ended September 30, 2016, exclude the impact of common stock options and warrants, totaling 209,398 shares, as the effect of their inclusion would be anti-dilutive, due to the loss from continuing operations for the periods.

Adoption of New Accounting Standards

Effective January 1, 2016, the Company adopted Accounting Standard ASU No. 2015-16, "Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments." The amendments in ASU 2015-16 require that an acquirer recognize adjustments to estimated amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, rather than retrospectively adjusting amounts previously reported. The amendments require that the acquirer record, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the estimated amounts, calculated as if the accounting had been completed at the acquisition date.

ASU 2015-16 became effective for public business entities for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments is required be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued.

The adoption of this ASU did not have a significant impact on the condensed consolidated financial statements.

Recently Issued Accounting Standards

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

ASU 2014-09 outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 also requires entities to disclose sufficient information, both quantitative and qualitative, to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

During 2016, the FASB issued several Accounting Standard Updates that focuses on certain implementation issues of the new revenue recognition guidance including Narrow-Scope Improvements and Practical Expedients, Principal versus Agent Considerations and Identifying Performance Obligations and Licensing.

An entity should apply the amendments in this ASU using one of the following two methods: 1. Retrospectively to each prior reporting period presented with a possibility to elect certain practical expedients, or, 2. Retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. If an entity elects the latter transition method, it also should provide certain additional disclosures.

For a public entity, the amendments in ASU 2014-09 (including the amendments introduced through recent ASU's) are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period (the first quarter of fiscal year 2018 for the Company). Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is in the process of assessing the impact, if any, of ASU 2014-09 on its consolidated financial statements.

In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern ("ASU 2014-15"). ASU 2014-15 provide guidance on management’s responsibility in evaluating whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). ASU 2014-15 also provide guidance related to the required disclosures as a result of management evaluation.

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

In July, 2015, The FASB issued Accounting Standards Update No. 2015-11, Simplifying the Measurement of Inventory (Topic 330) ("ASU 2015-11"). ASU 2015-11 outlines that inventory within the scope of its guidance be measured at the lower of cost and net realizable value. Inventory measured using last-in, first-out (LIFO) are not impacted by the new guidance. Prior to the issuance of ASU 2015-11, inventory was measured at the lower of cost or market (where market was defined as replacement cost, with a ceiling of net realizable value and floor of net realizable value less a normal profit margin). For a public entity, the amendments in ASU 2015-11 are effective, in a prospective manner, for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period (the first quarter of fiscal year 2017 for the Company). Early adoption is permitted as of the beginning of an interim or annual reporting period. The Company is in the process of assessing the impact, if any, of ASU 2015-11 on its consolidated financial statements.

In November 2015, the FASB has issued Accounting Standards Update (ASU) No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which changes how deferred taxes are classified on organizations’ balance sheet. The ASU eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, all deferred tax assets and liabilities will be required to be classified as noncurrent.The amendments apply to all organizations that present a classified balance sheet. For public companies, the amendments are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods (i.e., in the first quarter of 2017 for calendar year-end companies).Early adoption is permitted for all entities as of the beginning of an interim or annual reporting period.The guidance may be applied either prospectively, for all deferred tax assets and liabilities, or retrospectively (i.e., by reclassifying the comparative balance sheet). If applied prospectively, entities are required to include a statement that prior periods were not retrospectively adjusted. If applied retrospectively, entities are also required to include quantitative information about the effects of the change on prior periods. The Company does not believe this ASU will have a significant impact on its consolidated financial statements.

In March 2016, the FASB has issued Accounting Standards Update (ASU) No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments are intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees.

Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The amendments also simplify two areas specific to private companies.

For public companies, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted in any interim or annual period periods (i.e., in the first quarter of 2017 for calendar year-end companies).

Note 2

Discontinued Operations:

LCA, acquired by the Company on May 12, 2014, 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. After preliminary investigations and discussions, the Board of Directors of the Company, with the aid of its investment banker, had reached a formal decision during December 2014 to enter into, substantive, confidential discussions with potential third-party buyers and began to develop plans for implementing a disposal of the assets and operations of the business. The Company accordingly previously classified this former segment as held for sale and discontinued operations in accordance with ASC Topic 360. On February 2, 2015, the Company closed on sale transaction of 100% of the shares of LCA for $40 million in cash. Excluding estimated working capital adjustments and direct expenses (professional fees to third parties), the Company realized net proceeds of approximately $36.5 million which amount is considered as the fair value less cost to sell of LCA. The sale was effective January 31, 2015.

The accompanying condensed consolidated financial statements reflect the operating results of the discontinued operations separately from continuing operations. Revenues from LCA, reported as discontinued operations, for the nine months ended September 30, 2015 were $9,158. Loss from LCA, reported as discontinued operations, for the nine months ended September 30, 2015 was $1,667, which includes stock compensation of $2,363 related to the contractual acceleration of vesting of awards then outstanding to employees from LCA, included as a result of acceleration of vesting periods, due to the sale of LCA.

On June 22, 2015, the Company closed on the asset sale of the XTRAC and VTRAC business for $42.5 million in cash. The Company realized net proceeds of approximately $41 million. The sale was effective June 22, 2015. The domestic XTRAC business was considered a recurring revenue stream given its pay-per-use model, where the machines are provided to professionals who then paid us based on the number of treatments administered with the device. The domestic revenues from this business have historically been reported in our Physician Recurring business segment. Internationally, we sold our XTRAC-Velocity and VTRAC equipment to distributors which sales have been historically reported in our Professional Equipment segment. As this business was a substantial business unit of the Company, and as such the sale brought a strategic shift in focus of management. The Company accordingly classified this former business as held for sale and discontinued operations in accordance with ASC Topic 360. The XTRAC and VTRAC business met the criteria for presentation as a discontinued operation during the nine months ended September 30, 2015. As a result, the accompanying condensed consolidated statement of comprehensive loss for the nine months ended September 30, 2015 presented the XTRAC and VTRAC business as a discontinued operation.

Revenues from the XTRAC and VTRAC business, reported as discontinued operations, for the nine months ended September 30, 2015 were $14,699. Loss from the sale of the XTRAC and VTRAC business, reported as discontinued operations, for the nine months ended September 30, 2015 was $5,042, which includes stock compensation of $2,289 related to the contractual acceleration of vesting of awards then outstanding to employees from LCA, included as a result of acceleration of vesting periods, due to the sale of XTRAC and VTRAC.

Note 3

Acquisition:

See Pending Transactions in Note 1 for a discussion of the terminated DSKX transaction and Note 1 and Note 16 (Subsequent Event) for the pending transaction with ICTV Brands, Inc.

Note 4

Inventories:

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

Note 5

Property and Equipment, net:

Depreciation and related amortization expense was $218 and $84 for the nine months ended September 30, 2016 and 2015, respectively.

Note 6

Patents and Licensed Technologies, net:

Related amortization expense was $230 and $681 for the nine months ended September 30, 2016 and 2015, respectively.

Note 7

Goodwill and Other Intangible Assets:

As part of the purchase price allocation for the reverse acquisition of Radiancy, Inc. in 2011, the Company recorded goodwill in the amount of $24,005 and definite-lived intangibles in the amount of $12,000. Goodwill reflects the value or premium of the acquisition price in excess of the fair values assigned to specific tangible and intangible assets. Goodwill has an indefinite useful life and therefore is not amortized as an expense, but is reviewed annually for impairment of its fair value to the Company.

During the fourth quarter of 2015, we recorded goodwill and other intangible asset impairment charges of $21,481, as we determined that a portion of the value of our goodwill and other intangible assets was impaired in connection with our annual impairment test. See Note 7 to the annual audited 2015 consolidated financial statements.

During the third quarter of 2016, we recorded goodwill and other intangible asset impairment charges of $3,518, as we determined that a portion of the value of our goodwill and other intangible assets was impaired in connection with the pending transaction with ICTV Brands, Inc. (see Note 1, The Company and Note 16, Subsequent Event). The Company recorded an impairment of the Consumer segment goodwill in the amount of $2,257 and recorded the impairment of the Consumer segment of the intangibles for its licensed technology in the amount of $1,261. The Company recorded the reduction of goodwill in the Physician Recurring segment with the asset sale of the Neova product line in the amount of $1,039.

Set forth below is a summary of activity in Goodwill for the nine months ended September 30, 2016:

Set forth below is a summary of activity in finite-lived intangible assets for the nine months ended September 30, 2016 along with the related accumulated amortization:

Related amortization expense was $37 and $647 for the nine months ended September 30, 2016 and 2015, respectively. Customer Relationships embody the value to the Company of relationships that PhotoMedex had formed with its customers. Trademarks include the tradenames and various trademarks associated with PhotoMedex products (e.g. “Neova” “Omnilux” and “Lumiere”).

Note 8

Accrued Compensation and related expenses:

Note 9

Other Accrued Liabilities:

Note 10

Long-term Debt:

On January 6, 2016, PhotoMedex, Inc. received an advance of $4 million, less a $40 financing fee (the “January 2016 Advance”), from CC Funding, a division of Credit Cash NJ, LLC, (the "Lender"), pursuant to a Credit Card Receivables Advance Agreement (the "Advance Agreement"), dated December 21, 2015.  The Company’s domestic subsidiaries, Radiancy, Inc.; PTECH; and Lumiere, Inc., were also parties to the Advance Agreement (collectively with the Company, the “Borrowers”). Each Advance was secured by security interest in defined collateral representing substantially all the assets of the Company. Concurrent with the funding of the loan agreement, the Company established a $500 cash reserve account in favor of the lender to be used to make loan payments in the event that weekly remittances, net of sales return credits and other bank charges or offsets, were insufficient to cover the weekly repayment amount due the lender. The advance was paid in full on July 29, 2016 and the security interest in the defined collateral was released from lien.

Subject to the terms and conditions of the Advance Agreement, the Lender was to make periodic advances to the Company (collectively with the January 2016 Advance and the April 2016 Advance described below, the “Advances”). The proceeds can be used for general corporate purposes.

All outstanding Advances were required to be repaid through the Company’s existing and future credit card receivables and other rights to payment arising out of our acceptance or other use of any credit or charge card (collectively, “Credit Card Receivables”) generated by activities based in the United States.

On April 29, 2016 the Company received an additional advance of $1 million, less a $10 financing fee (the “April 2016 Advance”), from the Lender pursuant to the Advance Agreement

On June 17, 2016, the Company received an advance of $550, less a $50 financing fee (the “June 2016 Advance”), from the Lender pursuant to the Advance Agreement.

The advances were paid in full on July 29, 2016 and the security interest in the defined collateral was released from lien.

Note 11

Income Taxes:

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

The difference between the Company's effective tax rates for the three and nine month period ended September 30, 2016 and the U.S. Federal statutory rate (34%) resulted primarily from current federal and state losses for which no tax benefit is provided due to the 100% valuation allowance for those jurisdictions. In addition, the Israeli and UK subsidiaries’ earnings are taxed at rates lower than the U.S. federal statutory rate (Israel 25% standard corporation tax rate and in the UK 20%).

During the three and nine months ended September 30, 2016, the Company had no material changes to liabilities for uncertain tax positions. PhotoMedex files corporate income tax returns in the United States, both in the Federal jurisdiction and in various State jurisdictions. The Company is subject to Federal income tax examination for calendar years 2012 through 2015 and is also generally subject to various State income tax examinations for calendar years 2012 through 2015. Photo Therapeutics Limited files in the United Kingdom. Radiancy (Israel) Limited files in Israel. The Israeli subsidiary is subject to tax examination for calendar years 2011 through 2015.

Note 12

Commitments and contingencies:

See Note 11, Commitment and Contingencies in the Company’s Form 10-K for the year ending December 31, 2015 for additional information. Below are updates on the company litigation since this report.

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. A mediation was scheduled in this matter for November 24, 2014, but no settlement was reached. On March 30, 2015, the Court dismissed this action in its entirety for failure to state a claim. The Court specifically dismissed with prejudice the claims pursuant to New York General Business Law §349-50 and the implied warranty of fitness for a particular purpose; the other counts against Radiancy were dismissed without prejudice. The Court also granted Dr. Rafaeli's motion to dismiss the actions against him for lack of personal jurisdiction over him by the Court. The Court denied the plaintiffs request for jurisdictional discovery with respect to Dr. Rafaeli and plaintiffs request to amend the complaint. Radiancy and its officers intend to continue to vigorously defend themselves against any attempts to continue this lawsuit.

On July 17, 2014, plaintiffs’ attorneys refiled their putative class action lawsuit in the United States District Court for the District of Columbia against only the Company’s subsidiary, Radiancy, Inc. The claims of the suit are virtually identical to the claims originally considered, and dismissed without prejudice, by the same Court. A companion suit was filed in the United States District Court for the Southern District of New York, raising the same claims on behalf of plaintiffs from New York and West Virginia against Radiancy and its President, Dr. Dolev Rafaeli. That New York case was removed to the D.C. Court and the cases were consolidated into one action. The Company filed a Motion to Dismiss the complaint against Dr. Rafaeli and Radiancy; on August 1, 2016, the D.C. Court granted the dismissal of the case against Dr. Rafaeli, with prejudice, and decided to allow the action against Radiancy to proceed. The Company intends to defend itself vigorously against this suit. At this time, the amount of any loss, or range of loss, cannot be reasonably estimated as the case has only been initiated and no discovery has been conducted to determine the validity of any claim or claims made by plaintiffs. Therefore, the Company has not recorded any reserve or contingent liability related to these particular legal matters. However, in the future, as the cases progress, the Company may be required to record a contingent liability or reserve for these matters.

On June 30, 2014, the Company’s subsidiary, Radiancy, Inc., was served with a 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 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 has filed an Answer to this Complaint; the case is now in the discovery phase. On October 30, 2015, Radiancy filed to remove this action to the United States District Court for the Southern District of California; as a result of that filing, all discovery in this case has now been stayed. That removal was granted, and the Company has now filed to remove this case to the U.S. District Court for the District of Columbia, the district with jurisdiction over Jan Mouzon v. Radiancy, Inc. and Dolev Rafaeli, President. The suit was filed by Jan Mouzon and twelve other customers residing in ten different states, including California, who purchased Radiancy’s no!no! hair products and 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 Company’s Motion to Remove the Cantley case had been stayed pending resolution of the Mouzon litigation; now that the Court in Mouzon has issued its opinion regarding the Company’s Motion to Dismiss, the California Court has granted the Company’s Motion to Remove the Cantley case to the Federal Court for the District of Columbia. Radiancy and its officers intend to vigorously defend themselves against this lawsuit. Discovery has now commenced in this action. At this time, the amount of any loss, or range of loss, cannot be reasonably estimated as the case has only been initiated and no discovery has been conducted to determine the validity of any claim or claims made by plaintiffs. Therefore, the Company has not recorded any reserve or contingent liability related to these particular legal matters. However, in the future, as the cases progress, the Company may be required to record a contingent liability or reserve for these matters.

On February 19, 2016, the Company and its subsidiaries entered into Agreements and Plans of Merger and Reorganization with DS Healthcare Group, Inc. and its subsidiaries (“DSKX”), under which DSKX would acquire the Company’s subsidiaries Radiancy, Inc. and PhotoMedex Technology, Inc. in exchange for shares of stock in DSKX as well as cash payments and notes for future cash payments. Subsequent to the signing of those Agreements, on March 23, 2016, DSKX filed a Current Report on Form 8-K (the “DSKX March 23 Form 8-K”) with the SEC reporting its audit committee, after discussion with its independent registered public accounting firm, concluded that the unaudited condensed consolidated financial statements of DSKX for the two fiscal quarters ended June 30, 2015 and September 30, 2015 should no longer be relied upon because of certain errors in such financial statements. Also, DSKX reported that its audit committee, consisting of all members of its board of directors other than Daniel Khesin (at the time DSKX’s President and Chairman of the Board and a member of its board of directors), had engaged independent counsel to conduct an investigation regarding certain transactions involving Mr. Khesin and other individuals; the committee’s investigation had begun earlier in February. The board also reported that it had terminated the employment of Mr. Khesin as DSKX’s president and as an employee of DSKX, and also terminated Mr. Khesin’s employment agreement, dated December 16, 2013, for cause.

The Company was not advised of this investigation during its negotiations with DSKX or after signing the Merger Agreements until the evening of March 21, 2016. On April 12, 2016, the Company sent a Reservation of Rights letter to DSKX. The Notice states that, based upon the disclosures set forth in DSKX’s Current Report on Form 8-K filed on March 23, 2016 and subsequent press releases and filings by DSKX with the United States Securities and Exchange Commission (collectively, the “DSKX Public Disclosure”), DSKX is in material breach of various representations, warranties, covenants and agreements set forth in the Agreements; had failed to provide to the Company the information contained in the DSKX Public Disclosures during the discussions relating to the negotiation and execution of the Agreements; and continues to be in material breach under the Agreements. As a result, the conditions precedent to the closing of these transactions as set forth in the Agreements may not be able to occur. The Notice also declares that the Company reserves all its rights and remedies under the Agreements, including, without limitation, the right to terminate the Agreements and collect a termination fee from DSKX of $3.0 million. The Notice further asserts that the Company regards certain provisions of the Agreements to have been waived by DSKX and to no longer be in effect, including the non-solicitation and no-shop provisions, negative covenants, and termination events, as applicable solely to the PHMD Group, as well as the payment of any termination fee by PHMD to DSKX. Finally, the Notice provided that the Company has the right to terminate the Agreements to pursue, consider and enter into any acquisition proposal or other transaction without the payment of fees and expenses to DSKX.

On May 27, 2016, the Company and its subsidiaries Radiancy, Inc., an indirectly wholly-owned subsidiary of the Company (“Radiancy”), and Photomedex Technology, Inc., a wholly-owned subsidiary of the Company (“P-Tech”), terminated: (a) the Agreement and Plan of Merger and Reorganization, dated as of February 19, 2016 (the “Radiancy Merger Agreement”), among the Company, Radiancy, DS Healthcare Group, Inc. (“DSKX”) and PHMD Consumer Acquisition Corp., a wholly-owned subsidiary of DSKX (“Merger Sub A”), and (b) the Agreement and Plan of Merger and Reorganization, dated as of February 19, 2016 (the “P-Tech Merger Agreement” and together with the Radiancy Merger Agreement, the “Merger Agreements”), among the Company, P-Tech, DSKX, and PHMD Professional Acquisition Corp., a wholly-owned subsidiary of DSKX (“Merger Sub B”). Pursuant to the Merger Agreements, Radiancy was to merge with Merger Sub A, with Radiancy as the surviving corporation in such merger, P-Tech was to merge with Merger Sub B, with P-Tech as the surviving corporation in such merger, and DSKX was to become the holding company for Radiancy and P-Tech.

Given the material breaches identified in the Company’s notice to DSKX, and other disclosures and communications by DSKX, in connection with the Company’s termination of the Merger Agreements and pursuant to their terms, the Company is seeking to recover a termination fee of $3.0 million, an expense reimbursement of up to $750,000 and its liabilities and damages suffered as a result of DSKX’s failures and breaches in connection with each of the Merger Agreements. On May 27, 2016, the Company, Radiancy and P-Tech filed a complaint in the U.S. District Court for the Southern District of New York alleging breaches of the Merger Agreements by DSKX and seeking the damages described in the foregoing sentence. On August 1, 2016, DSKX filed its answer to the complaint, denying the allegations stated in the complaint and alleging its own counterclaims including, among others, the Company’s alleged failure to disclose the Mouzon and Cantley cases filed against Radiancy.

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. For additional information regarding these matters, see the Pending Transactions disclosures in the Company’s Form 10-K for the year ending December 31, 2015, and the Company’s Form 10-Q for the period ending March 31, 2016.

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

Radiancy, and PhotoMedex, had moved to dismiss PhotoMedex from the case, and to dismiss the counterclaims and affirmative defenses asserted by Viatek. On March 28, 2014, the Court granted the Company’s motion and dismissed 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 tortuous 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 that motion. Viatek appealed both the sanctions ruling and the dismissal of Viatek’s counterclaims and defenses from the case, as well as PhotoMedex dismissal as a plaintiff; the Court has denied those appeals. The Court had appointed a Special Master to oversee discovery. A Markman hearing on the patents at issue was held on March 2, 2015. Viatek had requested an opportunity to supplement its patent invalidity contentions in the US case; Radiancy opposed that request. Radiancy had been granted permission by the US Court to supplement its earlier sanctions motion to include the legal fees and costs associated with preparing and prosecuting that motion; to date, Viatek has paid $83 in sanctions to Radiancy. Discovery and related court hearings continued in both the US and the Canadian cases.

On October 4, 2016, PhotoMedex, Inc., Radiancy, Inc. and Viatek Consumer Products, Inc. entered into General Releases under which the parties and the former and present corporations in which they were or are shareholders; each and every one of their corporations; and such corporations’ predecessors, former and present subsidiaries, parent entities, affiliates, divisions, licensees, receivers, distributors, successors and assigns, and the present, former and future officers, directors, employees and shareholders of the foregoing entities, and their heirs, executors, administrators, attorneys, associates, agents, successors, assigns, and anyone affiliated with or acting on behalf of any of them, from all actions, claims, liabilities, causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims, and demands whatsoever, in law, admiralty or equity, that a party or its affiliate ever had, now has or hereafter can, shall or may have, from the beginning of the world to the day of the date of the General Release including, but not limited to, the claims and counterclaims in the United States and Canadian litigation, as well as all claims and rights of Viatek arising out of or related to the Letter of Intent, dated August 5, 2016, between Photomedex, Radiancy and Viatek entitled Proposal to Acquire Certain Assets of Radiancy, Inc. As a result of these General Releases, both the United States and the Canadian litigation were dismissed without costs effective October 11, 2016.

Note 13

Employee Stock Benefit Plans:

Post-Reverse Merger

The Company has a Non-Employee Director Stock Option Plan. This plan has authorized 74,000 shares; of which 1,733 shares had been issued or were reserved for issuance as awards of shares of common stock, and 1,999 shares were reserved for outstanding stock options. The number of shares available for future issuance pursuant to this plan is 69,756 as of September 30, 2016.

In addition, the Company has a 2005 Equity Compensation Plan (“2005 Equity Plan”). The 2005 Equity Plan has authorized 1,200,000 shares, of which 477,695 shares had been issued or were reserved for issuance as awards of shares of common stock, and 140,615 shares were reserved for outstanding options as of September 30, 2016. The number of shares available for future issuance pursuant to this plan is 578,772 as of September 30, 2016.

Stock option activity under all of the Company’s share-based compensation plans for the nine months ended September 30, 2016 was as follows:

At September 30, 2016, there was $2,211 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 2.11 years. The intrinsic value of options outstanding and exercisable at September 30, 2016 was not significant. The Company calculates expected volatility for share-based grants based on historic daily stock price observations of its common stock. For estimating the expected term of share-based grants, 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 respect to grants of options, the risk-free rate of interest is based on the U.S. Treasury rates appropriate for the expected term of the grant or award.

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

Restricted stock vests ratably over a three-to-five year period, depending upon the terms of the grant. Employees must remain employed by the Company on each vesting date in order to have unrestricted ownership in these shares; employees who leave before a vesting date forfeit the shares in which they have not yet vested and the issuance of those shares is cancelled. For the three and nine months ended September 30, 2016, 22,000 and 37,250 shares had been cancelled due to forfeiture by employees.

On October 29, 2015, the Company issued 1,000 shares of common stock to a non-employee director for an aggregate fair value of $3.

Total stock based compensation expense was $1,478, and $5,901, including $4,652 that is included in discontinued operations for the nine months ended September 30, 2016 and 2015, respectively, including amounts relating to consultants.

Note 14

Business Segments and Geographic Data:

The Company has organized its business into three operating segments to align its organization 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 mainly from the sales of skincare products; the operating results of the Neova product line were included thru September 15, 2016, the closing date of the asset sale of the Neova product line. See Note 1, Acquisitions and Dispositions, above for more information. The Professional segment generates revenues from the sale of equipment, such as medical and esthetic light and heat based products. Management reviews financial information presented on an operating segment basis for the purposes of making certain operating decisions and assessing financial performance. Unallocated operating expenses include costs that are not specific to a particular segment but are general to the group; included are expenses incurred for administrative and accounting staff, general liability and other insurance, professional fees and other similar corporate expenses. Interest and other financing income (expense), net is also not allocated to the operating segments. Unallocated assets include cash and cash equivalents, prepaid expenses and deposits.

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

Three Months Ended September 30, 2016 (unaudited)

Three Months Ended September 30, 2015 (unaudited)

Nine Months Ended September 30, 2016 (unaudited)

Nine Months Ended September 30, 2015 (unaudited)

For the three and nine months ended September 30, 2016 and 2015 (unaudited), net revenues by geographic area were as follows:

As of September 30, 2016 and December 31, 2015, long-lived assets by geographic area were as follows:

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:

Customer (A) representing retail sales reflected in the Company’s Consumer Segment in the amount of $766 represented approximately 10.6% of consolidated revenues for the three months ended September 30, 2016. Customer (A) representing retail sales reflected in the Company’s Consumer Segment in the amount of $1,836 represented approximately 10.2% of consolidated revenues for the three months ended September 30, 2015. No single customer accounted for more than 10% of total company revenues for the nine months ended September 30, 2016 or for the nine months ended September 30, 2015.

Note 16

Subsequent Event:

On October 4, 2016, PhotoMedex and its subsidiaries Radiancy, Inc., a Delaware corporation (“Radiancy US”), Photo Therapeutics Ltd., a private limited company incorporated under the laws of England and Wales (“PHMD UK”), and Radiancy (Israel) Limited, an Israel corporation (“Radiancy Israel” and, together with the Company, Radiancy, and PHMD UK, “PHMD”) entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with ICTV Brands, Inc., a Nevada corporation (“ICTV Parent”), and its subsidiary ICTV Holdings, Inc. a Nevada corporation (the “Purchaser” and together with together with ICTV Parent, “ICTV”) pursuant to which ICTV will acquire PHMD’s consumer products division, including its no!no!® hair and skin products and the Kyrobak back pain management products (all such consumer products, the “Consumer Products”) and the shares of capital stock of Radiancy (HK) Limited, a private limited company incorporated under the laws of Hong Kong (the “Hong Kong Foreign Subsidiary”), and LK Technology Importaçăo E Exportaçăo LTDA, a private Sociedade limitada formed under the laws of Brazil (the “Brazilian Foreign Subsidiary” and together with the Hong Kong Foreign Subsidiary, the “Foreign Subsidiaries”) (collectively, the “Transferred Business”) from PHMD, for a total purchase price of $9.5 million (the “Purchase Price”) including $3 million in cash at closing, $2 million of cash 90 days after closing collateralized by a letter of credit, and a $4.5 million royalty on future sales of the product line..  The closing (“Closing”) is anticipated to occur no later than 120 days from the date of the Agreement, or by February 1, 2017 (the date of Closing, the “Closing Date”).

The Purchase Price will be paid as follows:

ICTV placed Three Million Dollars ($3,000) in immediately available funds in an escrow account in ICTV’s counsel’s IOLTA Trust Account to be held by ICTV’s counsel as escrow agent under an escrow agreement among PHMD, ICTV and certain investors in ICTV Parent’s securities (the “Escrow Agreement”). These funds will be paid to PHMD on the Closing Date of this transaction.

On or before the ninetieth (90th) day following the Closing Date of this transaction, ICTV will pay PHMD Two Million Dollars ($2,000) in immediately available funds.

The remaining Four Million Five Hundred Thousand Dollars ($4,500) will be paid by ICTV to PHMD under a continuing royalty on net cash (invoiced amount less sales refunds, returns, rebates, allowances and similar items) actually received by ICTV or its Affiliates from sales of the Consumer Products commencing with net cash actually received by the Purchaser or its Affiliates from and after the Closing Date of this transaction and continuing until the total royalty paid to PHMD reaches that amount. Royalty payments will be made on a monthly basis in arrears within thirty days of each month end. PHMD will receive thirty five percent (35%) of net cash actually received by ICTV through Consumer Products sold through live television promotions less certain deductions and six percent (6%) of all other sales of Consumer Products.

The sale of the Transferred Business will result in the disposition of substantially all of PHMD’s assets, requiring shareholder approval of the transaction. To obtain shareholder approval, the Company is obligated under the Asset Purchase Agreement to file the appropriate preliminary proxy documents by October 19, 2016. The Company complied with this requirement.

The Asset Purchase Agreement provides that ICTV will make offers of employment to certain employees of the Transferred Business and that PHMD will not solicit such employees (or any other employees of ICTV) for employment or other services for a period of five years and that PHMD will not compete with ICTV with respect to the Transferred Business for a period of five years.  It also contains customary representations, warranties and covenants by the Company, each of its subsidiaries and ICTV, as well customary indemnification provisions among the parties.

The Closing is subject to customary closing conditions, including, without limitation, the accuracy of all representations and warranties of PHMD and ICTV, the performance of all covenants of PHMD and ICTV, the receipt of all authorizations, consents and approvals of all governmental authorities or agencies or any required consents of third parties, delivery of all documents required for the transfer of the acquired assets, including all intellectual property assignments and lease assignments and the requisite approvals of the shareholders of the Company and ICTV Parent.

The Asset Purchase Agreement may be terminated by mutual written consent of the parties, by PHMD or ICTV if there has been a material misrepresentation or a breach of any covenant or agreement contained in the Asset Purchase Agreement by the other party if such material misrepresentation or breach has not been promptly cured after at least fourteen (14) day’s written notice by the non-offending party, or by PHMD or ICTV if the other party has not met the conditions to closing contained in the Asset Purchase Agreement by February 1, 2017.

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, 2015. 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.

On September 23, 2016, we affected a 1-for-5 reverse stock split of our outstanding common stock, which we refer to herein as the “reverse split”.  Our authorized common stock and the par value of our common stock were not impacted by the reverse split.  Any reference in this Quarterly Report to our capitalization and other matters pertaining to our common stock, relate to our capitalization and common stock after giving effect to the reverse split.

Introduction, Outlook and Overview of Business Operations

PhotoMedex, Inc., re-incorporated in Nevada on December 30, 2010, originally formed in Delaware in 1980, is a Global Health products and services company providing integrated disease management and aesthetic solutions to dermatologists, professional aestheticians and consumers. We provide proprietary products and services that address skin diseases and conditions including acne and photo damage. Our experience in the physician market provides the platform to expand our skin health solutions to spa markets, as well as traditional retail, online and infomercial outlets for home-use products. Through our subsidiary Radiancy, Inc., which was merged into PhotoMedex in 2011, we’ve added a range of home-use devices under the no!no!® brand, for various indications including hair removal, acne treatment, skin rejuvenation, and lower back pain. In addition, our professional product line increased its offerings for acne clearance, skin tightening, psoriasis care and hair removal sold to physician clinics and spas.

After a period of significant growth and profitability following the PhotoMedex-Radiancy merger and concurrent with entering into the Chase Credit Agreement and the merger with LCA-Vision, Inc., the Company began to face a number of factors that caused the operating profitability of its consumer business to suffer. These factors included competition from consumer device companies claiming similar product functionality, the inability to purchase cost effective advertising to promote our consumer product portfolio, and the inability to effectively expand operations into foreign markets. Furthermore, after satisfying on June 23, 2015 the bank covenant defaults of our senior credit facility, we continued to face a challenging media environment to purchase cost effective advertisement in the USA, our largest product distribution market. Coupled with our inability to attract sufficient financial resources to quickly increase our advertisement to overcome the market confusion created by competitors and quickly ramp new and innovative product launches in the second half of the 2015, the company entertained a variety of inquiries to sell-off the remainder of its assets culminating in the February 2016 announcement of a proposed transaction with DSKX whereby PhotoMedex, thru multiple concurrent merger transactions will sell to DSKX substantially all of its remaining operations. On May 27, 2016, the proposed merger transactions with DSKX were terminated and PhotoMedex commenced litigation to recover its expenses and damages. See ITEM 1. Business – Our Company in the Company’s Form 10-K for the year ended December 31, 2015.

We believe that we are one of only a few aesthetic companies to have developed professional technologies geared toward physicians and med spas and adapting them for the home-use market and have successfully sold millions of these products to consumers. Our professional- and consumer-use products are listed below, noting that this is not an exhaustive listing of our product portfolio. The Company has historically financed its activities with cash from operations, the private placement of equity and debt securities, borrowings under lines of credit and in the most recent periods with sale of certain assets and business units. The Company will be required to obtain additional liquidity resources in order to support its operations. The Company is addressing its liquidity needs by seeking additional funding from lenders as well as selling certain of its product lines to a third party. There are no assurances, however, that the Company will be able to obtain an adequate level of financial resources required for the short and long-term support of its operations. In light of the Company’s recent operating losses and negative cash flows, the termination of the pending merger agreement (see Acquisitions and Dispositions below) and the uncertainty of completing further sales of its product lines, there is no assurance that the Company will be able to continue as a going concern.

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

On October 4, 2016, the Company entered into an Asset Purchase Agreement for the sale of its Consumer Division for $9.5 million, including $5 million in cash plus a $4.5 million royalty agreement. (see Note 16 Subsequent Event and Acquisitions and Dispositions).

Key Technology Platforms

Our revenue generation is categorized as Consumer, Physician Recurring or Professional. Each of our segments benefit from the combination of our proprietary global consumer marketing engine with our direct sales force for U.S. physicians, and are described below:

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 North America, Japan and Europe.

Our consumer marketing platform is built upon a proprietary direct-to-consumer sales engine and creative marketing programs that drive brand awareness. It is highly dependent upon the ability to procure cost effective advertising media to reach our targeted customer, particularly short-form TV advertising.

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:

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 $4 million and $10 million for the three months ended September 30, 2016 and 2015, respectively. Our consumer distribution segment in North America had sales of approximately $15 million and $35 million for the nine months ended September 30, 2016 and 2015, 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 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.

International (excluding North America). In the international consumer segment, sales were approximately $3 million and $6 million for the three months ended September 30, 2016 and 2015, respectively. In the international consumer segment, sales were approximately $11 million and $17 million for the nine months ended September 30, 2016 and 2015, respectively. We utilize various sales and marketing methods including sales by direct-to-consumer, sales to retailers and home shopping channels. Our main international targeted markets include Asia Pacific, Europe and South America. (See Note 16 Subsequent Event and Acquisitions and Dispositions).

Physician Recurring

Physician recurring sales primarily include those generated from our NEOVA® skin care product line. NEOVA® skin care is a topical therapy combining DNA repair enzymes and copper peptide complexes to prevent premature skin aging. NEOVA represents a recurring revenue stream 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 NEOVA products.

NEOVA®

Sales of the NEOVA skin care products at present are driven by physicians, who act as spokespersons to their patients in support of the NEOVA line. We have historically marketed to physicians in the dermatology and plastic surgery field, but plan to supplement these efforts with a direct-to-consumer approach to lead consumers into those physician practices. NEOVA addresses a sizeable global market for anti-aging skin care products. In addition, we had 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.

The asset sale of the Neova product line was completed on September 15, 2016; see Note 1, Acquisitions and Dispositions, above for more information.

Professional

Sales under the professional business segment are mainly generated from capital equipment, namely our LHE® brand products.

Prior to the sale of the Neova product line on September 15, 2016, we utilized a 9 person sales and marketing team calling directly on a network of approximately 2,000 physician locations in the U.S. to distribute the LHE-based professional products. As a result of the sale of that business line, we are transitioning the marketing and sales of these products to medical device distributors. For markets outside the United States, we already rely upon medical device distributors to promote our products to these markets.

The LHE® brand Technology combines direct heat and a full-spectrum light source to give a greater treatment advantage for acne care, skin tightening, skin rejuvenation, wrinkle reduction, collagen renewal, vascular and pigmented lesion treatments, and hair removal. Using LHE®, the Mistral intelligent phototherapy medical device can treat a larger spot size than a laser with less discomfort. In addition, our research finds that LHE offers meaningful results for thin, light hair. The technology is also used in the no!no! Skin™, a handheld consumer product sold worldwide under the no!no!® brand. The no!no! Skin™ is a 510(k)-cleared product that has been clinically shown to reduce acne by 81% over 24 hours.

Sales and Marketing

As of September 30, 2016, our sales and marketing personnel consisted of 35 full-time positions.

Critical Accounting Policies and Estimates

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, 2015. In Note 1 to the consolidated financial statements for the three and nine months ended September 30, 2016 we have updated our critical accounting policies and estimates to reflect conditions that raise doubt about the Company’s ability to continue as a going concern and that the accompanying financial statements do not include any adjustments to reflect possible future effects on recoverability and classification of liabilities that may result from the outcome of this uncertainty.

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 three business segments for the periods indicated below:

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 September 30, 2016, consumer products revenues were $6,142 compared to $15,994 in the three months ended September 30, 2015. For the nine months ended September 30, 2016, consumer products revenues were $25,724 compared to $51,659 in the nine months ended September 30, 2015. The decrease of 61.6% and 50.2% during the periods, respectively, was mainly due to the following reasons:

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

Physician Recurring Segment

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

NEOVA skincare

For the three months ended September 30, 2016, revenues were $840 compared to $1,074 for the three months ended September 30, 2015. For the nine months ended September 30, 2016, revenues were $3,302 compared to $3,785 for the nine months ended September 30, 2015. 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 decrease in revenues in the three and nine month periods is generally due to a customer in the hair restoration business discontinuing purchasing a specific product line designed for use in that type of procedure. The asset sale of the Neova product line was completed on September 15, 2016; see Note 1, Acquisitions and Dispositions, above for more information.

Surgical products

For the three months ended September 30, 2016 and 2015, revenues were $0 and $203, respectively. For the nine months ended September 30, 2016 and 2015, revenues were $0 and $856, respectively. Effective September 1, 2015, PhotoMedex, Inc. and its subsidiary, PTECH, entered into an asset purchase agreement and a supplemental agreement (together, the “SLT Asset Purchase Agreement”) with DaLian JiKang Medical Systems Import & Export Co., LTD, (“JIKANG”).  Under the SLT Asset Purchase Agreement, JIKANG acquired the SLT® surgical laser business (the “Transferred Business”) from PTECH, for a total purchase price of $1.5 million (the “Purchase Price”).  The Company received net approximately $1.2 million after payment of closing and ancillary costs.

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

Professional Segment

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

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 September 30, 2016 and 2015, LHE® brand products revenues were $276 and $320, respectively. For the nine months ended September 30, 2016 and 2015, LHE® brand products revenues were $708 and $1,098 respectively.

Omnilux/Lumiere equipment

For the three months ended September 30, 2016 and 2015, Omnilux/Lumiere equipment revenues were $0 and $369, respectively. For the nine months ended September 30, 2016 and 2015, Omnilux/Lumiere equipment revenues were $0 and $958, respectively. These revenues are generated from the sale of LED devices. On June 30, 2016 the Company completed the sale to The Lotus Global Group, Inc. of all of the tangible and intangible assets of the Omnilux product line.

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

Cost of Revenues: all segments

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

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

Gross Profit Analysis

Gross profit decreased to $5,771 for the three months ended September 30, 2016 from $13,657 during the same period in 2015. As a percentage of revenues, the gross margin was 79.5% for the three months ended September 30, 2016 and 75.9% during the same period in 2015. Gross profit decreased to $22,139 for the nine months ended September 30, 2016 from $44,681 during the same period in 2015. As a percentage of revenues, the gross margin was 74.5% for the nine months ended September 30, 2016 and 76.3% during the same period in 2015.

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

The primary reasons for the changes in gross profit for the three and nine months ended September 30, 2016, compared to the same period in 2015, were due mainly to decreases in direct response revenues as well as home shopping and retailers within the Consumer segment. The gross margin percentage increased for the three months ended September 30, 2016 as compared to the same period in the prior year as a result of a change in product mix of consumer products sold, particularly no!no! hair removal products classified as local assembly. The consumer margin percentage improvements for the three month period comparison were offset by decreases in the gross margins realized from the Physician Recurring segment revenues for the nine months ended September 30, 2016, particularly the margins realized on the Neova skin care products. The Neova product line was sold in September 2016.

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

Gross profit for the three and nine months ended September 30, 2016 decreased by 7,414 and $20,424 from the comparable periods in 2015. The key factor for these decreases were the decrease in all channels of consumer revenues particularly the direct-to-consumer channel which typically generated higher gross margins than the other consumer channels. The gross margin percentage increased for the three months ended September 30, 2016 as compared to the same period in the prior year as a result of a change in product mix of consumer products sold, particularly no!no! hair removal products classified as local assembly.

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

Gross profit for the three and nine months ended September 30, 2016 decreased by $411 and $1,486, respectively from the comparable periods in 2015. The primary reason for the changes in gross profit and gross margin is due to the decrease in skincare revenues from a customer in the hair restoration business for a specific product line that has a lower gross margin than other skin care products in this business segment. The asset sale of the Neova product line was completed on September 15, 2016; see Note 1, Acquisitions and Dispositions, above for more information.

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

Gross profit for the three and nine months ended September 30, 2016 decreased as a result of lower equipment sales for each period and the decrease in the gross margin percentage for each period reflects a change in the product mix of equipment sold in the comparable periods.

Engineering and Product Development

Engineering and product development expenses for the three months ended September 30, 2016 increased to $326 from $239 for the three months ended September 30, 2015. Engineering and product development expenses for the nine months ended September 30, 2016 increased to $983 from $967 for the nine months ended September 30, 2015. The majority of this expense relates to the salaries of our worldwide engineering and product development team and both personnel levels and committed expenses were reduced.

Selling and Marketing Expenses

For the three months ended September 30, 2016, selling and marketing expenses decreased to $4,529 from $14,277 for the three months ended September 30, 2015. The decrease was primarily for the following reasons:

For the nine months ended September 30, 2016, selling and marketing expenses decreased to $18,757 from $46,371 for the nine months ended September 30, 2015. The decrease was primarily for the following reasons:

General and Administrative Expenses

For the three months ended September 30, 2016, general and administrative expenses decreased to $2,894 from $3,450 for the three months ended September 30, 2015. The decrease was due to the following reasons:

For the nine months ended September 30, 2016, general and administrative expenses decreased to $9,791 from $12,463 for the nine months ended September 30, 2015. The decrease was due to the following reasons:

Impairment

On October 4, 2016, the Company entered into an Asset Purchase Agreement for the sale of its Consumer Division for $9.5 million, including $5 million in cash plus a $4.5 million royalty agreement. (see Note 16 Subsequent Event and Acquisitions and Dispositions). The Company performed an impairment analysis of its goodwill and other intangibles comparing its existing carrying values against the projected net proceeds expected from the pending transaction for the Consumer Division. As a result of this analysis, the Company recorded an impairment of its goodwill in the amount of $2,257 and an impairment of its Licensed Technology intangibles in the amount of $1,261 for a total of $3,518 impairment for the three months ended September 30, 2016.

Loss on Sale of Assets (see also Note 1 Acquisitions and Dispositions)

On September 15, 2016, the sale of the Neova skin care product line was completed for an amount of $1.8 million. A loss on the sale of assets was recorded in the amount of $1,731 for the three months ended September 30, 2016. On March 31, 2016 the Company completed the sale of the Omnilux product line in the amount of $220. The Company recorded a loss in the amount of $843. Consequently, the loss on the sale of assets for the nine months ended September 30, 2016 was $2,574.

Interest and Other Financing Expense, Net

Net interest and other financing income for the three months ended September 30, 2016 increased to $88 from an expense of $332 for the three months ended September 30, 2015. The reduction in expense is mainly due to a decrease in interest expense.

Net interest and other financing expense for the nine months ended September 30, 2016 decreased to $537 from $936 for the nine months ended September 30, 2015. The decrease of $399 is due to a decrease in interest expense. 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 September 30, 2016, the net tax expense amounted to $278 as compared to $658 for the three months ended September 30, 2015. For the nine months ended September 30, 2016, the net tax expense amounted to $506 as compared to a net tax benefit of $2,919 for the nine months ended September 30, 2015.

Net Income (Loss)

The factors described above resulted in net loss of $7,417 during the three months ended September 30, 2016, as compared to a net loss, including discontinued operations, of $5,109 during the three months ended September 30, 2015, an increase of 45%. The factors described above resulted in net loss of $14,652 during the nine months ended September 30, 2016, as compared to a net loss, including discontinued operations, of $9,062 during the nine months ended September 30, 2015, an increase of 61%.

Liquidity and Capital Resources