Item
1. Business
Our Company
(dollar
amounts in thousands except where indicated and for per-share amounts)
PhotoMedex, Inc.,
re-incorporated in Nevada on December 30, 2010, originally formed in Delaware in 1980, and until the recent sale of the Company’s
last significant business unit, as described below and in other sections of this report, has been a Global Health products and
services company providing integrated disease management and aesthetic solutions to dermatologists, professional aestheticians
and consumers. We have provided proprietary products and services that address skin diseases and conditions including acne and
photo damage. Our past experience in the physician market has provided 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, our professional product line increased its offerings using Radiancy’s LHE
medical device portfolio to include 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. During this time the Company
has also sold off certain business units and product lines to support this restructuring culminating in PhotoMedex’s shareholders
approving the sale of its consumer products division to ICTV Brands, Inc. on January 23, 2017, which represented the sale of substantially
all of the Companies remaining assets (See Acquisitions and Dispositions - Pending Transaction below and Note 18 - Subsequent
Event).
Reasons for
the Asset Sale
The decision by the
Board to approve the entry into the Asset Purchase Agreement with ICTV was based on a careful evaluation of the Company's strategic
alternatives following an extensive strategic review process. Over the past two years, in an effort to find a buyer for this business,
over 151 entities were contacted; only a few entities then entered into a non-disclosure agreement with the Company to conduct
due diligence work, and none of those entities then made an offer for the business. Due to the Company’s financial condition
and the uncertainty of the Company’s ability to continue as a going concern, the Company did not engage financial and legal
advisors to prepare a fairness opinion on the ICTV deal, as such an opinion would be quite expensive and would strain the Company’s
remaining financial resources. In addition, the Company did not feel a fairness opinion was necessary considering so much effort
had been put into finding a suitable candidate and yet the Company ended up with only one offer for the purchase of the Radiancy
Consumer Products Business, so it appeared there were no other offers available. After considering the Company's strategic alternatives,
the opportunities for the rather immaterial operational assets following the sale of the Consumer Business, the Board determined
that the sale of the Radiancy Business pursuant to the terms of the Asset Purchase Agreement was desirable and in the best interests
of the Company.
Our Board considered
a number of factors before deciding to enter into the Asset Purchase Agreement, including, among other things, the price to be
paid by the Purchaser, the strategic and financial benefits that the Asset Sale will provide to the Company, the Company’s
extensive search process with respect to the sale of the Radiancy Business that led the Company to enter into the Asset Purchase
Agreement, the future business prospects of the Radiancy Business and the terms and conditions of the Asset Purchase Agreement.
Our Board also considered the Company’s current financial condition, including that without an imminent injection of cash,
we would likely default on certain outstanding indebtedness that could lead to the Company’s bankruptcy or liquidation.
Ultimately, the Board
of Directors concluded that the price offered by ICTV was a fair offer for the consumer products division, given that the Asset
Sale to ICTV represented the only deal available to the company that would likely close in a timely manner, that the previous
deal would not be resumed as it was beyond the current capability of DS Healthcare, that the alternative of bankruptcy would wipe
out shareholder equity and likely result in little to no payments to vendors, and that the Asset Sale would provide the Company
with a cash infusion to achieve the following considerations and objectives:
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The
sale to ICTV would provide cash to the Company by which to pay outstanding debts to vendors
and creditors.
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In
the process of locating buyers for the assets or finding alternative sources of financing,
the management and Board members agreed to forebear on employment and board related payments
in order to preserve the Company’s liquid assets and allow for its survival.
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While
there were certain outstanding payments that are due to the Board, those payments were
not a defining concern to the Board during its review as the Board was seeking the best
option it could find for the Company at that time. This was especially the case considering
the Company only ever had a couple offers available to it and, ultimately, only ended
up with one offer for final consideration. Without the sale of the consumer products
division to ICTV, and as there were no other offers to purchase the Radiancy consumer
products division available at the time, the Company would have no choice but to declare
bankruptcy. The Board was well aware of this situation and, as a result, was not
in a position to place its compensation issues front and center and, instead, is simply
trying to complete a sale of the Assets so as to protect the Company from declaring bankruptcy.
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A
primary consideration for the board was the ability to resolve the outstanding payables
to the Company’s trade creditors, while
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allowing
the Company space to determine what could be done with the relatively immaterial remaining
LHE business assets, and
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providing
a clear path to enter into possible strategic transactions with regard to the Company,
thus
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allowing
the Company to resume growth and provide some return to its shareholders.
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Absent
the completion of this transaction, the Board believed that PhotoMedex would have little
recourse but to enter into a restructuring through bankruptcy.
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The
Board believed that entering into bankruptcy would likely reduce shareholder value significantly
and result in vendors and other creditors of the Company receiving little return on their
debts.
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As
a result, the Board believes that the sale of the consumer products division to ICTV
is to the benefit of the company as the sale will allow the Company to continue its existence,
satisfy its debts, and explore methods of increasing investment return to its shareholders.
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As stated above,
PhotoMedex has been engaged in an exhaustive and a multi-pronged effort over the past two and a half years to sell its consumer
products division, either as an individual asset sale or through the sale of the subsidiary owning the Radiancy, Inc. division.
Following the purchase
of LCA-Vision, Inc. (see Acquisitions and Dispositions, below), PhotoMedex defaulted upon its credit agreement (the “Credit
Agreement”) with JP Morgan Chase in May 2014. At the time of the default, the entire $85 million credit arrangement under
the Credit Agreement was outstanding. As a result of that default, and as a condition of the forbearance agreements that we had
entered into with the Bank, the Company began marketing its various product divisions, both as independent offerings and as components
in the overall sale of PhotoMedex itself, to numerous entities in order to obtain the funds to repay that Credit Agreement. The
entire $85 million, plus applicable interest, was repaid in full to JP Morgan Chase in June 2015 following the sale of the Company’s
LCA and XTRAC product divisions.
Beginning in mid-2014,
PhotoMedex contracted with two investment banks (Canaccord Genuity, LLC and Nomura Securities, Inc.) to sell one, several or all
of its product divisions and the Company itself. Through this process, Nomura contacted a total of 151 parties including financial
sponsors and strategic parties for the Radiancy Business and/or parties who could provide incremental working capital to the Company.
This process yielded 36 interested parties that signed a Non-Disclosure Agreement (NDA), and, subsequently, conducted a due diligence
investigation of this division, including meetings with management, facility visits, and document review through a data room.
None of these parties submitted Letters of Interest (LOI) for the purchase of the division.
While other sales
of the LCA and XTRAC divisions were concluded and were monetarily sufficient to pay off in full the defaulted Credit Agreement,
PhotoMedex’s overall finances had been negatively affected as a result of the default and the resulting prolonged forbearance
workout process.
In the middle of
2015, after failing to locate a buyer for the consumer division, PhotoMedex terminated its engagement with Nomura as an investment
bank. In light of its ongoing financial constraints, PhotoMedex engaged in short term lending facilities and continued to explore
avenues to sell one or more of its business lines in order to raise needed capital for the Company. In particular, PhotoMedex
made multiple attempts to market and sell the consumer products division. Following the termination of Nomura as an investment
advisor, Photomedex maintained an active data room and entertained several entities that signed NDAs including Hawk Capital, Femme
Pharma, Aerus Health, and the three entities which indicated interest in purchasing the consumer division and ultimately provided
Letters of Intent: DS Healthcare, Viatek Consumer Products Group, Inc., and ICTV Brands, Inc.
In May 2015, the
Company was introduced to the principals of DS Healthcare which led to our mutual companies entering into a series of agreements
by which DS Healthcare would purchase not just the consumer products division, but Radiancy, Inc. itself, another subsidiary,
PhotoMedex Technology, Inc. including its Neova skincare product line, as well as ancillary foreign subsidiaries and assets. However,
as disclosed in the Company’s previous filings under Forms 8-K, 10-K and 10-Q, DS Healthcare had withheld material information
from PhotoMedex during those negotiations, information which became public after the signing of the agreements to sell those assets
and the public disclosure of the proposed transaction. That information resulted in a breach by DS Healthcare of the signed agreements
and the resulting cancellation of the transaction with that company.
PhotoMedex then attempted
to contact other parties who had, in the past, expressed an interest in purchasing the division, but at this time those parties
were no longer interested in obtaining this product group. The only parties who expressed interest were Viatek Consumer Products
Group, Inc., and ICTV Brands, Inc.
Viatek’s interest
was in part an interest in the business and in part an attempt to settle ongoing patent infringement and commercial litigation
between Radiancy, Inc. and Viatek. PhotoMedex entered into due diligence and negotiations with Viatek, as described in Background
of the Asset Sale beginning on page 57. While Viatek provided an initial LOI, it then immediately began attempting to re-negotiate
the deal, continually trying to lower the purchase price and more particularly, lower the guaranteed cash portion of the transaction.
PhotoMedex was also
engaged in discussions with ICTV Brands. Its initial offer with regard to the consumer products division was not a purchase, per
se, but rather a licensing agreement for the products of that division which would contain no specific guarantees with regard
to payments to be received by the Company. As a result, at the time, PhotoMedex favored the Viatek transaction, both because it
did provide some level of guaranteed cash payments and because it would also resolve longstanding litigation between the parties.
However, Viatek’s
continuous attempts to lower the purchase price and the amount of guaranteed cash to be paid was a cause for concern by the board
of PhotoMedex, particularly in light of Viatek’s past history of walking away from financial transactions. Under the terms
of the Viatek LOI, PhotoMedex had agreed to a no-shop provision, and while that agreement was in force, the Company was restricted
from seeking alternative buyers. At the time the board was re-evaluating the Viatek transaction, and attempting to reach an agreement
with Viatek to terminate the LOI and settle the patent litigation, ICTV returned with a structured proposal to purchase the consumer
products division in its entirety, with a guaranteed cash payment, a second payment guaranteed by a Letter of Credit, and then
a royalty payment based upon future revenue streams.
The Board reviewed
and compared the two transactions. Given that the ICTV Brands offer provided a final negotiated asset purchase agreement, guaranteed
a higher cash payment and a longer-term royalty and thus a higher return to the Company, as compared to Viatek’s continued
attempts to lower the transaction price while eliminating the upfront cash payment, the board determined that the ICTV Brands
offer was a superior offer for the consumer products division.
Moreover, while the
ICTV price was lower than that offered by DS Healthcare, the DS Healthcare offer was an all-stock deal which, if converted at
the last traded price for DS Healthcare’s stock ($0.66/share) would be equal to or lower than the ICTV cash offer. At that
time, there were no other offers for the product line, despite repeated and multiple attempts to market the line to other parties
over the preceding two years. The DS Healthcare transaction had been terminated. DS Healthcare was not, at that time and to this
day, in a legal or financial condition to close the transaction, given that it was not in compliance with its filings before the
U.S. Securities and Exchange Commission and that its finances and stock price had materially suffered as a result of the events
involving its board and executive officers. The only other offer on the table for the division was from a company, Viatek, which
had already lowered its offer multiple times and was, at the time PhotoMedex received the offer from ICTV, attempting to lower
its offer yet again and to remove any guaranteed cash payments from the offer.
The board recommended
the sale of the division and the PhotoMedex shareholders agreed by approving the transaction on January 19, 2017 for several reasons.
The sale to ICTV would provide cash to the Company with which to pay outstanding debts to vendors and creditors. In the process
of locating buyers for the assets or finding alternative sources of financing, the management and board members agreed to forebear
on payment of salaries and board-related payments to reduce the Company’s financial obligations and allow the Company to
survive. While there were certain outstanding payments that are due to the board, those payments were not a defining concern to
the board during its review. While the board was aware it would likely receive no compensation in the event of a bankruptcy reorganization,
neither would the vendors or shareholders likely reach a favorable outcome in such a case. Thus, what was of greater concern was
the ability to resolve the outstanding payables to the Company’s trade creditors, which would be necessary in order to allow
the Company space to begin marketing its remaining LHE business line, and also offer a clear path to enter into possible strategic
transactions with regard to the Company, which would allow the Company the opportunity to resume its growth and provide some return
to its shareholders. Absent completion of this transaction, PhotoMedex would have no recourse but to enter into a restructuring
through bankruptcy, which would wipe out all shareholder value and guarantee that the shareholders, vendors and other creditors
of the Company would receive little to no value on their debts and investments. As a result, the board does not believe there
were any negative factors with regard to the sale of the consumer products division to ICTV, as the sale will allow the Company
to continue its existence, satisfy its debts, and explore methods of increasing the investment return to its shareholders.
Activities of PhotoMedex Following the Asset Sale
Following the Asset
Sale, the Company plans to primarily focus on collecting the remaining payments, if any, from ICTV under the Letter of Credit,
as well as any ongoing royalty payments (up to a maximum of $4.5 million in royalty payments from ICTV). We will also continue
to defend and prosecute the existing litigation involving the Company (including the claim by the Company against DS Healthcare
regarding the failed acquisition earlier in 2016), and will consider other strategic investments or alternatives for the Company
including merger opportunities to build shareholder value as well as to determine what can be done to create value out of the
remaining LHE assets despite their relatively immaterial value.
Liquidity and
Going Concern
As of December 31,
2016, the Company had an accumulated deficit of $115,635 and shareholders deficit of $1,408. 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 December 31, 2016 were $2,677, 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 collecting amounts due from past sales of business assets and amounts due from asset sales that occurred after the year
ending December 31, 2016 (see Acquisitions below and in other areas of this report). 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 collecting further amounts due from 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 $253 from the Neova Escrow Agreement (see Acquisitions and Dispositions below). Restricted cash also includes
$89 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 payable
in two tranches ($3 million at closing and $2 million 90 days after closing) plus a $4.5 million royalty agreement. (See Note
18 Subsequent Event and Acquisitions and Dispositions below). On January 23, 2017, the Company entered into a First Amendment
(the “First APA Amendment”) to the Asset Purchase Agreement. This transaction was completed on January 23, 2017.
All references to
the Neova, the Consumer or Radiancy business and/or XTRAC product divisions within this Form 10-K are intended for historical
purposes only and for the interpretation of past revenue and business results, and do not form a part of the Company’s future
business and revenue plans.
Acquisitions and Dispositions
(dollar amounts in thousands except where indicated and for per-share amounts)
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 year ended December 31, 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.
The Company used the proceeds from the
sale of the LCA and XTRAC/VTRAC transactions to fully pay off and satisfy the $85 million senior secured credit facilities entered
into with JP Morgan Chase as part of financing 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 2016), 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 year ended December 31, 2016.
Sale of Neova
product line
On August 30, 2016,
the Company 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 year ended December 31, 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.
There is not expected to be any working capital adjustment as of the measurement date which was 60 days after closing.
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.
Sale of Radiancy
Consumer Products line
On October 4, 2016,
the Company 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 Purchase Price will be paid as follows:
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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.
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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.
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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.
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As part of this Transaction,
ICTV will also acquire from PHMD all of the shares of capital stock of the Foreign Subsidiaries.
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.
In connection with
the sale of the Transferred Business, on October 4, 2016, the parties entered into an Escrow Agreement and a Transition Services
Agreement.
Under the Escrow
Agreement, ICTV deposited $3,000 of the Purchase Price into an escrow account which will be released to PHMD upon closing.
Under the Transition
Services Agreement, PHMD will continue to provide certain accounting, benefit, payroll, regulatory, IT support and other services
to ICTV for periods ranging from approximately three to up to nine months following the Closing. During those periods, ICTV will
arrange to transition the services it receives to its own personnel. In consideration for such services, ICTV will pay to
PHMD the documented costs and expenses incurred by PHMD in connection with the provision of those services and the documented
lease costs including monthly rental and any utility charges incurred under the applicable leases and will reimburse PHMD for
the documented costs and expenses incurred for the continued storage of inventory and raw materials at warehouse locations, and
for services for fulfilling and shipping orders for such inventory and the payroll, employment-related taxes, benefit costs and
out of pocket expenses paid to or on behalf of employees. ICTV shall also have the right to continue occupying certain portions
of the Orangeburg, New York facility of PHMD’s Radiancy, Inc. subsidiary for a period of time.
Also on January 23,
2017, (the “Closing Date”), the Company and its subsidiaries completed the disposition of the Transferred Business
to ICTV. On that date, pursuant to the terms of the Asset Purchase Agreement as amended, ICTV 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 on the Closing Date an initial net payment from ICTV of $3.0 million.
Upon entering into
the ICTV asset purchase agreement, the Company recorded an impairment of the consumer segment’s goodwill in the amount of
$ 2,257 and intangible asset in the amount of $1,261 for the period ended September 30, 2016. Consequently, the Company is not
expected to record significant gain or loss from the transaction contemplated under the Asset Purchase Agreement upon closing
in January 2017 (see Note 18 Subsequent Event and Acquisitions and Dispositions).
On January 23, 2017,
PhotoMedex, Inc. (the “Company”) (Nasdaq and TASE: PHMD) and its subsidiaries Radiancy, Inc., (“Radiancy”),
PhotoTherapeutics Ltd. (“PHMD UK”), and Radiancy (Israel) Limited, (“Radiancy Israel” and, together with
the Company, Radiancy, and PHMD UK, the “Sellers” and each, a “Seller”) entered into a First Amendment
(the “First APA Amendment”) to the Asset Purchase Agreement (the “Asset Purchase Agreement”) between the
Company and its subsidiaries, and ICTV Brands Inc. (“Parent”) and ICTV Holdings, Inc. (“Purchaser” and
together with Parent, the Company, Radiancy, PHMD UK and Radiancy Israel, the “Parties” or singularly a “Party”)
under which Purchaser agreed to acquire the consumer products division of PhotoMedex and its subsidiaries (the “Acquisition”),
which includes, among other products, the no!no!® Hair and Skin and the Kyrobak pain management products (the “Transferred
Business”). This transaction was previously reported on a Current Report filed on Form 8-K on October 5, 2016 and in a Definitive
Proxy on Schedule 14A on December 16, 2016.
The First APA Amendment
revised the definition of Business Assets and Assumed Liabilities in the Asset Purchase Agreement, as set forth in the attached
exhibit. It also modified the first sentence of Section 5.5(b) of the Asset Purchase Agreement to provide that the Parent, Purchaser,
or an affiliate would take the necessary steps to establish and implement “employee benefit plans” within the meaning
of Section 3(3) of ERISA and a 401(k) plan intended to be qualified under Section 401(a) of the Code (collectively, “Applicable
Plans”) in which employees of the consumer products division who are hired by Purchaser shall be eligible to participate
from and after the date of establishment. These steps are to be taken as soon as reasonably practicable after the Closing Date
(defined below) of the Transaction, or a later date agreed to by the Parties or permitted under the Transition Services Agreement
(defined below), but no later than 60 days after the Closing Date. The First APA Amendment also replaced the initial Disclosure
Letter delivered by the Sellers to Purchaser concurrently with the execution of the Asset Purchase Agreement in its entirety with
an amended Disclosure Letter.
Finally, the First
APA Amendment modified the Letter of Credit issued in connection with the Asset Purchase Agreement. Under the Asset Purchase Agreement,
the Purchaser agreed to pay to the Company $2.0 million on or before the ninetieth (90th) day following the Closing Date. This
amount is guaranteed by an original letter of credit for the benefit of the Company made by a third party; however, under its
original terms, the Letter of Credit was valid until the earlier of 180 days after the letter of credit was issued, or April 4,
2017, or until full payment upon demand and presentation on or January 3, 2017. Accordingly, the parties agreed to extend the
term of the Letter of Credit to 100 days after the Closing Date.
Also on January 23,
2017, the Company and its subsidiaries entered into a First Amendment (the “First TSA Amendment”) to the Transition
Services Agreement (the “Transition Services Agreement”) between the Company and its subsidiaries and Parent and Purchaser,
pursuant to which the Company and its subsidiaries will provide the Purchaser with certain accounting, benefit, payroll, regulatory,
IT support and other services for periods ranging from approximately three to up to one year following the Closing Date. During
that time the Purchaser will arrange to transition the services it receives to its own personnel. The First TSA Amendment revised
references in the Transition Services Agreement from “Effective Date” to “Closing Date”, and amended the
fifth recital in its entirety to clarify specifications regarding the lease for certain premises in Israel by and between Radiancy
Israel and the landlord for those premises. Furthermore, the sale of assets to ICTV Brands, Inc. represented the sale of substantially
all the remaining operational assets of the Company. Consequently, the Company did not present discontinued operations in respect
of the sale of the remaining consumer products because the Company had immaterial remaining operations.
TERMINATION
OF PENDING TRANSACTION
On February 19,
2016, the Company, 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.
Discontinued Operations
As stated above,
on May 12, 2014, the Company acquired LCA.
LCA is a provider
of fixed-site laser vision corrections services at its LasikPlus® vision centers. This business, from May 2014 through December
31, 2014, was a fourth business segment for the Company, referred to as the Clinics Segment, through which the Company briefly
provided fixed-site laser vision correction services at its Lasik
Plus
®
vision centers.
Effective January
31, 2015, influenced by the Chase Credit Agreement defaults of August 2014 and after preliminary investigations and discussions,
the Company, and LCA entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") with Vision Acquisition,
LLC ("Vision"), under which Vision acquired LCA and its subsidiaries from PhotoMedex for a total purchase price of $40
million in cash (the "Purchase Price"). After giving effect to working capital and indebtedness adjustments and the
payment of professional fees, the Company realized net proceeds of approximately $37.7 million from this sale. The Company used
the proceeds from this transaction to pay down portions of its outstanding revolving line of credit and term loan under the Credit
Agreement.
Based on the above
information, the Company accordingly classified this former segment as held for sale and discontinued operations in accordance
with ASC Topic 360. For the statement of operations, the activity related to LCA is captured as discontinued operations through
the disposal date of January 31, 2015.
XTRAC® EXCIMER LASERS
XTRAC is an excimer
laser technology used to treat psoriasis and other skin diseases for which there are no cures.
Also influenced by
the Chase Credit Agreement default occurring in August 2014 and continuing until the debt was repaid in June of 2015, the Company,
entered into a Purchase Agreement (the "Purchase Agreement") with MELA Sciences, Inc. ("MELA"), under which
MELA acquired the XTRAC business and its India subsidiary from PhotoMedex for a total purchase price of $42.5 million in cash
(the "Purchase Price") including an escrow of $750.
Based on the above
information, the Company accordingly classified these related assets as held for sale and discontinued operations in accordance
with ASC Topic 360. For the statement of operations, the activity related to the XTRAC business is captured as discontinued operations
thru the disposal date of June 22, 2015.
Our Key Strategies
Our technologies,
products and research efforts have been directed to addressing a worldwide aesthetic industry valued at more than $34 billion
annually. In December 2011, PhotoMedex merged with Radiancy Inc. which brought to PhotoMedex the no!no!® line of home-use
consumer products for hair removal, acne treatment, skin rejuvenation and lower back pain. Radiancy also markets capital equipment
to physicians, salons and med spas for hair removal, acne treatment, skin tightening and rejuvenation and psoriasis care. In addition
to a synergistic product line, Radiancy possesses a proprietary consumer marketing engine built upon direct-to-consumer sales
and creative marketing programs that drive brand awareness
.
After a period of significant growth and profitability following
the PhotoMedex-Radiancy merger and then 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 sale of the Neova and
consumer products lines as reported above.
See above – Our Company, Acquisitions and Dispositions
for more
information.
Following these product
line and asset sales, the Company plans to focus primarily on collecting the remaining payments, if any, from ICTV under the Letter
of Credit, as well as any ongoing royalty payments (up to a maximum of $4.5 million in royalty payments from ICTV). We will also
continue to defend and prosecute the existing litigation involving the Company (including the claim by the Company against DS
Healthcare regarding the failed acquisition earlier in 2016), and will consider other strategic investments or alternatives for
the Company including merger opportunities to build shareholder value as well as to determine what can be done to create value
out of the remaining LHE assets despite their relatively immaterial value.
Expertise in
Global Consumer Marketing
Until the recent
sale to ICTV in January 2017, we had developed and owned a highly advanced consumer sales engine accompanied by creative marketing
programs, well-tested and successful direct-to-consumer marketing strategies and a global distributor and retail network. That
network was used to market the no!no!® products throughout the world and in multiple countries, through infomercials and print,
radio other television advertising worldwide, online, on home shopping channels and at stores and kiosks.
Our Global Growth Strategies
The global market
for aesthetic devices and procedures continues to expand, driven by an individual desire to improve one’s appearance; a
higher disposable income being spent on aesthetic treatments; an aging population in the industrialized world that desires a more
youthful look; a younger generation seeking preventive solutions for the inevitable aging process; technological advances making
products available to a consumer market that were previously only possible at the physician level; an increasing number of conditions,
including acne and wrinkles, that can now be non-invasively treated; and a lower procedural cost, which has expanded the availability
and affordability of many procedures to a greater number of individuals.
We had focused our
efforts on addressing the above-mentioned trends in all three of our core business segments including the consumer and physician
recurring segments, (which the product portfolio underlying each of these two business segments have now been sold to third parties
– see Sale of Consumer product line and Sale of Neova product line above) and the professional segment. We are now primarily
focused on collecting the remaining payments, if any, from sales of business assets. We will consider other strategic investments
or alternatives for the Company, including merger opportunities to increase shareholder value as well as determine what can be
done to create value out of the remaining LHE assets despite their relatively immaterial value.
In the last two years
our three main sources of revenue have been generated from our three business segments: the Consumer segment, the Physician Recurring
segment and the Professional segment. The remaining LHE product lines generates revenue as part of the Professional segment. We
also operated the XTRAC business through June 22, 2015 which generated Physician Recurring revenues from our USA business and
Professional revenues from our International operations.
Consumer Segment
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Selectively
expand into additional geographic markets.
Part of our growth strategy included implementing
a global multichannel sales and marketing strategy. Our ability to grow organically was
significantly dependent upon the ability to advertise our products locally in a cost
effective manner. The availability of cost effective advertising was irregular and volatile
at times. We continued to explore ways to expand our product distribution efforts to
selective foreign markets where we could effectively advertise our products to our targeted
demographic audience. Although our subsidiary operations are much more limited following
the sale of the consumer business to ICTV in January 2017, we continue to have operations
in North America, United Kingdom, Israel and Hong Kong.
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Market for sale
the LHE product line into additional health and wellness channels.
The LHE medical
device line of professional products is the technology upon which Radiancy, Inc. was
founded. Our proprietary LHE® brand technology combines the benefits of direct heat
and a full-spectrum light source for a variety of clinical applications, including psoriasis
care, acne treatment, skin tightening, skin rejuvenation, wrinkle reduction, collagen
renewal, vascular and pigmented lesion treatments and hair removal. This technology was
originally used primarily in our professional products, including capital equipment sold
to physicians and skin care specialists worldwide. The technology was then adapted to
our hand-held consumer line of products like no!no! Skin, a medical device for acne.
The hand-held product portfolio is included with the assets being sold to ICTV. The professional
line of products, however, is not part of the sale to ICTV and will remain with the Company.
However, their value is relatively immaterial and it is uncertain if anything can be
done to create shareholder value out of these remaining assets.
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Physician Recurring Segment
NEOVA® PHYSICIAN-DISPENSED SKIN
CARE
Until the sale of
the product line to Pharma Cosmetics, Inc. in September 2016, our NEOVA skin care line was designed as a therapeutic intervention
for preventing premature skin aging due to UV-induced DNA damage. The topical technology seeks to repair photo-damaged skin using
a novel combination of two key ingredients: DNA repair enzymes and our Copper Peptide Complex®. Copper has been studied for
more than 20 years for its wound healing applications. Research suggests that copper can be used to improve the elasticity of
skin and is complementary to DNA repair enzymes, which repair damage caused by sunlight and other UV rays.
The NEOVA technology
represented another opportunity to integrate our marketing platform with our direct sales force for plastic surgeons and dermatologists,
which has traditionally been responsible for furthering market adoption of NEOVA products. Through a direct-to-consumer initiative,
we sought to drive consumers to medical practices for NEOVA as well as to our website to buy direct.
We held several patents
related to the NEOVA technology, as well as the ability to draw upon more than 150 peer-reviewed journal articles that provide
scientific support for these ingredients.
Professional Segment
LHE SKINCARE DEVICES
Sales under the professional
business segment are mainly generated from capital equipment, namely our LHE® brand products.
Our proprietary LHE®
brand technology combines the benefits of direct heat and a full-spectrum light source for a variety of clinical applications,
including psoriasis care, acne treatment, skin tightening, skin rejuvenation, wrinkle reduction, collagen renewal, vascular and
pigmented lesion treatments and hair removal. This technology was originally used primarily in our professional products, including
capital equipment sold to physicians and skin care specialists worldwide. The technology was then adapted to our hand-held consumer
line of products like no!no! Skin, a medical device for acne.
LHE capitalizes upon
the principles of selective photothermolysis, which is a type of photo (or light-based) therapy in which heat is generated using
selective absorption of light within the targeted tissue. Selective photothermolysis entails precisely targeting a pigmented tissue
or structure with a specific wavelength of light that is absorbed into and limited to the target area of the skin but does not
penetrate into surrounding areas. Heat is also produced and directed to the target with minimal effect on surrounding skin.
There are many phototherapy
options available for patients today, including laser and intense pulse light (IPL), although we believe that we have optimized
the light/heat relationship in our LHE products, there are many phototherapy options available for patients today including laser
and intense pulse light (IPL). These factors together with the relatively immaterial value of the LHE assets and the Professional
segment as of December 31, 2016, discontinued operations were not presented to reflect the sale of the consumer products division
to ICTV Brands, Inc. that occurred in January 2017.
In contrast, LHE technology
was developed with the objective of efficiently using both light and heat energy to provide a greater treatment advantage. In
doing so, LHE® brand products can deliver less energy density to the target skin area, which is believed to create a safer,
more efficient product. In addition, balancing light and heat enables phototherapy treatments for more sensitive skin types as
well as a broader spectrum of hair colors.
As a result of our
LHE technology, we have created an LHE® brand professional product line designed for clinical efficacy in a variety of applications,
including psoriasis care, acne treatment, skin tightening, skin rejuvenation, wrinkle reduction, collagen renewal, vascular and
pigmented lesion treatments and hair removal. The competitive advantages LHE products enjoy over the competition include its excellent
performance and safety record, low operational costs, ease of operation, versatility and cost flexibility. We believe we have
a market opportunity as physicians and skin care providers are seeking a product which offers an efficient and safe product at
a lower price point, which we believe our LHE technology provides. In addition, lasers and IPL Technology carry with them an inherent
risk of patient burns, and depending upon the conditions being treated, may require longer and more extensive treatment times
to effect a result. The Company will refocus its efforts on its LHE products after the closing of the ICTV transaction.
Although we currently
distribute this product line through a network of medical device distributors, the activity of this product line is relatively
immaterial and generally reflects only the occasional sale of replacement parts to the installed based on past equipment sales.
Our Products
In the past, we have
emphasized the development of physician-endorsed skin related products based on science. Once cleared for use by the required
regulatory agencies, like the FDA, these products are commercialized through a systematic, proprietary marketing program that
we view as integral to our business success. Some of our products, which are described in more detail below, have generated significant
revenue for us
.
Our primary technology and product platforms contributing to this revenue are described below.
We evaluate four
principal criteria in determining where to allocate product development resources:
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demonstrable clinical efficacy
and safety;
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intellectual property protection;
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Specifically, new
projects must be able to work effectively, but also have a low enough cost of goods to achieve a favorable price point for consumers
and a favorable margin for us to advertise our products effectively. As well, the market should be well defined and large enough
to accommodate the new product with room for growth as we ramp up marketing efforts.
These platforms have
included:
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Our Thermicon® technology
and no!no!® product line; (see Acquisitions and Dispositions)
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Professional equipment built
upon our Light and Heat Energy (LHE®) technology which was also incorporated into
some of the consumer devices until they were sold to ICTV; (the remaining LHE assets
as of December 31, 2016, have only immaterial value to the Company)
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Our topical NEOVA® formulations
to combat UV-induced damage causing premature skin aging; (see Acquisitions and Dispositions)
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Our Kyrobak® technology
which incorporates Continuous Passive Motion (CPM) and Oscillation Therapy is for the
relief of unspecified, lower back pain; (see Acquisitions and Dispositions)
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THERMICON® HEAT TRANSFER TECHNOLOGY
Until the sale of
the consumer product portfolio to ICTV, our no!no!® hair removal products were built upon our proprietary heat-based Thermicon®
brand technology to address consumer concerns over perceived limitations of existing hair removal products, including safety and
pain, and to overcome inherent limitations of light-based hair removal solutions. Unlike other products that use methods that
are painful, have side effects, are limited in body areas that can be treated or that emanate from the principle of selective
thermolysis, the Thermicon® brand devices are based on heat only and are therefore applicable for all hair colors and skin
types, can be used on all body areas, and if used per instructions do not have adverse events, and are virtually painless. Thermicon®
brand devices utilize a high-temperature thermodynamic wire filament that is activated when the devices are moved in contact with
and across the treatment area. We believe that the no!no!® brand hair removal products have several advantages over existing
products for both the consumer and professional hair removal market, including:
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Broad Applicability
.
Where other hair removal products such as shavers, waxing, threading and laser-based
and intense pulsed light-based products are either limited by body area treated, are
only effective at treating certain hair colors and skin types or are limited by the age
of the consumer, products employing the Thermicon® brand devices technology, which
do not rely upon light, are virtually painless and without side-effects and are equally
effective across all hair colors and all skin types. Therefore, we believe that unlike
other hair removal methods (such as shaving, threading and waxing), including light based
devices, Thermicon® brand devices effectively remove hair on people with light hair
or dark skin.
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Compact Size
. Since the
Thermicon® brand devices do not require large energy sources or cooling systems,
we are able to produce compact, hand-held, portable, reachable wireless products uniquely
suitable for the consumer market, without sacrificing safety or efficacy.
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Pain-Free
. Many traditional
hair-removal procedures, such as waxing or shaving, can cause nicks, cuts and significant
pain. We believe that users of products employing the Thermicon® Brand devices experience
only a mild tingling sensation.
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Low Cost of Goods to MSRP
ratio.
Thermicon® brand technology has an average retail price of around two
hundred and seventy dollars in the US and between three hundred and four hundred dollars
in other markets. In contrast, other hair removal methods, require consumers to undergo
expensive in-office (or in-spa) visits for treatments that can cost several thousands
of dollars. The Thermicon® brand platform enables a low cost of goods, and therefore
a beneficial relationship cost of goods to MSRP.
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no!
no!®
Product Line: “Professional Technology Made for Consumers”
We have realized
favorable market adoption of Thermicon® brand technology, which not only overcomes the challenges of other hair removal methods
but also puts control of the hair removal process in consumers’ hands.
We marketed a full
line of consumer products based on the patented Thermicon® brand technology. These products are sold globally through infomercials
and television shopping channels, retail stores, online shopping websites and worldwide strategic distribution agreements.
Since 2007, we have introduced a series
of no!no! devices. Every product evolution—from the no!no! Classic™, the no!no! Hair™, the no!no! Hair for Men™,
the no!no! Plus™ to the no!no! PRO 3™ and the no!no! PRO 5™—represents continued innovation and product
line extension. Notably, each of the prior brands was still marketed even as we continued to introduce new product extensions
like the no!no! Micro and no!no! Ultra launched in 2014.
LIGHT AND HEAT ENERGY (LHE
®
)
Our proprietary LHE®
brand technology combines the benefits of direct heat and a full-spectrum light source. This technology is used primarily in our
professional products, which entail capital equipment sold to physicians and skin care specialists worldwide. This technology
had also been adapted to the hand-held consumer line of products like no!no! Skin, a medical device for acne which was included
as part of the product portfolio sold to ICTV in January 2017.
LHE capitalizes upon
the principles of selective photothermolysis, which is a type of photo (or light-based) therapy in which heat is generated using
selective absorption of light within the targeted tissue. Selective photothermolysis entails precisely targeting a pigmented tissue
or structure with a specific wavelength of light that is absorbed into and limited to the target area but does not penetrate into
the surrounding area. Heat is also produced and directed to the target with minimal effect on surrounding skin.
Although we believe
that we have optimized the light/heat relationship in our LHE products, there are many phototherapy options available for patients
today, including laser and intense pulse light (IPL). These factors together with the relatively immaterial value of the LHE assets
and the Professional segment as of December 31, 2016, discontinued operations were not presented to reflect the sale of the consumer
product division to ICTV Brands, Inc. that occurred in January 2017.
In contrast, LHE
technology was developed with the objective of efficiently using both light and heat energy to provide a greater treatment advantage.
In doing so, LHE® brand products can deliver less energy density (known as “low fluences”) to the target skin
area, which is believed to create a safer, more efficient product. We believe that lowering the fluence of our LHE® brand
products reduces the need for skin cooling techniques, simplifies the treatment process and decreases the risk of harmful side
effects. In addition, balancing light and heat enables phototherapy treatments for more sensitive skin types as well as a broader
spectrum of hair colors.
We have incorporated
patented internal filters that protect the skin during treatment with LHE technology. We also offer a specialized light unit assembly
for use on sensitive skin to further enhance our products’ safety and comfort without compromising results.
As a result of our
LHE technology, we have created an LHE® brand professional product line designed for clinical efficacy in a variety of applications,
including psoriasis care, acne treatment, skin tightening, skin rejuvenation, wrinkle reduction, collagen renewal, vascular and
pigmented lesion treatments and hair removal. (Note that not all applications are cleared in the U.S.)
NEOVA® PHYSICIAN-DISPENSED SKIN
CARE
Until the sale of
the skin care product line to Pharma Cosmetics, Inc. in September 2015 (see Acquisitions and Dispositions) the NEOVA skin care
line was designed as a therapeutic intervention for preventing premature skin aging due to UV-induced DNA damage. The topical
technology seeks to repair photo-damaged skin using a novel combination of two key ingredients: DNA repair enzymes and our Copper
Peptide Complex®. Copper has been studied for more than 20 years for its wound healing applications. Research suggests that
copper can be used to improve the elasticity of skin and is complementary to DNA repair enzymes, which repair damage caused by
sunlight and other UV rays.
The DNA repair enzymes
contained in the NEOVA formulation have several objectives:
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Continuously repair and enhance skin’s natural processes;
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Protect from UV immunosuppression;
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Restore barrier function;
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Promote collagen regeneration
and skin elasticity; and
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Assist in correcting and improving
cell metabolism.
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In concert with the
repair enzymes, NEOVA’s Copper Peptide Complex serves to promote new blood vessel growth and enhance the expression of growth
factors. It stimulates collagen and elastin formation, which accelerate the repair process. Additionally, the Copper Peptide Complex
is designed to mitigate damage caused by free radicals by promoting an antioxidant defense. Free radicals are a type of highly
reactive oxygen molecule known to cause oxidative stress, which triggers harmful inflammatory responses and cell death as the
free radicals attack DNA, lipids, proteins and other cell components. They are also believed to accelerate the progression of
cancer, cardiovascular disease and age-related diseases, including cataracts, arthritis, Alzheimer’s disease and diabetes.
As typically occurs in normal, healthy cells, an antioxidant defense system comprising vitamins C and E and a variety of enzymes
can minimize and repair free radical-induced damage.
We previously held,
until the sale to Pharma Cosmetics, several patents related to the NEOVA technology, as well as the ability to draw upon more
than 150 peer-reviewed journal articles that provide scientific support for these ingredients.
Competition
The markets in which
we have participated are highly competitive. Certain of our competitors are larger than us and have substantially more resources.
As it pertains to the aesthetic device market, this arena is complex and highly competitive—both for home use and treatment
in a physician’s office. Over the past several decades, the aesthetics technology market has changed considerably due to
technological innovation and discoveries. We are exposed to competition from small, closely held, specialized aesthetic device
companies, and several public companies, such as Syneron Medical Ltd. (ELOS-NASDAQ), Cynosure Inc. (CYNO-NASDAQ) and Valeant Pharmaceuticals,
Inc. (VRX-NYSE).
We believe that a
significant barrier to entry into an applicable market is the cost basis of the product and our products were based upon a proprietary
technology that allowed us to build products inexpensively. From a marketing standpoint, if competitors are developing a product
that may compete with our products they then become tasked with the challenge of building the marketing for that product. We invested
roughly $13 million in 2016 in marketing and advertising. Furthermore, our intellectual property position has also likely served
as a deterrent to companies to compete against our brands.
We currently face
competitors offering discounted prices in some geographic markets where we conduct business. It is possible that our
business
could be materially adversely affected in the future by discounting practices of competitors, including from both a price and
volume perspective. In individual markets, our challenge is to leverage the national strengths of our company and enhance local
efforts in order to grow market share.
Research and Development
Our research and
development expenditures were approximately $1.2 million in 2016 and $1.3 million in 2015. As of January 23, 2017 the research
and development personnel were transferred to ICTV in connection with the closing of the sale of the consumer product line assets.
See ITEM 1. Business-Our Company, Acquisitions and Dispositions
above for more information.
Our research and
development activities were focused on:
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the utilization of existing
technologies to develop additional consumer and professional applications and products;
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the development of new skin
health and hair care products; and
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•
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the development of additional
products and applications, whether in phototherapy or surgery, by working closely with
our Scientific Advisory Board, medical centers, universities and other companies worldwide.
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Patents and Proprietary Technologies
We intend to protect
our proprietary rights from unauthorized use by third parties to the extent that our proprietary rights are covered by valid and
enforceable patents or are effectively maintained as trade secrets.
Our policy is to
file patent applications and to protect certain technology, inventions and improvements that are commercially important to the
development of our business. As patents expire and expose our inventions to public use, we seek to mitigate the impact of such
expirations by seeking protection of improvements. In connection with the sales of our Neova product line and our Consumer Products
division to Pharma Cosmetics and ICTV Brands, respectively, we transferred the intellectual property associated with those product
lines, including patents, to their respective purchasers. As of December 31, 2016, we had 12 issued patents and 1 patent applications.
In the U.S. alone, our business is protected by 3 patents.
We also relied on
trade secrets, employee and third-party nondisclosure agreements and other protective measures to protect our intellectual property
rights pertaining to our products and technology.
Our products and services are offered
under trademarks and service marks, both registered and unregistered. We believe our trademarks encouraged customer loyalty and
aided in the differentiation of our products from competitors’ products. . In connection with the sales of our Neova product
line and our Consumer Products division to Pharma Cosmetics and ICTV Brands, respectively, we transferred the intellectual property
associated with those product lines, including trademarks and trade names, to their respective purchasers. Accordingly, we had
20 trademarks, either registered or being registered, in markets around the world that we intend to maintain in support of our
products. These include 9 trademarks issued in the U.S. and 11 trademarks issued in the rest of the world. We periodically review
the trademarks in our portfolio for usefulness with our existing and anticipated product lines; as a result, certain trademarks
which were no longer in use in our business were not renewed.
Government Regulation
Regulations Relating to Products
and Manufacturing
Our products and
research and development activities are regulated by numerous governmental authorities, principally the FDA and corresponding
state and foreign regulatory agencies. Any medical device or cosmetic we manufacture and/or distribute will be subject to pervasive
and continuing regulation by the FDA. The U.S. Food, Drug and Cosmetics Act, or FD&C Act, and other federal and state laws
and regulations govern the pre-clinical and clinical testing, design, manufacture, use, labeling and promotion of medical devices,
including our, LED devices, and other products currently under development by us and govern the manufacture and labeling of the
cosmetic products. Product development and approval for medical devices within this regulatory framework takes a number of years
and involves the expenditure of substantial resources.
In the U.S., medical
devices are classified into three different classes, Class I, II and III, on the basis of controls deemed necessary to provide
a reasonable assurance of the safety and effectiveness of the device. Class I devices are subject to general controls, such
as facility registration, medical device listing, labeling requirements, premarket notification (unless the medical device has
been specifically exempted from this requirement), adherence to the FDA’s Quality System Regulation, and requirements concerning
the submission of device-related adverse event reports to the FDA. Class II devices are subject to general and special controls,
such as performance standards, pre-market notification (510(k) clearance), post-market surveillance, and FDA Quality System Regulations.
Generally, Class III devices are those that must receive premarket approval by the FDA to provide a reasonable assurance of their
safety and effectiveness, such as life-sustaining, life-supporting and implantable devices, or new devices that have been found
not to be substantially equivalent to existing legally marketed devices.
With limited exceptions,
before a new medical device can be distributed in the U.S., marketing authorization typically must be obtained from the FDA through
a premarket notification under Section 510(k) of the FDA Act, or through a premarket approval application under Section 515 of
the FDA Act. The FDA will typically grant a 510(k) clearance if it can be established that the device is substantially equivalent
to a predicate device that is a legally marketed Class I or II device (or to pre-amendments Class III devices for which the FDA
has yet to call for premarket approvals). We have received FDA 510(k) clearance to market our LED products for a variety of indications
for use. The FDA granted these clearances under Section 510(k) on the basis of substantial equivalence to other devices that had
received prior clearances.
For any devices that
are cleared through the 510(k) process, modifications or enhancements that could significantly affect the safety or effectiveness
of the device, or that constitute a major change in the intended use of the device, will require a new 510(k) submission. To date,
we have not been required to secure premarket approval for our devices. A premarket approval application may be required for a
Class II device if it is not substantially equivalent to an existing legally marketed Class I or II device (or a pre-amendments
Class III device for which the FDA has yet to call for premarket approval) or if the device is a Class III premarket approval
device by regulation. A premarket approval application must be supported by valid scientific evidence to demonstrate a reasonable
assurance of safety and effectiveness of the device, typically including the results of clinical trials, bench tests and possibly
animal studies. In addition, the submission must include, among other things, the proposed labeling. The premarket approval process
can be expensive, uncertain and lengthy and a number of devices for which FDA approval has been sought by other companies have
never been approved for marketing.
We are subject to
routine inspection by the FDA and, as noted above, must comply with a number of regulatory requirements applicable to firms that
manufacture medical devices and other FDA-regulated products for distribution within the U.S., including requirements related
to device labeling (including prohibitions against promoting products for unapproved or off-label uses), facility registration,
medical device listing, labeling requirements, adherence to the FDA’s Quality System Regulation, good manufacturing processes
and requirements for the submission of reports regarding certain device-related adverse events to the FDA.
We have received
approval from the European Union to affix the CE Mark to our LHE products. This certification is a mandatory conformity mark for
products placed on the market in the European Economic Area, which is evidence that they meet all European Community, or EC, quality
assurance standards and compliance with applicable European medical device directives for the production of medical devices. This
will enable us to market our approved products in all of the member countries that accept the CE Mark. We also will be required
to comply with additional individual national requirements that are in addition to those required by these nations. Our products
have also met the requirements for marketing in various other countries.
Failure to comply
with applicable regulatory requirements can result in fines, injunctions, civil penalties, recalls or seizures of products, total
or partial suspensions of production, refusals by the U.S and foreign governments to permit product sales and criminal prosecution.
As to our cosmetic
products, the FD&C Act and the regulations promulgated there and under other federal and state statutes govern the testing,
manufacture, safety, labeling, storage, record-keeping, advertising and promotion of cosmetic products. Our cosmetic products
and product candidates may be regulated by any of the various FDA Centers. Routinely, however, cosmetics are regulated by the
FDA’s Center for Food Safety and Applied Nutrition. In other countries, cosmetic products may also be regulated by similar
health and regulatory authorities. The skin care business also has two devices (e.g. wound care dressings) subject to 510(k) clearance,
four products (e.g. sunscreen products) that contain drugs approved for use in over-the-counter products, and one prescription
drug. Currently, the skincare products that are classified as drugs are not required to obtain pre-marketing regulatory approval.
The process of obtaining and maintaining regulatory approvals in the U.S. and abroad for the manufacturing or marketing of our
existing and potential skincare products is potentially costly and time-consuming and is subject to unanticipated delays. Regulatory
requirements ultimately imposed could also adversely affect our ability to clinically test, manufacture or market products.
Failure to obtain
regulatory approvals where appropriate for our cosmetic, device or drug product candidates or to attain or maintain compliance
with quality system regulations or other manufacturing requirements, could have a material adverse effect on our business, financial
condition and results of operations.
We are or may become
subject to various other federal, state, local and foreign laws, regulations and policies relating to, among other things, safe
working conditions, good laboratory practices and the use and disposal of hazardous or potentially hazardous substances used in
connection with research and development.
Fraud and Abuse Laws
Because of the significant
federal funding involved in Medicare and Medicaid, Congress and the states have enacted, and actively enforce, a number of laws
whose purpose is to eliminate fraud and abuse in federal health care programs. Our business is subject to compliance with these
laws.
Anti-Kickback Laws
In the U.S., there
are federal and state anti-kickback laws that generally prohibit the payment or receipt of kickbacks, bribes or other remuneration
in exchange for the referral of patients or other health-related business. The U.S. federal healthcare programs’ Anti-Kickback
Statute makes it unlawful for individuals or entities knowingly and willfully to solicit, offer, receive or pay any kickback,
bribe or other remuneration, directly or indirectly, in exchange for or to induce the purchase, lease or order, or arranging for
or recommending purchasing, leasing, or ordering, any good, facility, service, or item for which payment may be made in whole
or in part under a federal healthcare program such as Medicare or Medicaid. The Anti-Kickback Statute covers “any remuneration,”
which has been broadly interpreted to include anything of value, including for example gifts, certain discounts, the furnishing
of free supplies, equipment or services, credit arrangements, payments of cash and waivers of payments. Several courts have interpreted
the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals
of federal healthcare covered business, the arrangement can be found to violate the statute. Penalties for violations include
criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal
healthcare programs. In addition, several courts have permitted kickback cases brought under the Federal False Claims Act to proceed,
as discussed in more detail below.
Because the Anti-Kickback
Statute is broadly written and encompasses many harmless or efficient arrangements, Congress authorized the Office of Inspector
General of the U.S. Department of Health and Human Services, or OIG, to issue a series of regulations, known as “safe harbors.”
For example, there are regulatory safe harbors for payments to bona fide employees, properly reported discounts and rebates, and
for certain investment interests. Although an arrangement that fits into one or more of these exceptions or safe harbors is immune
from prosecution, arrangements that do not fit squarely within an exception or safe harbor do not necessarily violate the statute.
The failure of a transaction or arrangement to fit precisely within one or more of the exceptions or safe harbors does not necessarily
mean that it is illegal or that prosecution will be pursued. However, conduct and business arrangements that arguably implicate
the Anti-Kickback Statute but do not fully satisfy all the elements of an exception or safe harbor may be subject to increased
scrutiny by government enforcement authorities such as the OIG.
Many states have
laws that implicate anti-kickback restrictions similar to the Anti-Kickback Statute. Some of these state prohibitions apply, regardless
of whether federal health care program business is involved, to arrangements such as for self-pay or private-pay patients.
Government officials
have focused their enforcement efforts on marketing of healthcare services and products, among other activities, and recently
have brought cases against companies, and certain sales, marketing and executive personnel, for allegedly offering unlawful inducements
to potential or existing customers in an attempt to procure their business.
Federal Civil False Claims Act and
State False Claims Laws
The federal civil
False Claims Act imposes liability on any person or entity who, among other things, knowingly and willfully presents, or causes
to be presented, a false or fraudulent claim for payment by a federal healthcare program, including Medicare and Medicaid. The
“qui tam,” or “whistleblower” provisions of the False Claims Act allow a private individual to bring actions
on behalf of the federal government alleging that the defendant has submitted a false claim to the federal government, and to
share in any monetary recovery. In recent years, the number of suits brought against healthcare providers by private individuals
has increased dramatically. Medical device companies, like us, can be held liable under false claims laws, even if they do not
submit claims to the government, when they are deemed to have caused submission of false claims by, among other things, providing
incorrect coding or billing advice about their products to customers that file claims, or by engaging in kickback arrangements
with customers that file claims.
The False Claims
Act also has been used to assert liability on the basis of misrepresentations with respect to the services rendered and in connection
with alleged off-label promotion of products. Our future activities relating to the manner in which we sell our products and document
our prices, such as the reporting of discount and rebate information and other information affecting federal, state and third-party
reimbursement of our products, and the sale and marketing of our products, may be subject to scrutiny under these laws.
When an entity is
determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by
the government, plus civil penalties of five to eleven thousand dollars for each separate false claim. There are many potential
bases for liability under the False Claims Act. A number of states have enacted false claim laws analogous to the federal civil
False Claims Act and many of these state laws apply where a claim is submitted to any state or private third-party payor. In this
environment, our engagement of physician consultants in product development and product training and education could subject us
to similar scrutiny. We are unable to predict whether we would be subject to actions under the False Claims Act or a similar state
law, or the impact of such actions. However, the costs of defending such claims, as well as any sanctions imposed, could significantly
affect our financial performance.
HIPAA Fraud and Other Regulations
The Health Insurance
Portability and Accountability Act of 1996, or HIPAA, created a class of federal crimes known as the “federal health care
offenses,” including healthcare fraud and false statements relating to healthcare matters. The HIPAA health care fraud statute
prohibits, among other things, knowingly and willfully executing, or attempting to execute, a scheme or artifice to defraud any
healthcare benefit program, or to obtain by means of false of fraudulent pretenses, any money under the control of any health
care benefit program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment
and/or exclusion from government-sponsored programs. The HIPAA false statements statute prohibits, among other things, knowingly
and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement
or representation in connection with the delivery of or payment for healthcare benefits, items or services. A violation of this
statute is a felony and may result in fines and/or imprisonment. Entities that are found to have aided or abetted in a violation
of the HIPAA federal health care offenses are deemed by statute to have committed the offense and are punishable as a principal.
We are also subject
to the U.S. Foreign Corrupt Practices Act and similar anti-bribery laws applicable in non-U.S. jurisdictions that generally prohibit
companies and their intermediaries from making improper payments to non-U.S. government officials for the purpose of obtaining
or retaining business. Because of the predominance of government-sponsored healthcare systems around the world, most of our customer
relationships outside of the U.S. will be with governmental entities and therefore subject to such anti-bribery laws.
HIPAA and Other Privacy Regulations
The regulations that
implement HIPAA also establish uniform standards governing the conduct of certain electronic healthcare transactions and protecting
the security and privacy of individually identifiable health information maintained or transmitted by healthcare providers, health
plans and healthcare clearinghouses, which are referred to as “covered entities.” Several regulations have been promulgated
under HIPAA’s regulations including: the Standards for Privacy of Individually Identifiable Health Information, or the Privacy
Rule, which restricts the use and disclosure of certain individually identifiable health information; the Standards for Electronic
Transactions, or the Transactions Rule, which establishes standards for common healthcare transactions, such as claims information,
plan eligibility, payment information and the use of electronic signatures; and the Security Standards for the Protection of Electronic
Protected Health Information, or the Security Rule, which requires covered entities to implement and maintain certain security
measures to safeguard certain electronic health information. Although we do not believe we are a covered entity and therefore
are not currently directly subject to these standards, we expect that our customers generally will be covered entities and may
ask us to contractually comply with certain aspects of these standards by entering into requisite business associate agreements.
While the government intended this legislation to reduce administrative expenses and burdens for the healthcare industry, our
compliance with certain provisions of these standards entails significant costs for us.
The Health Information
Technology for Economic and Clinical Health Act, or the HITECH Act, which was enacted in February 2009, strengthens and expands
the HIPAA Privacy and Security Rules and the restrictions on use and disclosure of patient identifiable health information. HITECH
also fundamentally changed a business associate’s obligations by imposing a number of Privacy Rule requirements and a majority
of Security Rule provisions directly on business associates that were previously only directly applicable to covered entities.
HITECH includes, but is not limited to, prohibitions on exchanging patient identifiable health information for remuneration, restrictions
on marketing to individuals, and obligations to agree to provide individuals an accounting of virtually all disclosures of their
health information. Moreover, HITECH requires covered entities to report any unauthorized use or disclosure of patient identifiable
health information, known as a breach, to the affected individuals, the United States Department of Health and Human Services,
or HHS, and, depending on the size of any such breach, the media for the affected market. Business associates are similarly required
to notify covered entities of a breach. Most of the HITECH provisions became effective in February 2010. HHS has already issued
regulations governing breach notification which were effective in September 2009.
HITECH has increased
civil penalty amounts for violations of HIPAA by either covered entities or business associates up to an annual maximum of $1.5
million for uncorrected violations based on willful neglect. Imposition of these penalties is more likely now because HITECH significantly
strengthens enforcement. It requires HHS to conduct periodic audits to confirm compliance beginning in February 2010 and to investigate
any violation that involves willful neglect which carries mandatory penalties beginning in February 2011. Additionally, state
attorneys general are authorized to bring civil actions seeking either injunctions or damages in response to violations of HIPAA
Privacy and Security Rules that threaten the privacy of state residents.
In addition to federal
regulations issued under HIPAA, some states have enacted privacy and security statutes or regulations that, in some cases, are
more stringent than those issued under HIPAA. In those cases, it may be necessary to modify our planned operations and procedures
to comply with the more stringent state laws. If we fail to comply with applicable state laws and regulations, we could be subject
to additional sanctions.
Federal and state
consumer protection laws are being applied increasingly by the United States Federal Trade Commission, or FTC, and state attorneys
general to regulate the collection, use, storage and disclosure of personal or patient information, through websites or otherwise,
and to regulate the presentation of web site content. Courts may also adopt the standards for fair information practices promulgated
by the FTC, which concern consumer notice, choice, security and access. Numerous other countries have or are developing laws governing
the collection, use, disclosure and transmission of personal or patient information.
HIPAA as well as
other federal and state laws apply to our receipt of patient identifiable health information in connection with research and clinical
trials. We collaborate with other individuals and entities in conducting research and all involved parties must comply with applicable
laws. Therefore, the compliance of the physicians, hospitals or other providers or entities with whom we collaborate also impacts
our business.
Employees
As of March 30, 2017,
we had 6 full-time employees devoted to the ongoing business of the Company, which consisted of two executive officers and 4 finance,
legal and administration staff. We do however, still technically employ personnel on behalf of ICTV in connection with the sale
of the consumer business in January 2017 in connection with assisting the transition of that business to ICTV and will continue
to employ these people at the direction of ICTV until such time that ICTV has its systems in place to seamlessly affect such transition.
ICTV contractually reimburses the Company for the full cost of providing such transition services.
Our employees are
not represented by a labor union nor covered by a collective bargaining agreement. We believe that we have good relations with
our employees.
Financial Information about Geographic
Areas
See Note 15 to the
consolidated financial statements included elsewhere in this filing.
Available Information
PhotoMedex’s
website is www.photomedex.com. Our annual reports on Form 10-K, quarterly reports on 10-Q, current reports on Form 8-K, and amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available on
our website at www.photomedex.com as soon as reasonably practicable after we electronically file such reports with, or furnish
them to, the SEC. The information on the Company’s website is not a part of this Annual Report on Form 10-K.
In addition to the other information
contained in this Annual Report and the exhibits hereto, the following risk factors should be considered carefully in evaluating
our business. Our business, financial condition, cash flows or results of operations could be materially adversely affected by
any of these risks. Additional risks not presently known to us or that we currently deem immaterial may also adversely affect
our business, financial condition, cash flows or results of operations. The following discussion of risk factors contains forward-looking
statements as discussed on page 1. Our business routinely encounters and addresses risks, some of which may cause our future results
to be different – sometimes materially different – than we presently anticipate.
Risk factors relating to acquisition of First Capital Real Estate
Development Business
Failure to complete the acquisition could negatively impact
the stock price and the future business and financial results of the Company.
As noted in Item 1.
Liquidity and Going
Concern
, the Company has issued a going concern notice to its shareholders. The Company anticipates that the acquisition
of this new line of business will bring renewed liquidity and growth to the Company; however, as the latter stages of this acquisition
require approval by the Company’s shareholders at a to-be-called special meeting, there is no assurance that the proposals
relating to the acquisition to be presented at the special meeting will be approved, and there is no assurance that the Company
or First Capital Real Estate Operating Partnership, L.P., and First Capital Real Estate Trust Incorporated (together, “First
Capital”) will receive any necessary regulatory approvals or satisfy the other conditions to the completion of the acquisition.
If the acquisition is not completed for any reason, the Company will be subject to several risks, including the possible payment
of a termination fee and related costs, the loss of other business ventures as a result of the restriction on the Company’s
investigation of other avenues of revenue under the Contribution Agreement, and having had the focus of management of the Company
directed toward the acquisition and integration planning and diverted from the Company’s other business and other opportunities
that could have been beneficial to the Company. In addition, if the acquisition is not completed, the Company will not realize
any of the expected benefits of having completed the acquisition and will continue to face the non-acquisition related risks outlined
in this Form 10-K, Annual Report for the calendar year ending December 31, 2016.
If the acquisition is not completed, the price
of the Company’s common and preferred stock may decline (i) to the extent that the current market price of that stock reflects
a market assumption that the acquisition will be completed and that the related benefits and synergies will be realized, or (ii)
as a result of the market’s perceptions that the acquisition was not consummated due to an adverse change in the Company’s
or First Capital’s business or financial positions. Further, if the acquisition is not completed, the price of the Company’s
stock could decline as a result of employees, customers, suppliers, and others remaining uncertain about the Company’s future
prospects in the absence of the acquisition.
In addition, if the acquisition contemplated
with First Capital is not completed and the Company’s board of directors determines to seek another merger or business combination,
there can be no assurance that such a transaction, if consummated, would create Company stockholder value comparable to the value
that might have been created had the acquisition been completed.
Litigation against the Company or First Capital could result
in an injunction preventing completion of the acquisition, or the payment of damages in the event the acquisition is completed.
Such outcomes could adversely affect the Company’s business, financial condition or results of operations.
One of the conditions to the closing of the
acquisition is that no order issued by a governmental authority of competent jurisdiction or law or other legal restraint or prohibition
making the acquisition illegal or permanently restraining, enjoining, or otherwise prohibiting or preventing the consummation of
the acquisition or the other transactions contemplated by the Contribution Agreement be in effect. Consequently, if any plaintiffs
in a litigation against the Company or First Capital, or any of their respective directors, secures injunctive or other relief
prohibiting, delaying, or otherwise adversely affecting the Company’s ability to complete the acquisition, such injunctive
or other relief may prevent the acquisition from becoming effective within the expected time frame or at all. If completion of
the acquisition is prevented or delayed, substantial costs to the Company could result. In addition, the Company could incur significant
costs in connection with lawsuits, including costs associated with the indemnification of the Company’s directors and officers.
If all stages of the acquisition are completed, the Company
may not be able to successfully integrate the acquired real estate business or realize the anticipated benefits of the acquisition.
Realization of the anticipated benefits in
the acquisition will depend on the Company’s ability to successfully integrate the operations of the real estate development
business into the Company. A successful integration will require that the Company devote significant management attention and resources
to integrating its business practices, operations, and support functions into a public company structure. The challenges the Company
may encounter include preserving customer, supplier, and other important relationships and resolving potential conflicts that
may arise as a result of the acquisition, addressing differences in business cultures, preserving employee morale, and retaining
key employees while maintaining focus on meeting the operational and financial goals of the Company and the real estate development
business, and adequately addressing other business integration issues. The process of integrating a real estate development
business, the diversion of management’s attention from other business efforts, and any subsequent delays in the integration
process, could adversely affect the Company’s business and financial performance and the market price of the Company’s
stock.
Following the acquisition, the Company may be unable to retain
key employees.
The success of the Company after the acquisition
will depend in part upon its ability to retain key employees who may depart either before or after the acquisition because of issues
relating to the uncertainty and difficulty of integration or a desire not to remain with the Company following the acquisition.
Accordingly, no assurance can be given that the Company will be able to retain key employees to the same extent as in the past.
The Contribution Agreement limits the Company’s ability
to pursue an alternative acquisition proposal and requires that the Company pay a termination fee if it does.
The Contribution Agreement prohibits the Company
from soliciting, initiating, encouraging, or facilitating certain acquisition proposals with any third party, subject to exceptions
set forth in the Contribution Agreement. The Contribution Agreement also provides for the payment by either party of a termination
fee of the cost incurred by the non-terminating party in negotiating the transaction, if the other party terminates the Contribution
Agreement. These provisions limit the Company’s ability to pursue offers from third parties that could result in greater
value to the Company’s stockholders. The obligation to make the termination fee payment also may discourage a third party
from pursuing an acquisition proposal with the Company.
The shares of Company common and preferred stock to be received
by First Capital stockholders as a result of the acquisition may have different rights from other shares of the Company’s
common and preferred stock.
Following completion of each stage of the acquisition,
the First Capital stockholders will receive shares of common and/or preferred stock in the Company. Those shares may be subject
to different rights than those held by earlier shareholders of the Company. This disparity could adversely affect existing Company
shareholders.
The Company’s ability to use its net operating loss
carryforwards to offset future taxable income for U.S. federal income tax purposes may be limited as a result of “ownership
changes” of the Company caused by the transaction. In addition, the amount of such NOL carryforwards could be subject to
adjustment in the event of an IRS examination.
If a corporation undergoes an “ownership
change” under Section 382 of the Code as a result of the acquisition, the amount of its pre-change net operating losses,
or “NOLs”, that may be utilized to offset future taxable income will be subject to an annual limitation. In general,
an ownership change occurs if the aggregate stock ownership of certain stockholders increases by more than 50 percentage points
over such stockholders’ lowest percentage ownership during the applicable testing period (generally three years). The annual
limitation generally is determined by multiplying the value of the corporation’s stock immediately before the ownership change
by the applicable long-term tax-exempt rate. Any unused annual limitation may, subject to certain limits, be carried over to later
years, and the limitation may under certain circumstances be increased by recognized built-in gains or reduced by recognized built-in
losses in the assets held by the corporation at the time of the ownership change. Similar rules and limitations may apply for state
income tax purposes.
The Company’s NOLs, which for federal
income tax purposes expire over the next 20 years, may be subject to an annual limitation under Section 382 of the Code as
a result of the completion of one or more stages of the acquisition. Consequently, the Company’s ability to utilize
its pre-change NOLs may be subject to an additional layer of limitations imposed by Section 382 of the Code. The amount of
the NOL carryforwards is subject to review and audit by the Internal Revenue Service (the “IRS”), and there can be
no assurance that the benefit of such NOL carryforwards will be fully realized.
The acquisition may not qualify for special tax treatment,
for example, as a tax-free reorganization for U.S. federal income tax purposes, resulting in certain shareholders’ recognition
of taxable gain or loss in respect of their stock.
There is currently no opinion as to whether
the acquisition will qualify for special tax treatment, as, for example, a tax-free reorganization for U.S. federal income tax
purposes. Moreover, there is no requirement that the Company take all actions to ensure that the acquisition so qualifies and,
therefore, no assurance can be given that the acquisition will qualify for any certain tax treatment, including as a tax-free reorganization,
or that the Internal Revenue Service or the courts will not assert that the acquisition fails to qualify as such. If the acquisition
does not qualify as a tax-free reorganization, some holders of stock may be required to recognize gain or loss or incur other taxable
consequences as a result of this transaction.
Factors involving the real estate investment
business
The following risk factors are associated with
a proposed transaction involving the acquisition of certain real estate investments from First Capital Real Estate Operating Partnership,
L.P. and First Capital Trust Inc. (together First Capital). Should the transaction be completed, as more fully described
in Note18 Subsequent Events, then these risks will become applicable to the Company and its business and financial operations.
The Company is entering into a new business
line and, therefore, there is only a limited history upon which investors can evaluate the Company’s performance and its
future business prospects
.
The Company has entered
into a Contribution Agreement with First Capital on March 31, 2017, pursuant to which it is planned that First Capital will contribute
real estate assets to the Company on a staggered schedule, beginning with the contribution of $10 million in assets at the close
of the initial transaction, currently scheduled to occur on or before May 17, 2017. This Contribution Agreement represents
a new business line for the Company, which has no experience in the real estate sector. The Company will be relying on the
experience of the principals of First Capital for the operation and development of this business line. As a result, the Company’s
business will be subject to the substantial risks which are found in the early stages of a new business venture operating in the
competitive real estate industry. The Company’s future growth and development prospects must be evaluated in light
of the risks, expenses and difficulties encountered by all companies in such situations, and in particular those companies which
operate a business, such as real estate investment, in competitive environments that can be greatly affected by changes in economic
conditions.
The Company will be subject to demand fluctuations in the
real estate industry. Any reduction in demand could adversely affect the Company’s business, results of operations, and financial
condition.
Upon consummation of the transactions contemplated
by the Contribution Agreement, the Company will be entering the real estate industry, where demand for properties similar to those
expected to be owned by the Company is subject to fluctuations that are often due to factors outside the Company’s control.
Neither the Company, nor the personnel of First Capital joining the Company, are able to predict the course of the real estate
markets or whether the current favorable trends in those markets can, or will, continue. In the event of an economic downturn,
the Company’s results of operations may be adversely affected, and the Company may incur significant inventory impairments
and other write-offs, a major decline in its gross margins from past levels, and substantial losses from operations of this business.
Adverse changes in economic conditions in markets where the
Company’s real estate investments may be made and where prospective purchasers and utilizers of these properties live could
reduce the demand for and utilization of these properties and, therefore, adversely affect the Company’s operations and financial
condition.
The real estate investment business in which
the Company has become involved as a result of its signing of the Contribution Agreement will be conduct in various global locales,
including the United States, Mexico, the Caribbean and South America. Adverse changes in economic conditions in these markets,
and in the markets where prospective purchasers and utilizers of the Company’s to-be-acquired properties live, could negatively
impact those properties and their profitability. Unfavorable changes in job growth, employment levels, consumer income and
spending patterns, a decline in consumer confidence, increases in interest rates, and an oversupply of similar properties, could
reduce the demand, and depress the prices we may ask, for these properties, resulting in lower sales and income from these properties
and a negative impact on the Company’s results of operations and financial condition.
Adverse weather conditions, natural disasters, and other unforeseen
and/or unplanned conditions could disrupt the Company’s real estate developments.
Adverse weather conditions and natural disasters,
such as hurricanes, tornadoes, earthquakes, floods, droughts, and fires, could have serious impacts on the Company’s ability
to develop and market individual real estate offerings. Properties that the Company looks to acquire may also be affected
by unforeseen planning, engineering, environmental, or geological conditions or problems, including conditions or problems which
arise on third party properties adjacent to or in the vicinity of properties which the Company expects to own and which may result
in unfavorable impacts on the Company’s prospective properties. As the Company’s proposed real estate investments
are located in multiple countries, with differing climates and geological characteristics, each property will face different known
and unknown risks. Any adverse event or circumstance could cause a delay in, prevent the completion of, or increase the cost
of, one or more of these properties expected to be developed and brought to market by the Company, thereby resulting in a negative
impact on the Company’s operations and financial results.
If the market value of the Company’s future real estate
investments decreases, the Company’s results of operations will also likely decrease.
The market value of each prospective real estate
investment will depend on market conditions both locally and globally. The Company expects to acquire land for each expansion
into a new market at a cost based upon then-current economic conditions. If local and/or global economic conditions deteriorate,
or if the demand for such properties decreases below the levels anticipated at the time of acquisition of a property, the Company
may not be able to make a profit on such property comparable to those profits made by First Capital in the past. As a result of
declining economic conditions, the Company may experience lower than anticipated or forecast results or profits, and/or may not
be able to recover the Company’s costs of a project when a property is brought to market.
The Company will be relying on subcontractors to construct
each property, and on building supply companies to provide components for each property’s construction. The failure of one
or more of these subcontractors to properly construct these facilities, or any defects in the components obtained from building
supply companies, could adversely affect these properties, and thus the Company’s operations.
The Company plans to engage and rely on subcontractors
to perform the actual construction of the buildings upon each property it expects to purchase. Also, the Company plans to
purchase the components used in its construction projects from third party independent building supply companies. The Company
will utilize industry standard quality control programs, but despite these programs, the Company may find that subcontractors are
utilizing improper construction practices or the components purchased from building supply companies do not perform as specified
in the project’s plans. The Company may also find that its subcontractors are inadequately capitalized or have insufficient
staffing to undertake the required work. In such events, the Company may incur substantial additional costs to repair substandard
construction at its properties, to comply with the plans and local legal requirements. The cost of satisfying local legal building
code obligations may be significant, and the Company may not be able to recover these costs from its subcontractors, suppliers
and/or their respective insurers.
Legal challenges or governmental regulations may delay the
start or completion of construction on the Company’s projected real estate ventures, increase the Company’s expenses,
or limit the Company’s construction activities, which could have a negative impact on operations.
Each of the Company’s future real estate
development may experience a delay and/or increased expenses in construction, marketing and/or operation due to legal challenges
to the development. These challenges may be brought by private parties or by governmental authorities, resulting in delays
in the start or completion of each project’s construction or requiring changes to the design or construction of each development.
Any delay or change in a development’s construction would result in increased expenses to the Company in the development
of the property, which could in turn negatively impact the Company’s financial results with respect to that development and
with respect to its overall operations.
Numerous governmental authorities are typically
involved in each new development project, and such authorities have broad discretion in exercising their approval authority.
Various local, state, and federal statutes, ordinances, rules, and regulations concerning building, zoning, sales, and similar
matters apply to and/or affect the real estate development industry and govern matters including construction, marketing, sales,
operation, lending, and other activities concerning each development. In the United States, there have been numerous changes
in regulations that limit the availability or use of land, including regulations which limit growth in certain communities, the
use of utilities including water and sewer outlets, road construction and utilization, and other related matters. Each jurisdiction
in which the Company expects to invest in real estate development will have different and varying levels of regulation which must
be taken into account when planning and implementing such developments. For example, the Company may be required to change
or modify its plans due to alterations in local planning or laws. As a result, the Company could incur substantial costs
related to compliance with legal and regulatory requirements with regard to each real estate development, negatively impacting
the Company’s business by causing delays, increasing costs, or limiting the Company’s ability to operate in those locations.
If a development project experiences increased costs or shortages
of labor or components, or other circumstances beyond the Company’s control, there could be delays or increased costs in
developing such project, which could negatively impact the Company’s finances and operating results.
The Company will have real estate development
projects in a number of countries and regions, including the United States, Mexico, the Caribbean and South America. Each
project may be negatively impacted by local circumstances beyond the Company’s control, including labor shortages, disputes
and work stoppages, union organizing activities, price changes and delays in availability of building materials and components,
and a lack of adequate utility and road infrastructure and services. Any change in these circumstances could delay the start or
completion of, or increase the cost of, one or more developments. The Company may not be able to recover any additional such
costs through an increase in the prices for its properties, and therefore the Company’s operating results may be negatively
affected.
Changes in tax laws, taxes or fees may increase the cost of
each development, and such changes could adversely impact the Company’s finances and operational results.
Each development project will be subject to
different tax laws, tax levies and governmental fees, depending upon its geographic location. Any increase or change in such
laws, taxes, or fees, including real estate property taxes, and fees to fund schools, open space, utility and road improvements,
could increase the cost of a development and thus have an adverse effect on the Company’s operations. Such changes
could also negatively impact potential and/or actual users and purchasers of a development because potential buyers may factor
such changes into their decisions to utilize or purchase a property.
The Company will incur significant advance costs in each real
estate development before that development begins to generate revenue from sales and/or public usage, and as a result, the Company
may not recover its costs in whole or in part, may recover those costs slower than originally anticipated, or may incur higher
costs as a result of any delays in completion of a project, resulting in an adverse impact to the Company’s operating results.
The Company expects to make a number of significant
cash outlays for each real estate development before that construction on that development begins, and considerably before any
development begins to generate revenue. Such cash outlays will include expenditures to buy, rent, lease or otherwise acquire land,
to plan, design and develop a property, to conduct site studies as necessary for development, to provide basic utility and infrastructure
access to a property, to obtain permits, licenses, and other required regulatory approvals, to post surety bonds and such other
construction guarantees as required by law, and to actually construct the project building(s) and to fully develop a property.
These processes can take up to several years before a development is completed and ready to generate any revenue for the Company.
The time to complete each development will vary, based on local geographic conditions, legal requirements, regulatory and community
concerns, the ability to obtain required construction materials and labor, and other factors that may be unique to each project.
The Company will face the risk that, during construction, demand for a project may change, alter or decline, and the Company may
be forced to take steps to adjust to these changes in demand, including altering a project and its scope, and selling the property
at lower than anticipated or planned prices or at prices that generate lower profit margins or losses. Inflation, economic
changes or downturns, asset carrying costs (including interest on funds that are used to acquire land and/or construct a building)
may also be generated and may be significant. As a result of these factors, the Company may experience adverse impacts on
its operating results, and if a development experiences a significant decline in value, the Company may also be required to recognize
material write-downs of the book value of a project building in accordance with U.S. generally accepted accounting principles.
The real estate industry is highly competitive; if other property
developers are more successful or offer better value to customers, the Company’s business could suffer.
The real estate industry is highly competitive,
regardless of locale, and the Company will face competitors in each location where it expects to develop, construct, market, sell
and/or operate real estate ventures. Competitors will range from small local companies to large international conglomerates
with financial resources much greater than those of the Company. The Company will have to compete in each market for land,
raw materials, construction components, financing, environmental resources, utilities, infrastructure, labor, skilled management,
governmental permits and licensing and other factors critical to the successful development of each project. The Company
will compete against both new and existing developments and developers. Any increase in or change to any competitive factor
could result in the Company’s inability to begin or complete development of a project in a timely manner, increased costs
for the design, development and completion of a project, and/or higher costs and/or lower revenues from the marketing, sales and/or
operation of a development. As a result, the Company may experience lower revenue and decreased profits due to these factors,
impacting the Company’s operations and its overall financial results.
Future terrorist activity and/or international instability
could adverse impact the Company’s real estate developments and financial operations.
The Company expects to operate real estate developments
in a variety of locales, including the United States, Mexico, the Caribbean and South America. A terrorist attack against
the United States or other foreign country, an increase in terroristic threats or suspected activity, and/or an increase in domestic
or international instability, whether or not located in a country in which the Company has real estate assets, could significantly
affect the Company’s business by slowing, delaying or halting construction of real estate developments, increasing the cost
of such developments, and/or reducing the sales and/or usages of such properties, thereby adversely affect the Company’s
business.
The Company may incur environmental liabilities with respect
to its development projects.
The properties the
Company will target for investment will be subject to a variety of local, state and federal statutes, ordinances, rules and regulations
concerning the protection of health and the environment. The particular environmental laws that apply to any given community vary
greatly according to the community site, the site’s environmental conditions and the present and former use of the site.
Environmental laws may result in delays, may cause the Company to incur substantial compliance and other costs and may prohibit
or severely restrict development in certain environmentally sensitive regions or areas. Furthermore, under various federal, state
and local laws, ordinances and regulations, an owner of real property may be liable for the costs or removal or remediation of
certain hazardous or toxic substances on or in such property. Such laws often impose such liability without regard to whether the
Company knew of, or was responsible for, the presence of such hazardous or toxic substances. The cost of any required remediation
and the Company’s liability therefor as to any property are generally not limited under such laws and could exceed the value
of the property and/or the aggregate assets of the Company. The presence of such substances, or the failure to properly remediate
contamination from such substances, may adversely affect the Company’s ability to sell the real estate or to borrow using
such property as collateral.
If the Company fails to diversify its
real estate investment portfolio, downturns relating to certain geographic regions, types of assets, industries or business sectors
may have a more significant adverse impact on the Company’s income and assets than if it had a diversified development property
portfolio.
The Company is not required
to observe specific diversification criteria. Therefore, its target portfolio may at times be concentrated in certain asset types
that are subject to higher risk of foreclosure, or secured by assets concentrated in a limited number of geographic locations.
To the extent that the Company’s real estate portfolio will be concentrated in limited geographic regions, types of assets,
industries or business sectors, downturns relating generally to such region, type of asset, industry or business sector may result,
for example, in tenants defaulting on their lease obligations at a number of properties within a short time period, which may reduce
future projected net income and the value of the Company’s publicly traded securities and, accordingly, adversely affect
the Company’s business and prospects.
The Company’s co-venture partners,
co-tenants or other partners in co-ownership arrangements could take actions that decrease the value of an investment to the Company
and lower the Company’s valuation.
Certain of the development
properties that we may acquire could involve joint ventures, tenant-in-common investments or other co-ownership arrangements with
third parties having investment objectives that are may or may not be similar to those of the Company for the acquisition, development
or improvement of properties, as well as the acquisition of real estate-related investments. The Company also may purchase and
develop properties in joint ventures or in partnerships, co-tenancies or other co-ownership arrangements with the sellers of the
properties, affiliates of the sellers, developers or other persons. Such investments may involve risks not otherwise present with
other forms of real estate investment, including, for example:
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the possibility that the Company’s co-venturer, co-tenant or partner in an investment might become bankrupt;
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the possibility that the investment may require additional capital that the Company or its partner do not have, which lack of capital could affect the performance of the investment or dilute our interest if the partner were to contribute the Company’s share of the capital;
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the possibility that a co-venturer, co-tenant or partner in an investment might breach a loan agreement or other agreement or otherwise, by action or inaction, act in a way detrimental to the Company or the investment;
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that such co-venturer, co-tenant or partner may at any time have economic or business interests or goals that are or that become inconsistent with the business interests or goals of the Company;
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the possibility that the Company may incur liabilities as the result of the action taken by the Company’s partner or co-investor;
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that such co-venturer, co-tenant or partner may be in a position to take action contrary to the Company’s instructions or requests or contrary to the Company’s policies or objectives; or
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that such partner may exercise buy/sell rights that force the Company to either acquire the entire investment, or dispose of its share, at a time and price that may not be consistent with the Company’s investment objectives.
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Any of the above might subject a property to
liabilities in excess of those contemplated and thus reduce the Company’s returns on that investment.
Uninsured losses relating to real property
or excessively expensive premiums for insurance coverage may adversely affect the value of your Company stock.
The nature of the activities
at certain properties we may acquire or develop will expose us and our operators to potential liability for personal injuries and,
in certain instances, property damage claims. For instance, there are types of losses, generally catastrophic in nature, such as
losses due to wars, acts of terrorism, earthquakes, pollution, environmental matters or extreme weather conditions such as hurricanes,
floods and snow storms that are uninsurable or not economically insurable, or may be insured subject to limitations, such as large
deductibles or co-payments. Insurance risks associated with potential terrorist acts could sharply increase the premiums the Company
will pay for coverage against property and casualty claims. Mortgage lenders generally insist that specific coverage against terrorism
be purchased by commercial property owners as a condition for providing mortgage, bridge or mezzanine loans. It is uncertain whether
such insurance policies will be available, or available at reasonable cost, which could inhibit the Company’s ability to
finance or refinance its planned to-be-acquired properties. In such instances, the Company may be required to provide other financial
support, either through financial assurances or self-insurance, to cover potential losses. The Company cannot assure you that it
will have adequate coverage for such losses. If any of the Company’s future properties incurs a casualty loss that is not
fully covered by insurance, the value of the Company’s assets will be reduced by the amount of any such uninsured loss. In
addition, other than the capital reserve or other reserves the Company may establish, the Company does not expect to have any contingent
sources of funding in place to repair or reconstruct any uninsured damaged property, and the Company cannot assure you that any
such sources of funding will be available to the Company for such purposes in the future. Also, to the extent the Company must
pay unexpectedly large amounts for insurance, the Company could suffer reduced earnings that would result in a decreased value
attributed to the Company’s publicly traded stock.
The
Company could face losses with respect to abandoned predevelopment costs.
The
development process inherently requires that a large number of opportunities be pursued with only a few being developed and constructed.
The Company may incur significant costs for predevelopment activity for projects that are abandoned that directly affect the Company’s
results of operations. The Company expects to institute procedures and controls that are intended to minimize this risk, but it
is likely that there will be predevelopment costs charged to expense on an ongoing basis.
The Company may not have adequate financing to fund its future
property acquisitions and project developments, and such capital resources may not be available to the Company on commercially
reasonable terms, or at all.
The implementation of the Company’s new
business plan including the prospective acquisition of development properties and the completion of construction projects on such
properties will involve considerable sums of capital. The Company currently does not have any such capital and will be required
to raise acquisition, construction and related funds in the future on a project by project basis. The Company may not be successful
in its efforts to raise such funds, or capital that it can acquire may not be reasonably priced. In such a case, the Company may
not be able to successfully effect its new business plan. Such a failure would have a material adverse effect on the Company’s
financial results, its future business prospects and its public market stock valuation.
The Company’s financial condition
as of December 31, 2016 raises substantial doubt about the Company’s ability to continue as a going-concern.
As of December 31,
2016, the Company had an accumulated deficit of $115,635 and shareholders deficit of $1,408. 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 December 31, 2016 were $2,677, 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 $253 from the Neova Escrow Agreement (see Acquisitions and Dispositions below). Restricted cash also includes
$89 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 payable
in two tranches ($3 million at closing and $2 million 90 days after closing) plus a $4.5 million royalty agreement. (See Note
18 Subsequent Event and Acquisitions and Dispositions below). On January 23, 2017, the Company entered into a First Amendment
(the “First APA Amendment”) to the Asset Purchase Agreement. This transaction was completed on January 23, 2017.
All references to
the Neova, the Consumer or Radiancy business and/or XTRAC product divisions within this Form 10-K are intended for historical
purposes only and for the interpretation of past revenue and business results, and do not form a part of the Company’s future
business and revenue plans.
Risk Factors Relating to the Sale of
the Consumer Products Division
Because the Consumer Products division
represented approximately 89% of the Company’s total revenues for fiscal year 2016, its business following the Asset Sale
will be substantially different.
The Consumer Products
division represented approximately 89% of the Company’s total revenues for the fiscal year 2016. Following the consummation
of the sale of this business, the Company’s results of operations and financial condition may be materially adversely affected
if it fails to effectively reduce its overhead costs to reflect that the sale of the consumer business represented sale of substantially
all of the operational assets of the Company.
If the sale of the Consumer Products
division disrupts the Company’s business operations and prevents the Company from realizing intended benefits, our business
may be harmed.
The sale of the Consumer
Products division may disrupt the operation of the Company’s business and prevent it from realizing the intended benefits
of the Asset Sale as a result of a number of obstacles, such as the loss of key employees, customers or business partners, the
failure to adjust or implement its business strategies, additional expenditures required to facilitate the Asset Sale transaction,
and the diversion of management's attention from day-to-day operations.
There is no assurance that the $2.0
million portion of the purchase price for the consumer products group will be paid.
The consideration
for the sale of the Consumer Products division was $9.5 million in cash, with three million dollars ($3,000) paid upon closing
on January 23, 2017; two million dollars ($2,000) to be paid on or before the ninetieth (90th) day following the closing date
of the transaction; and the remaining four million five hundred thousand dollars ($4,500) will be paid by Purchaser to the Company
under a continuing royalty on net cash (invoiced amount less sales refunds, returns, rebates, allowances and similar items) actually
received by Purchaser 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
the Company reaches that amount.
A letter of credit
for the payment of the two million dollars ($2,000) was issued for the Company’s benefit on the date that the Asset Purchase
Agreement was executed to guarantee the payment by the Purchaser of that amount. The letter of credit was issued by a third party
for our benefit and is not secured by any assets of the Purchaser or the third party issuer. However, the letter of credit is
only valid until the earlier of 180 days after the letter of credit was issued or full payment upon demand and presentation on
or before January 3, 2017. If the letter of credit is no longer valid, we may be unable to collect the $2.0 million payment for
the Asset Sale and the Asset Sale may therefore terminate. If we are unable to consummate the Asset Sale we could be forced into
bankruptcy or liquidation.
There is no assurance that the final
$4.5 million of the purchase price for the consumer products group will be paid to the Company in the near term or that the payment
will be made in full or at all.
The remaining four
million five hundred thousand dollar ($4,500) payment for the consumer products division will be paid by the Purchaser to the
Company under a continuing royalty on net cash (invoiced amount less sales refunds, returns, rebates, allowances and similar items)
actually received by Purchaser 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 the Company reaches that amount. Royalty payments will be made on a monthly basis in arrears within thirty days of each
month end. The Company will receive thirty five percent (35%) of net cash actually received by Purchaser through Consumer Products
sold through live television promotions less certain deductions and six percent (6%) of all other sales of Consumer Products.
The final $4.5 million
payment will be paid solely on the basis of future royalty payments. Further, the final $4.5 million payment is not secured by
the consumer products business or any other assets of the Purchaser. Accordingly, the Company’s receipt of the final payment
will be contingent upon the Purchaser’s ability to sell the consumer products.
If the Purchaser is
unable to successfully sell the consumer products, the Company may not receive the proceeds from the royalty until a time in the
distant future, or may only receive a portion of the royalties or none of the $4.5 million at all, if the Purchaser:
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sells
the consumer products at a slow rate;
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suffers
declining revenue from the loss of a significant customer;
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fails
to maintain its relationships with key retailers or distributors;
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suffers
a disruption in its third party call center operations;
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is
unable to attract visitors to its websites through search engines and other online sources
and then convert those visitors into customers in a cost-effective manner;
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is
unable to purchase an appropriate level of online, over-the-air and direct-to-market
advertising time, which has undergone major and unanticipated changes resulting in lowered
availability of advertising airtime and higher prices for the available airtime; or
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is
unable to deliver advertising in an appropriate and effective manner and/or reach an
acceptable rate of return on that advertising spend,
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There is no assurance that the funds
received from the sale of the Consumer Products division will be sufficient to repay all the Company’s debts, or provide
sufficient financing to the Company to grow its future operations.
As of December 31,
2016, the Company and its subsidiaries had a combined total of $6,648 in outstanding accounts payable to third parties and its
corporate officers and directors. As stated above, the Company will collect $9.5 million from the sale of its Consumer Products
division, and will have limited, if any, ongoing revenue from the sales of products in its LHE line, particularly since the value
of the LHE assets as of December 31, 2016, were relatively immaterial. Moreover, there is no guarantee that the Company will collect
approximately $6.5 million of the payments for the sale of its Consumer Products division. Because of the uncertainty of the collection
of those monies, there is no assurance that the Company will have sufficient funds to pay the outstanding accounts payable to
its third parties, corporate officers and directors, and also have sufficient funds to devote to the growth of its LHE product
line. Should the Company not be able to pay the amounts due to its creditors, those creditors may seek to take action to enforce
the payment of their debts, including the instigation of litigation to collect funds from the Company and the possibility of filing
a bankruptcy action against the Company. In the event of such steps, the Company’s assets could be liquidated, and there
would be no sums remaining for the payment of any dividends to the Company’s stockholders, while the value of the stock
of the Company would be reduced or eliminated as a result of these actions.
The Company is required to provide
certain transition services to the purchaser of the Consumer Products division.
Under a Transition
Services Agreement entered into with ICTV Brands, the purchaser of the Consumer Products division, the Company is required to
provide certain services to ICTV, including the provision of certain sales, marketing, legal, accounting and payroll services.
The period of time to provide those services ranges from a few months post-closing of the transaction, to up to a year following
the close of the transaction. In order to provide these contractually-mandated services, the Company must devote certain resources
to those services which would otherwise be devoted to the payment of the Company’s outstanding debts, the growth of its
LHE product line, and other strategic alliances for the Company. Moreover, these services require the presence of certain key
personnel of the Company. Should the Company lose a key employee, or be otherwise unable to provide one or more of these services,
the Company may be subject to action by ICTV to force the provision of these services or otherwise provide recompense to ICTV
for the lack of these services.
The Company may not be able to unwind
the business affairs, and terminate the existence, of certain of the Company’s international subsidiaries in a timely and
efficient manner. .
The Company has certain
international subsidiaries, including companies located in the United Kingdom and Israel. Those companies were involved in the
operation of the Company’s Neova and Consumer Products businesses; now that those businesses have been sold, those companies
are no longer required for the operations of the corporate group. The Company anticipates unwinding the business affairs of those
corporations over the next six to twelve months, and then deciding whether or not to terminate those corporations or seek an alternate
purchaser for these companies. There is no guarantee that the Company will be able to conclude these matters in a timely and efficient
manner. The unwinding of these subsidiaries will require the use of certain Company personnel and resources which might otherwise
be devoted to other operations of the Company, including personnel who are now, or will shortly be, employed by the purchasers
of the Neova and Consumer Products divisions.
The Company may not have sufficient
access to certain international personnel while unwinding its operations in those countries.
The Company utilized the services of certain
personnel at its international subsidiaries to provide accounting, legal, marketing and sales and other services to the Company
and its United States subsidiaries, including the accounting and record-keeping services for those international subsidiaries.
Those personnel have been assigned to ICTV Brands, the purchaser of the Company’s Consumer Products division, and will become
employees of ICTV brands at the end of a transition period. The Company may not be able to utilize the services of those employees
after this time. Until the Company closes those international subsidiaries, the Company will need such services in order to conduct
the business of the subsidiaries, and therefore the Company may need to seek third party replacements at a much higher cost to
the Company, placing a burden upon the Company’s remaining resources.
The sale of the Company’s
Consumer Products division may adversely affect the Company’s business and results of operations.
The sale of the Company’s
Consumer Products division may adversely affect the trading price of the Company’s common stock, its remaining business
or its relationships with customers and suppliers of that business and the Company’s remaining employees. This may affect
the Company’s ability to collect amounts when due from the sale of its business assets.
Risk Factors Relating to the Company’s
Business
Economic downturns and disruption
in the financial markets could adversely affect the Company’s financial condition and results of operations.
Financial markets
in the United States, Europe and Asia have experienced prolonged periods of significant disruption, particularly in the periods
following 2008 financial market tightening. These periods included volatility in securities prices and diminished liquidity and
credit availability. Furthermore, an economic slowdown in the United States and other countries can weaken consumer confidence
and lead to significant reductions in the amounts persons and businesses will spend on consumer products and other expenditures.
In part, as a result, certain of the Company’s operations and revenues can be negatively impacted.
If adverse general
economic conditions exist and continue for prolonged periods of time, the Company’s future revenue, profitability and cash
flow from operations could decrease and its liquidity and financial condition could be adversely impacted.
The Company
is exposed to credit risk of some of its customers.
The Company has experienced
demands for customer financing and facilitation of leasing arrangements, which it typically refers to leasing companies unrelated
to the Company.
The Company’s
exposure to the credit risks may increase during an economic slowdown. Although the Company has programs in place that are designed
to monitor and mitigate the associated risk, there can be no assurance that such programs will be effective in reducing its credit
risks. Future credit losses, if incurred, could harm its business and have a material adverse effect on its operating results
and financial condition. The Company maintains estimated accruals and allowances for its business terms. However, distributors
tend to have more limited financial resources than other resellers and end-user customers and therefore represent potential sources
of increased credit risk because they may be more likely to lack the reserve resources to meet payment obligations.
If the Company may need to raise
additional funds to pursue its growth strategy or continue its operations, we may be unable to raise capital when needed.
From time to time,
the Company may seek additional equity or debt financing to provide for capital expenditures, finance working capital requirements,
continue its expansion, increase liquidity, develop new products and services or make acquisitions or other investments. In addition,
if its business plans change, general economic, financial or political conditions in its markets change, or other circumstances
arise that have a material negative effect on its cash flow, the anticipated cash needs of its business as well as its conclusions
as to the adequacy of its available sources of capital could change significantly.
Any of these events
or circumstances could result in significant additional funding needs, requiring the Company to raise additional capital, and
we cannot predict the timing or amount of any such capital requirements at this time. If financing is not available on satisfactory
terms, or at all, the Company may be unable to expand its business or to develop new business at the rate desired and its results
of operations may suffer.
If the Company does not continue
to develop and commercialize new products and identify new markets for its products and technologies, the Company may not remain
competitive, and its revenues and operating results could suffer.
The medical and cosmetic
industry is subject to continuous technological development and product innovation. If the Company does not continue to innovate
in developing new products and applications, its competitive position will likely deteriorate as other companies successfully
design and commercialize new products and applications. Accordingly, its success depends in part on developing innovative applications
of its technology and identifying new markets for, and applications of, existing products and technology. The Company is primarily
focused on collecting the remaining payments, if any, from the sale of substantially all of its assets and has relatively immaterial
remaining assets from which to develop innovative products for sale.
The markets for the Company’s
products are intensely competitive and we may not be able to compete effectively against the larger, more well-established companies
that dominate this market or emerging, and small, innovative companies that may seek to obtain or increase their share of the
market.
The markets for the
Company’s products are intensely competitive and many of our competitors are much larger and have substantially more financial
and human resources than we do. Many have long histories and strong reputations within the industry and a relatively small number
of companies dominate these markets.
We face direct competition
from large pharmaceutical companies, including, for example, Biogen, Inc., Centocor, Inc., and Abbott Laboratories, which are
engaged in the research, development and commercialization of treatments for psoriasis, atopic dermatitis, and leukoderma. In
some cases, those companies have already received FDA approval or commenced clinical trials for such treatments. Many of these
companies have significantly greater financial resources and expertise in research and development, manufacturing, conducting
pre-clinical studies and clinical trials and marketing than we do.
Other competitors
include well-established pharmaceutical, cosmetic and healthcare companies such as Allergan, Inc., Valeant Pharmaceuticals International,
Inc. and Estee Lauder Inc. These companies may enjoy significant competitive advantages over us, including:
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broad
product offerings, which address the needs of physicians and hospitals in a wide range of procedures;
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greater
experience in, and resources for, launching, marketing, distributing and selling products, including strong sales forces and established
distribution networks;
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existing
relationships with physicians and hospitals;
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more
extensive intellectual property portfolios and resources for patent protection;
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greater
financial and other resources for product research and development;
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greater
experience in obtaining and maintaining FDA and other regulatory clearances or approvals for products and product enhancements;
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established
manufacturing operations and contract manufacturing relationships;
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significantly
greater name recognition and more recognizable trademarks; and
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established
relationships with healthcare providers and payors.
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Smaller or early-stage
companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established
companies. Our commercial opportunity will be reduced or eliminated if we are unsuccessful in convincing physician and patient
customers and consumers to use our products or if our competitors develop and commercialize products that are safer and more effective
than any products that we may develop.
The Company’s LHE products
and any of the Company’s future products or services may fail to gain market acceptance, which could adversely affect the
Company’s competitive position.
The Company has generated
limited commercial distribution for certain of its other products. The Company may be unsuccessful in continuing its existing
or developing new, strategic selling affiliates and alternate channels in order to maintain or expand the markets for the existing
or future products of the LHE business.
Even if adequate
financing is available and such products are ready for market, the Company cannot assure you that its products and services will
find sufficient acceptance in the marketplace under its sales strategies.
The Company also
faces a risk that other companies in the market for dermatological products and services may be able to provide dermatologists
a higher overall yield on investment and therefore compromise the Company’s ability to increase its base of users and ensure
they engage in optimal usage of its products. If, for example, such other companies have products (such as Botox or topical creams
for disease management) that require less time commitment from the dermatologist and yield an attractive return on a dermatologist’s
time and investment, we may find that our efforts to increase our base of users are hindered.
The Company therefore cannot assure you
that the marketplace will be receptive to its skincare products over competing products, services and therapies. Failure of the
Company’s products to achieve market acceptance could have a material adverse effect on the Company’s business, financial
condition and results of operations.
Many of the Company’s expenses
are fixed and many are based, in significant part, on its expectations of its future revenue and are incurred prior to the sale
of its products and services. Therefore, any significant decline in revenue for any period could have an immediate negative impact
on its margins, net income and financial results for the period.
The Company’s
expense levels are based, in significant part, on its estimates of future revenue and many of these expenses are fixed in the
short term. As a result, the Company may be unable to adjust its spending in a timely manner if its revenue falls short of its
expectations. Accordingly, any significant shortfall of revenue in relation to its estimates could have an immediate negative
effect on its profitability. In addition, as its business grows, the Company anticipates increasing its operating expenses to
expand its product development, technical support, sales and marketing and administrative organizations. Any such expansion could
cause material losses to the extent the Company does not generate additional revenue sufficient to cover the additional expenses.
The Company’s failure to maintain
its relationships with its key distributors (none of which have an ongoing obligation to sell our products) on acceptable terms
would have a material adverse effect on its results of operations and financial condition, or if the Company fails to effectively
manage or, retain its distribution network, its business, prospects and brand may be materially and adversely affected.
Sales made through
distributors have represented a significant part of the Company’s sales revenue from the LHE product line. The Company’s
LHE remaining assets are relatively immaterial and since these distributors are not obligated to sell our products, and they likely
may choose to end their relationship with us. Even if we maintain a business relationship with such distributors, they may sell
competing products or may not be able to sell our products.
Furthermore, the
Company has a limited ability to manage the activities of its independent third-party distributors. The Company’s distributors
could take one or more of the following actions, any of which could have a material adverse effect on its business, prospects
and brand:
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sell
products that compete with its products in breach of their non-competition agreements with the Company;
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violate
laws or regulations;
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fail
to adequately promote its products; or
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fail
to provide proper service to its retailers or end-users.
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Failure to adequately
manage the Company’s distribution network, or the non-compliance of this network with its obligations under agreements with
us, could harm the Company’s corporate image among end users of its products and disrupt its sales, or result in fines or
other legal action against the Company.
The Company has a new distributor
in the Japanese market, and the delay or failure to re-implement sales in this market may have an adverse effect on its business.
On April 7, 2015
the Company announced the signing of an exclusive distribution agreement by its Radiancy Inc. subsidiary with Synergy Trading
Corporation for certain no!no!™ products in Japan. Synergy Trading Corporation, based in Osaka, has been a leading Japanese
importer of consumer products for more than a decade, managing multinational brands from the U.S. and Europe. This agreement includes
Radiancy’s no!no! 8800 and no!no! PRO. In addition, Synergy will launch two new no!no! models during 2016 and has a right
of first refusal to market additional Radiancy consumer products. The agreement runs through December 31, 2016 and is renewable
thereafter. Synergy placed an initial stocking order of $1.2 million. Synergy is best known for bringing SodaStream to Japanese
consumers.
On November 21, 2013
the Company’s majority-owned subsidiary, Radiancy, Inc., had terminated the exclusive distribution agreement between itself
and Ya-Man Ltd., Radiancy’s independent distributor for the no!no!® brand products in the Japanese market. Sales in
Japan represented approximately 5% of the revenues related to the sale of the no!no! products for the year ended December 31,
2013; those sales were largely generated in the first six months of the year. Ya-Man failed to meet its minimum purchasing commitments
under the distribution agreement in the third and fourth quarters of 2013, due to a restructuring of its methods of business operations.
Radiancy and Ya-Man also disputed the responsibility for the payment of marketing expenses for that country of approximately $1
million.
Other factors that
could impact the Company’s results in the market include:
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increased
regulatory constraints with respect to the claims the Company can make regarding the efficacy of products and tools, which could
limit its ability to effectively market them;
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an
adverse impact on the Japanese economy and impairment of consumer spending as a result of the future earthquakes, tsunami and
other natural disasters in Japan;
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significant
weakening of the Japanese yen;
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continued
or increased levels of regulatory and media scrutiny and any regulatory actions taken by regulators, or any adoption of more restrictive
regulations, in response to such scrutiny; and
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increased
competitive pressures from other home use aesthetic device companies who actively seek to solicit its distributors to join their
businesses.
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The Company’s operating results
could be negatively impacted by economic, political or other developments in foreign countries in which it or its subsidiaries
do business.
The Company transports
some of its goods across international borders, primarily those of the U.S., Canada, Europe, Japan and Israel. Since September 11,
2001, there has been more intense scrutiny of goods that are transported across international borders. As a result, some of our
and our subsidiaries’ products may face delays, and increase in costs due to such delays in delivering goods to its customers.
Any events that interfere with, or increase the costs of the transfer of goods across international borders, could have a material
adverse effect on its business.
Further, global economic
conditions continue to be challenging. Although the economy appears to be recovering in some countries, it is not possible for
us to predict the extent and timing of any improvement in global economic conditions. Even with continued growth in many of our
and our subsidiaries’ markets during this period, the economic downturn could adversely impact its business in the future
by causing a decline in demand for our and our subsidiaries’ products, particularly if the economic conditions are prolonged
or worsen.
The international nature of the
Company’s business exposes us to certain business risks that could limit the effectiveness of the Company’s growth
strategy and cause our results of operations to suffer.
Continued expansion
into international markets is an element of the Company’s growth strategy. Introducing and marketing the Company’s
services internationally, developing direct and indirect international sales and support channels and managing foreign personnel
and operations will require significant management attention and financial resources. The Company faces a number of risks associated
with expanding the Company’s business internationally that could negatively impact the Company’s results of operations,
including:
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management, communication and integration problems resulting
from cultural differences and geographic dispersion;
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compliance with foreign laws, including laws regarding
manufacture, importation and registration of products;
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compliance with foreign regulatory requirements and the
establishment of additional regulatory clearances necessary to expand distribution of the Company’s products in countries
outside of the United States;
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competition
from companies with international operations, including large international competitors and entrenched local companies;
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difficulties
in protecting and enforcing intellectual property rights in international jurisdictions, including against persons and companies
which offer counterfeit copies of our products;
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political
and economic instability in some international markets;
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sufficiency
of qualified labor pools in various international markets;
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currency
fluctuations and exchange rates; and
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potentially
adverse tax consequences or an inability to realize tax benefits.
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The Company may not
succeed in its efforts to expand its international presence as a result of the factors described above or other factors that may
have an adverse impact on the Company’s overall financial condition and results of operations
Conditions in Israel may affect
our ability to collect royalty stream related to the consumer products division.
The Company sold
its consumer products division to ICTV Brands, Inc. on January 23, 2017, for which it is to receive up to a $4.5 million in royalty
over the next several years from the sale of those products by ICTV. All of that division’s research and development activities,
a portion of the manufacturing operations and other critical business activities are located in Israel, a country that has experienced
terrorist attacks. Political, economic and military conditions in Israel could adversely affect its operations, including a disruption
of such operations due to terrorist attacks or other hostilities. Although the current hostilities in Israel have had no immediate
and direct impact on the consumer products division to date, the interruption or curtailment of trade between Israel and its trading
partners, or a significant downturn in the economic or financial condition of Israel, may adversely affect the flow of vital components
to ICTV for sale to consumers. We cannot assure you that ongoing hostilities related to Israel will not have a material adverse
effect on ICTV’s business, and thus our royalty stream or our share price.
The Company’s
Israeli-based facilities and/or manufacturing subcontractors could also be subject to catastrophic loss such as fire, flood, or
earthquake. Any such loss at any of these facilities could disrupt operations, delay production, shipments and revenue and result
in significant expense to repair and replace those facilities.
The Israeli operations may be disrupted
by the obligation of its personnel to perform military service.
Many of the employees
of ICTV that are located in Israel are legally obligated to perform annual military reserve duty in the Israeli Defense Forces
and may be called to active duty under emergency circumstances at any time without substantial notice to their employer. If a
military conflict or war arises, these individuals could be required to serve in the military for extended periods of time. As
a result, the Israeli-based operations could be disrupted by the absence, for a significant period of time, of one or more of
its executive officers or a significant number of its other employees due to such reserve duty.
If the Company fails to manage its
distribution partners or to market and distribute its products effectively, the Company may experience diminished revenues and
profits.
There are significant
risks involved in building and managing the Company’s sales and marketing distribution network and marketing its products,
including the Company’s ability:
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to
contract with, as needed, a sufficient number of qualified distribution partners with the aptitude, skills and understanding to
market its LHE product line effectively;
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to
adequately train those distribution partners in the use and benefits of all its products and services, thereby making them more
effective promoters;
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to
manage its distribution partners and its ancillary channels (e.g., internet and/or telesales) such that variable and semi-fixed
expenses grow at a lesser rate than its revenues; and
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The Company cannot
predict how successful it may be in marketing its LHE skin health products in the U.S., nor can the Company predict the success
of any new skin health products that it may introduce. Despite an increased focus on developing alternate channels for many of
the Company’s skin health products, the Company may find that channels that are attractive to the Company are unavailable
because they already carry competitive products. No assurance can be given that the Company will be successful in marketing and
selling its skin health products.
The Company may encounter difficulties
in quality testing and the manufacturing of its products in commercial quantities, which could adversely impact the rate at which
the Company grows.
There can be no guarantee
that the Company’s quality assurance testing programs will be adequate to detect all defects, either ones in individual
products or ones that could affect numerous shipments, which might interfere with customer satisfaction, reduce sales opportunities,
or affect gross margins. In the future, the Company may need to replace certain product components and provide remediation in
response to the discovery of defects or bugs in such products that it has shipped. There can be no assurance that such a remediation,
depending on the product involved, would not have a material impact. An inability to cure a product defect could result in the
failure of a product line, temporary or permanent withdrawal from a product or market, damage to its reputation, inventory costs
or product reengineering expenses, any of which could have a material impact on the Company’s revenue, margins and net income.
Further, the Company
may encounter difficulties manufacturing its line of products because it has limited experience manufacturing such products in
significant commercial quantities. As a result, the Company will, in order to increase its manufacturing output significantly,
have to attract and retain qualified employees for such assembly and testing operations.
Some of the components
necessary for the assembly of the Company’s products are currently provided to the Company by third-party suppliers. While
alternative suppliers exist and could be identified, the disruption or termination of the supply of components could cause a significant
increase in the costs of these components, which could affect our operating results. The Company’s dependence on a limited
number of third-party suppliers and the challenges the Company may face in obtaining adequate supplies involve several risks,
including limited control over pricing, availability, quality and delivery schedules. A disruption or termination in the supply
of components could also result in the Company’s inability to meet demand for its products, which could harm its ability
to generate revenues, lead to customer dissatisfaction and damage its reputation. Furthermore, if the Company is required to change
the manufacturer of a key component of its products, the Company may be required to verify that the new manufacturer maintains
facilities and procedures that comply with quality standards and with all applicable regulations and guidelines including Quality
Systems Regulations, or QSR requirements and performance standards. Failure to do so could result in the FDA taking legal or regulatory
enforcement action against the Company and/or its products (e.g. recalls, fines, penalties, injunctions, seizures, prosecution
or other adverse actions). The delays associated with the verification of a new manufacturer could delay the Company’s ability
to manufacture its products in a timely manner or within budget. The Company faces the risk that there will be supply chain problems
if the volumes do not match to the margins, as certain of the Company’s consumer market products are intended to be high-volume,
lower-margined products.
Although the Company
believes that its current manufacturing facilities are adequate to support its commercial manufacturing activities for the foreseeable
future, the Company may be required to expand or restructure its manufacturing facilities to increase capacity substantially.
In addition, if the Company is unable to provide customers with high-quality products in a timely manner, the Company may not
be able to achieve market acceptance and growth for its consumer, skincare and other products. The Company’s inability to
manufacture or commercialize its devices successfully could have a material adverse effect on its revenue.
If the Company fails to manage and
protect its and its subsidiaries’ network security and underlying data effectively, its businesses could be exposed to a
cyber-attack or other disruption which could harm its operating results.
Like other large
corporations, the Company relies upon a variety of information technology systems to transmit, process and store information in
an electronic format for use in daily operations. In particular, the Company possesses and uses both personal health information
and personal identification information in the conduct of its business, including credit card, insurance and banking information
of our customers. The size, inter-relationship and complexity of these systems, and the possession of such information, makes
us vulnerable to a cyber-attack, malicious intrusion, breakdown, destruction, theft or loss of data privacy or other significant
interference with the use and possession of such information, that could harm our business. Unauthorized disclosure or manipulation
of such data, whether through breach of network security or other interception of this information, could expose the Company to
costly litigation, damage its reputation and result in a lower revenue stream and the loss of some of its customers.
Our information systems
require a constant and ongoing dedication of significant resources to maintain, protect, and enhance our existing systems as well
as keep pace with changes in information processing technology and regulatory standards. In particular, maintaining the Company’s
network security is of critical importance because the online e-commerce systems used by our consumer product lines store proprietary
and confidential customer data such as names, addresses, other personal information and credit card numbers. The Company uses
commercially available encryption technology to transmit personal information when taking orders. However, third parties may be
able to circumvent these security and business measures by developing and deploying viruses, worms and other malicious software
programs that are designed to attack or attempt to infiltrate its systems and networks. Employee error, malfeasance or other mistakes
in the storage, use or transmission of personal information could result in a breach of customer or employee privacy. The Company
employs contractors who may have access to the personal information of customers and employees. It is possible such individuals
could circumvent the Company’s data security controls, which could result in a breach of customer privacy. In addition,
third parties may attempt to hack into our systems to obtain data relating to our products or our proprietary technology. Any
failure to maintain or protect these information technology systems and data integrity, including from cyber-attacks, intrusions
or other breaches, could result in the unauthorized access to patient data and personally identifiable information, theft of intellectual
property or other misappropriation of assets, or otherwise compromise our confidential or proprietary information and disrupt
our operations.
The possession and
use of personal information in conducting its business subject the Company to legislative and regulatory burdens regarding the
safeguarding of this information and the processes to be followed in the event of a data breach. Any interference with or unauthorized
access to this information may cause us to lose existing customers; have difficulty preventing, detecting, and controlling fraud;
cause disputes with customers, physicians, and other health care professionals; render us subject to legal claims and liability;
result in regulatory sanctions or penalties; increase our operating expenses and cause us to incur additional significant expenses
or lose revenues; render us unable to accept and process credit card transactions in our consumer businesses; or suffer other
adverse consequences, any of which could have a material adverse effect on our business, financial condition or results of operations.
If the Company fails to manage its
and its subsidiaries’ growth effectively, its businesses could be disrupted which could harm its operating results.
The Company has experienced,
and may in the future experience, growth in its business, both organically and through the acquisition of businesses and product
lines. The Company expects to make significant investments to enable its future growth through, among other things, new product
innovation and clinical trials for new applications and products.
Such growth may place
a strain on the Company’s management and operations. The Company’s ability to manage this growth will depend upon,
among other factors, its ability to broaden its management team; its ability to attract, hire, train, motivate and retain skilled
employees; and the ability of its officers and key employees to continue to implement and improve its operational, financial and
other systems, to manage multiple, concurrent customer relationships and different products and to respond to increasing compliance
requirements. The Company’s future success is heavily dependent upon achieving such growth and acceptance of its products.
Any failure to effectively manage future growth could have a material adverse effect on the Company’s business, results
of operations and financial condition.
The Company is exposed to risks
associated with credit card and payment fraud and with credit card processing, which could cause the Company to lose revenue.
A significant part
of the payments for its products and services are processed by the Company through credit cards or automated payment systems.
The Company has suffered losses, and may continue to suffer losses, as a result of orders placed with fraudulent credit cards
or other fraudulent payment data. For example, under current credit card practices, the Company may be liable for fraudulent credit
card transactions if it does not obtain a cardholder’s signature, a frequent and accepted practice in internet sales. In
addition, charges under these payment methods may be challenged as fraudulent or unauthorized for a significant period of time
after the purchase of the goods and services, often up to 18 months after the transactions. While the Company employs technology
solutions to help it detect fraudulent transactions, those solutions are not guaranteed to uncover all fraudulent transactions.
Therefore, the failure to detect or control payment fraud could cause the Company to lose sales and revenue and incur additional
costs in managing fraud-control processes.
The Company’s
failure to respond to rapid changes in technology and its applications in the medical devices industry or the development of a
cure for skin conditions treated by its products could make its treatment system obsolete.
The medical device
industry is subject to rapid and substantial technological development and product innovations. To be successful, the Company
must respond to new developments in technology, new applications of existing technology and new treatment methods. The Company
may also encounter greater pressure for innovation in order to satisfy a demand for novelty in the consumer market. The Company’s
financial condition and operating results could be adversely affected if the Company fails to be responsive on a timely and effective
basis to competitors’ new devices, applications, treatments or price strategies.
As the Company develops
new products or improves its existing products, the Company may accelerate the economic obsolescence of the existing, unimproved
products and their components. The obsolete products and related components may have little to no resale value, leading to an
increase in the reserves the Company has against its inventory. Likewise, there is a risk that the new products or improved existing
products may not achieve market acceptance and therefore may also lead to an increase in the reserves against the Company’s
inventory.
The Company’s marketing campaigns
and advertising may be attacked as false and misleading, and our media spending might not result in increased net sales or generate
the levels of product and brand name awareness that the Company desires. The Company might not be able to increase its net sales
at the same rate as it increases its advertising and marketing expenditures.
The Company’s
future growth and profitability will depend in part on the effectiveness and efficiency of its marketing campaigns and media spending,
including its ability to:
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create
greater awareness of its products and brand name;
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determine
the appropriate creative message and media mix for future expenditures; and
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effectively
manage advertising costs, including creative and media costs, to maintain acceptable costs in relation to sales levels and operating
margins.
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The Company’s
former no!no!® Hair and other consumer product’s portfolio of infomercials advertising, and other forms of media may
not result in increased sales or generate desired levels of product and brand name awareness, and may be attacked as false and
misleading. The Company may be required to defend against inaccurate claims of false advertising. The Company is currently the
subject of certain legal proceedings relating to its advertising claims in the U.S. The Company has voluntarily made changes to
its advertising as part of its usual process for reviewing and updating its advertising through the various media and sales channels
we rely upon, and which address certain of the claims made in these matters. These changes have not adversely affected the Company’s
sales of the no!no!® Hair products in the U.S. to date; however the Company may be required to make other changes in the future
in response to existing or potential legal proceedings that could materially and adversely affect such sales.
A higher than anticipated level
of product returns may adversely affect the Company’s business and its customers, or physicians and technicians, as the
case may be, may misuse certain of its products, and product and other damages imposed on the Company may exceed its insurance
coverage, or the Company may be subject to claims that are not covered by insurance.
The Company offers
consumers who purchase its consumer products, including its no!no!
®
brands directly from the Company a money-back
guarantee, subject to time and certain other limitations. Retailers and home shopping channels are also permitted to return the
consumer products, subject to certain limitations. The Company establishes revenue reserves for product returns based on historical
experience, estimated channel inventory levels and other factors. If product returns exceed estimates, the excess would offset
reported revenue, which could negatively affect the Company’s financial results. Product returns and the potential need
to remedy defects or provide replacement products or parts for items shipped in volume could result in substantial costs, the
requirement to conduct an FDA recall and/or submit an FDA-required report of a correction/removal and have a material adverse
effect on the Company’s business and results of operations.
The Company may be
subject to product liability claims from time to time. A number of the Company’s products are highly complex and some are
used to treat delicate skin conditions on and near a patient’s face. In addition, the clinical testing, manufacturing, marketing
and use of certain of the Company’s products and procedures may also expose the Company to product liability, FDA regulatory
and/or legal actions, or other claims. Certain indications for use for the Company’s PTL light-based devices, though approved
outside the U.S., are not approved in the U.S. If a physician elects to apply an off-label use and the use leads to injury, the
Company may be involved in costly litigation. The Company presently maintains liability insurance with coverage limits of at least
$10 million per occurrence and overall aggregate, which the Company believes is an adequate level of product liability insurance,
but product liability insurance is expensive and the Company might not be able to obtain product liability insurance in the future
on acceptable terms or in sufficient amounts to protect the Company, if at all. A successful claim brought against the Company
in excess of its insurance coverage could have a material adverse effect on its business, results of operations and financial
condition. In addition, continuing insurance coverage may also not be available at an acceptable cost, if at all. Therefore, the
Company may not be able to obtain insurance coverage that will be adequate to satisfy a liability that may arise. Regardless of
merit or eventual outcome, product liability claims may result in decreased demand for a product, injury to its reputation, withdrawal
of clinical trial volunteers and loss of revenues. As a result, regardless of whether the Company is insured, a product liability
claim or product recall may result in losses that could result in the FDA taking legal or regulatory enforcement action against
the Company and or its products including recall, and could have a material adverse effect upon the Company’s business,
financial condition and results of operations.
The Company’s costs could
substantially increase if it experiences a significant number of warranty claims.
The Company provided
12-month embedded product warranties, and offers longer warranties available for separate purchase, against technical defects
of its former consumer products division. Its product warranty requires the Company to repair defective parts of its products,
and if necessary, replace defective components; the Company is still responsible for such claims under the Asset Purchase Agreement
by which this division was sold to ICTV Brands, Inc. on January 23, 2017. Historically, the Company has received a limited number
of warranty claims for these products and the costs associated with such warranty claims have also historically been relatively
low. Thus, the Company generally does not accrue a significant liability contingency for potential warranty claims.
If the Company experiences
an increase in warranty claims for products sold to consumers before the sale of that division, or if its repair and replacement
costs associated with such warranty claims increase significantly, we will begin to incur liabilities for potential warranty claims
after the sale of its products at levels that the Company has not previously incurred or anticipated. In addition, an increase
in the frequency of our warranty claims or amount of warranty costs may harm our reputation and could have a material adverse
effect on its financial condition and results of operations.
The Company may be subject to litigation
that will be costly to defend or pursue and uncertain in its outcome.
The Company’s
business may bring it into conflict with its licensees, licensors, or others with whom the Company have contractual or other business
relationships, or with its competitors or others whose interests differ from it. If the Company is unable to resolve those conflicts
on terms that are satisfactory to all parties, the Company may become involved in arbitration and/or litigation brought by or
against it. Such actions are likely to be expensive and may require a significant amount of management’s time and attention,
at the expense of other aspects of our business. The outcome of arbitration or litigation is always uncertain, and in some cases
could include judgments against the Company that require it to pay damages, enjoin it from certain activities, or otherwise affect
its legal or contractual rights, which could have a significant adverse effect on its business. In addition, while the Company
maintains insurance for certain risks, the amount of its insurance coverage may not be adequate to cover the total amount of all
insured claims and liabilities. It also is not possible to obtain insurance against all potential risks and liabilities. The Company
cannot predict what the outcome will be in any ongoing or threatened arbitrations and/or litigations, and any adverse results
in any such actions may also materially and negatively impact its business, the market price of its common stock, cash flow, prospects,
revenues, profitability or capital expenditures, or have other material adverse effects on its business, reputation, results of
operations, financial condition or liquidity.
From time to time, the Company may
be threatened with material litigation.
From time to time,
the Company is threatened with individual and class action litigations involving its business, products, advertisements, packaging,
labeling, consumer claims, contracts, agreements, intellectual property, SEC or FDA matters, licenses and other areas involving
it and its business. The outcome or effect on its business, the market price of the Company’s common stock, cash flows,
prospects, revenues, profitability, capital expenditures, reputation, demand for its products, results of operations, financial
condition or liquidity of any future litigation cannot be predicted by the Company. Except as disclosed in Item. 3. Legal Proceedings,
no such current pending matters, if any, are believed to be significant.
Litigation is inherently
unpredictable and may:
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•
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result
in rulings that are materially unfavorable to the Company, including claims for significant damages, fines or penalties, and administrative
remedies, or other rulings that prevent it from operating its business in a certain manner;
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•
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cause
the Company to change its business operations to avoid perceived risks associated with such litigation; and
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require
the expenditure of significant time and resources, which may divert the attention of management and interfere with the pursuit
of the Company’s strategic objectives.
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While the Company
maintains insurance for certain risks, the amount of its insurance coverage may not be adequate to cover the total amount of all
insured claims and liabilities. It also is not possible to obtain insurance against all potential risks and liabilities. If any
litigation were to have a material adverse result, there could be a material impact on the Company’s results of operations,
cash flows or financial position.
The Company has outstanding litigation
which it may not be able to settle, or which it may not be able to settle on terms favorable to the Company.
The Company is involved
in certain litigation, including suits brought by the Company against DS Healthcare, and suits brought against the Company and/or
its one or more of its subsidiaries including suits brought by Mouzon and April Cantley, and a suit brought by a consumer regarding
the no!no! product, as further described in Item 3. Legal Proceedings. The Company intends to vigorously defend itself and its
subsidiaries against claims brought against it, and to prosecute such suits to recoup sums owed to the Company. However, the Company
may seek to settle such matters in order to avoid excessive legal fees and costs and the lengthy time such litigation may require
in order to reach a resolution. However, there is no guarantee that the Company may be able to reach a settlement or resolution
of such litigation, or that such a settlement or resolution will be reached in a manner that is advantageous to the Company, and
in such cases the Company will need to proceed with litigation. Regardless of its outcome, litigation may result in substantial
costs and expenses, and significantly divert the attention of management. There can be no assurance that the Company will be able
to prevail in, or achieve a favorable settlement of, pending matters. In addition to the pending matters, future litigation, government
proceedings, labor disputes, or environmental matters could lead to increased costs or interruption of the Company’s normal
business operations, which could involve a costly and lengthy draw upon the Company’s resources and could result in a resolution
to the litigation which may be detrimental to the Company.
The Company is the subject of certain
tax audits which may not be resolved without impacting the Company’s operations.
The Company has in
the past, and is currently, the subject of certain audits by state agencies for various tax matters including sales and use and
corporate income taxes, and unclaimed property reporting. While past audits have been resolved without significant impact upon
the Company or its operations, there is no guarantee that future audits will be resolved in a manner that is satisfactory to the
Company or that has no material impact upon the Company’s operations. Such results could include the payment of assessments
which could impact the Company’s remaining resources and affect the Company’s ability to continue its operations in
the existing manner.
The Company depends on its executive
officers and key personnel to implement its business strategy and could be harmed by the loss of their services and the inability
to attract personnel for these positions.
The Company believes
that its growth and future success will depend in large part upon the skills of its key management, technical and scientific personnel.
Certain members of the Company’s management staff as well as other key employees may voluntarily terminate their employment
with the Company at any time, with or without notice. There is substantial competition for personnel in the industries in which
we operate, and we may face increased competition for such employees, resulting in the need to compensate these personnel at a
higher-than-anticipated rate, a delay in replacing such personnel and integrating them into the Company’s operations, and
the possibility that we may be unable to attract and retain these personnel. The loss of the services of key personnel, or the
inability to attract and retain additional qualified personnel, could result in delays to product development or approval, loss
of sales and diversion of management resources, and may have an adverse effect on our business and our ability to grow that business.
In particular, the
Company’s success depends in part upon the continued service and performance of Dr. Dolev Rafaeli and Dennis M. McGrath.
The Company has fixed-term employment agreements with Dr. Rafaeli and Mr. McGrath; however, there are no assurances
that the services of these individuals will be available to the Company for any specified period of time. The loss of the services
of one or both of these officers could adversely affect the Company’s ability to develop and introduce its new products.
Additionally, the
Company does not currently maintain “key person” life insurance on the lives of Dr. Rafaeli, Mr. McGrath, its other
executives or any of its employees. The Company’s lack of insurance means that it may not have adequate compensation for
the loss of the services of its key employees, which could affect the Company’s ability to maintain the level of services
formerly provided by those persons.
In our industry,
there is substantial competition for key personnel in the regions in which we operate and we may face increased competition for
such employees, particularly in emerging markets as the trend toward globalization continues. If we are unable to attract key
personnel in a timely manner, including key sales and other personnel who have critical industry experience and relationships
in the regions in which we operate, including in emerging markets, it may have an adverse effect on our business and our ability
to drive growth, including through execution of our strategic initiatives. Furthermore, some of the key personnel for whom we
compete have post-employment arrangements with their current or former employer that may impact our ability to hire them or expose
us and them to claims. In addition, if we are unable to retain and focus our existing key personnel it may have an adverse effect
on our business, financial condition and results from operations. Changes in our senior management structure could lead to inefficiencies
in our ability to execute our strategic, cost-reduction and efficiency initiatives, which may have an adverse effect on our business
and results of operations.
It may be difficult for any of the
Company’s stockholders to effect service of process and enforce their rights against the Company or its officers and directors
in foreign courts.
Certain of the Company’s
operating subsidiaries’ assets are located outside the United States, including locations in Israel and the United Kingdom.
As a result, the Company’s stockholders may find it difficult to enforce their legal rights in the courts of these countries
based on the civil liability provisions of the United States federal securities laws as applied in the courts of the United States
or these countries, even if civil judgments are obtained in courts of the United States. In addition, it is unclear if extradition
treaties in effect between the United States and these countries would permit effective enforcement against any of the Company’s
officers and directors that reside outside the United States of criminal penalties, whether sought under the United States federal
securities laws or other applicable laws.
Currency exchange rate fluctuations
could adversely affect the Company’s operating results.
Some of the Company’s
operating expenses are denominated in New Israeli Shekel (“NIS”). Any significant fluctuation in the value of the
NIS may materially and adversely affect its cash flows, earnings and financial position. For example, an appreciation of NIS against
the U.S. dollar would make any new NIS denominated investments or expenditures more costly to the Company, to the extent that
it needs to convert U.S. dollars into NIS for such purposes. Furthermore, because certain parts of our business include international
business transactions, costs and prices of its products or components in overseas countries, such transactions are affected by
foreign exchange rate changes.
The majority of sales
invoicing for the Company’s PTL business is done in Pounds Sterling, Euros or U.S. dollars, while product costs and the
overhead of the offices in the United Kingdom are denominated in Pounds Sterling. The sales invoicing for the LK Technology business
is done in Brazilian Real. The Company’s U.S. operations, with U.S. dollar operating costs, serve to reduce the exposure
to fluctuations in the value of the Pound Sterling, the Euro, or the Brazilian Real. To the extent that the Company adjusts
its invoicing practices for its PTL and LK Technology businesses, or if the remainder of its business (or any portion thereof)
ceases to be conducted primarily in U.S. dollars, the Company’s exposure to the market’s currency conditions could
present a greater risk to it.
As a result, foreign
exchange rate fluctuations may adversely affect the Company’s business, operating results and financial condition.
The Company’s ability to use
its net operating loss carryforwards to offset future taxable income for U.S. federal income and U.K. business tax purposes may
be limited as a result of “ownership changes” of PhotoMedex caused by the merger. In addition, the amount of such
NOL carryforwards could be subject to adjustment in the event of an IRS examination.
If a corporation
undergoes an “ownership change” under Section 382 of the U.S. Internal Revenue Code, the amount of its pre-change
net operating losses, which we refer to in this report as “NOLs”, that may be utilized to offset future taxable income
is subject to an annual limitation. In general, an ownership change occurs if the aggregate stock ownership of certain stockholders
increases by more than 50 percentage points over such stockholders’ lowest percentage ownership during the applicable testing
period (generally three years).
The annual limitation
generally is determined by multiplying the value of the corporation’s stock immediately before the ownership change by the
applicable long-term tax-exempt rate. Any unused annual limitation may, subject to certain limits, be carried over to later years,
and the limitation may under certain circumstances be increased by recognized built-in gains or reduced by recognized built-in
losses in the assets held by the corporation at the time of the ownership change. Similar rules and limitations may apply for
state income tax purposes.
The reverse merger,
effected on December 13, 2011, did result in an ownership change of PhotoMedex. At the time, the Company estimated that it would
have approximately $56.8 million of U.S. net operating loss carryforwards that could be utilized through the annual limitations
and also through the realization of its built-in gains through amortization in the first 5 years following December 13, 2011.
The balance of the net operating loss carryforwards of pre-merged PhotoMedex amounts was estimated to be approximately $53.5 million.
This balance could only be utilized through realization of the built-in gains other than by means of amortization. Therefore,
on December 27, 2012, PhotoMedex made an internal realignment of its operations by selling its operating businesses to a wholly-owned,
non-consolidated U.S. subsidiary, and thereby realized sufficient gain to offset approximately $45 million of the $53.5 million
remaining balance of net operating losses.
In addition, the
amount of the NOL carryforwards is subject to review and audit by the Internal Revenue Service (the “IRS”). There
can therefore be no assurance that the benefit of such NOL carryforwards will be fully realized.
Likewise, if a corporation
undergoes an “ownership change” and/or a “change in trade or business” under various standards of Her
Majesty’s Revenue and Customs (HMRC, U.K.), the amount of a company’s pre-change NOLs that may be utilized to offset
future taxable income in the U.K. may be limited or not available for offset against that income. After evaluating the effects
of the reverse merger and integration of Radiancy’s business on its U.K. NOLs; management determined that the NOLs remain
usable against future income of the UK subsidiary. However, the amount of the NOL carryforwards remains subject to review and
audit by the HMRC. There can therefore be no assurance that the benefit of such NOL carryforwards will be fully realized.
Risks Related to the Company’s
Intellectual Property Matters
If the Company is unable to adequately
protect or enforce its rights to intellectual property or secure patents right to technologies that it develops, the Company may,
experience reduced market share, assuming any, or incur costly litigation to enforce, maintain or protect such rights.
The Company’s
success depends in part on its ability to maintain and defend patent protection for its products, to preserve its trade secrets
and to operate without infringing the proprietary rights of third parties. However, the Company cannot guarantee that the patents
covering certain of its technologies and processes will not be contested, found to be invalid, unenforceable or owned by another
or circumventable. There can be no assurance that its pending patent applications will result in patents being issued, or that
its competitors will not circumvent, or challenge the validity of, any patents issued to the Company. Any such objections and
rejections may adversely affect the Company’s other patents and patent applications. There can be no assurance that measures
taken by the Company to protect its proprietary information will prevent the unauthorized disclosure or use of this information
or that others will not be able to independently develop such information. In addition, in the event that another party infringes
its patent rights or other proprietary rights, the enforcement of such rights can be a lengthy and costly process, with no guarantee
of success. Moreover, there can be no assurance that claims alleging infringement by the Company of the proprietary rights of
others will not be brought against the Company in the future or that any such claims will not be successful. If the Company is
unable to maintain the proprietary nature of its technologies, its ability to market or be competitive with respect to some or
all of its products may be affected, which could reduce its sales and affect its profitability. Also, as the Company’s patents
expire, competitors may utilize the technology found in such patents to commercialize their own products. Moreover, while the
Company seeks to secure additional patents on commercially desirable improvements, there can be no assurance that the Company
will be successful in securing such patents, or that such additional patents will adequately offset the effect of expiring patents.
Further, pending patent applications are not enforceable.
The Company’s
policy is to file patent applications and to protect certain technology, inventions and improvements that are commercially important
to the development of the Company’s business. The Company’s strategy has been to apply for and maintain patent protection
for inventions and their applications which it believes has potential commercial value in countries that offer significant market
potential. Because of the high costs of applying for, procuring and maintaining patents, the Company is unable to file patent
applications covering all of its products in every country and as a result its patents are limited in scope and geographic coverage
and may not protect the Company from competing products in those markets.
The Company’s
success may depend, in part, on its ability to continue to use certain software in its products and in its business. This software
may have been created by contractors to the Company or may include third-party software such as open source software. There is
a possibility that claims will be made that this software infringes the copyright and/or trade secret rights of one or more third
parties and that such claims may affect the Company’s right to use the software.
From an international
perspective, protection of intellectual property outside of the U.S. is uncertain to the Company. The laws of some countries may
not protect the Company’s intellectual property rights to the same extent as laws in the U.S. The intellectual property
rights the Company enjoys in one country or jurisdiction may be rejected in other countries or jurisdictions, or, if recognized
there, the rights may be significantly diluted. This may affect the Company’s ability to commercialize its products, grow
its product sales and maintain market share in countries outside the U.S. It may be necessary or useful for the Company to participate
in proceedings to determine the validity of its foreign intellectual property rights, or those of its competitors, which could
result in substantial cost and divert its resources, efforts and attention from other aspects of its business.
The Company’s trademarks on
its consumer products lines were limited in scope and geographic coverage and therefore may not significantly distinguish these
products from their competition. These products’ trade secrets were also limited in scope and geographic coverage and therefore
may not adequately protect these products from products offered by competitors.
The Company owned
several key federal and international trademark registrations, and has federal trademark applications pending in the United States
and abroad for additional trademarks, that cover its consumer products, including the no!no! Hair products. That product line
has been sold to a third-party buyer; a substantial amount of the purchase price for the consumer products division which is due
to be paid to the Company depends upon the purchaser’s ability to sell those products to consumers. Even though those federal
registrations were granted to the Company, those trademark rights may still be challenged by other parties. Furthermore, as registration
is usually a requirement for protection in most foreign countries, if those marks were not registered in certain countries, the
purchaser may not have any enforceable rights against competitors in those countries. It is also possible that competitors to
these products will adopt and register trademarks similar to the marks already registered by the Company for these product lines,
thus impeding the ability of the purchasers to build brand identity and possibly leading to customer confusion between the consumer
products and the products of competitors.
The requirement to
protect and enforce these registrations could result in the purchaser incurring substantial costs in prosecuting or defending
trademark infringement suits. It can be difficult and costly to defend trademarks from encroachment, especially on the Internet,
or misappropriation overseas; the consumer products’ customers may become confused and direct their purchases to competitors.
If the purchaser of this product line fails to effectively enforce these trademark rights, its competitive position and brand
recognition may be diminished.
Additionally, third
parties may independently discover trade secrets and proprietary information that allow them to develop technologies and products
that are substantially equivalent or superior to those in the Company’s former consumer products line. The Company attempted
to protect its trade secrets by, among other steps, entering into confidentiality agreements with third parties, employees and
consultants. However, those steps may prove to be ineffective and may be found to be invalid by the laws of a particular state
or country. Moreover, these agreements can be breached and, if they are and even if the purchaser is able to prove the breach
or that the technology has been misappropriated under applicable state law, there may not be an adequate remedy available to the
purchaser. Without the protection afforded by patent, trade secret and proprietary information rights, the purchaser of this line
may face direct competition from others commercializing their products using the Company’s technology, which may have a
material adverse effect on the purchaser’s business and its prospects and thus on its ability to pay the royalty on sales
of these products which is due to the Company.
The Company must monitor and protect
its internet domain names to preserve their value. The Company may be unable to prevent third parties from acquiring domain names
that are similar to, infringe on or otherwise decrease the value of its trademarks.
Third parties may
acquire substantially similar domain names that decrease the value of the Company’s domain names and trademarks and other
proprietary rights which may hurt its business. Moreover, the regulation of domain names in the United States and foreign countries
is subject to change. Governing bodies could appoint additional domain name registrars or modify the requirements for holding
domain names. Governing bodies could also establish additional “top-level” domains, which are the portion of the Web
address that appears to the right of the “dot,” such as “com,” “gov” or “org.”
As a result, the Company may not maintain exclusive rights to all potentially relevant domain names in the United States or in
other countries in which the Company conducts business, which could harm its business or reputation.
Claims that the Company misuses
the intellectual property of others could subject the Company to significant liability and disrupt its business.
The Company may become
subject to material legal proceedings and claims relating to intellectual property matters, including claims of infringement by
competitors and other third parties with respect to current or future products, e-commerce and other web-related technologies,
online business methods, trademarks, copyrights or other proprietary rights. Its competitors, some of which may have substantially
greater resources than the Company has and may have made significant investments in competing products and technologies, may have,
or seek to apply for and obtain, patents, copyrights or trademarks that will prevent, limit or interfere with the Company’s
ability to make, use and sell its current and future products and technologies. The Company may not be successful in defending
allegations of infringement of these patents, copyrights or trademarks. Further, the Company may not be aware of all of the patents
and other intellectual property rights owned by third parties that may be potentially adverse to its interests. The Company may
need to resort to costly and time-consuming litigation to protect and/or enforce its proprietary rights or to determine the scope
and validity of a third party’s patents or other proprietary rights, including whether any of its products, technologies
or processes infringe the patents or other proprietary rights of third parties. Any failure to enforce or protect its rights could
cause the Company to lose the ability to exclude others from using its technologies to develop or sell competing products. The
Company may incur substantial expenses in defending against third-party infringement claims regardless of the merit of such claims.
In addition, while the Company maintains insurance for certain risks, the amount of its insurance coverage may not be adequate
to cover the total amount of all insured claims and liabilities. It also is not possible to obtain insurance against all potential
risks and liabilities. The outcome of any such proceedings is uncertain and, if unfavorable, could force the Company to discontinue
sales of the affected products or impose significant penalties or restrictions on its business. The Company does not conduct comprehensive
patent searches to determine whether the technologies used in its products infringe upon patents held by others. In addition,
product development is inherently uncertain in a rapidly evolving technological environment in which there may be numerous patent
applications pending, many of which are confidential when filed, with regard to similar technologies.
If the Company is
unable to defend its intellectual property rights internationally, it may face increased competition outside the U.S., which could
materially and adversely affect its future business, prospects, operating results and financial results and financial condition.
Risks Related to the Company’s
Regulatory Matters
The Company’s failure to obtain
and maintain FDA clearances or approvals on a timely basis, or at all, would prevent the Company from commercially distributing
and marketing current or upgraded products in the United States, which could severely harm our business.
The Company’s
products, including its LHE product line and the products marketed through the now-sold skincare and consumer products divisions,
were and are subject to rigorous regulation by the FDA and numerous other federal, state and foreign governmental authorities.
The process of obtaining regulatory clearances or approvals to market a medical device can be costly and time consuming, and we
may not be able to obtain these clearances or approvals on a timely basis, if at all. In particular, the FDA permits commercial
distribution of a new medical device only after the device has received clearance under Section 510(k) of the Federal Food,
Drug and Cosmetic Act or is the subject of an approved premarket approval application, or PMA, unless the device is specifically
exempt from those requirements. Should the FDA require, or a change in current regulations occur, that our products be FDA-cleared
for marketing and sale in the U.S. we may be required to incur significant expense and engage in a time consuming process seeking
such approvals. If we were unable to obtain the required FDA approvals for these products or as necessary to make certain claims
about the efficacy of the products, our sales of these products in the U.S. could be materially adversely affected.
The FDA clears marketing
of lower-risk medical devices through the 510(k) process if the manufacturer demonstrates that the new product is substantially
equivalent to other 510(k)-cleared products. High risk devices deemed to pose the greatest risk, such as life-sustaining, life-supporting,
or implantable devices, or devices not deemed substantially equivalent to a previously cleared device, require the pre-market approval
(PMA). The PMA process is more costly, and much longer, than the 510(k) clearance process. A PMA application must be supported
by extensive data, including, but not limited to, technical, preclinical, clinical trial, manufacturing and labeling data, to demonstrate
to the FDA’s satisfaction the safety and efficacy of the device for its intended use.
The Company does not currently
have any products approved for market through the PMA process. Several products are cleared for market through the 510(k) pathway
or are class I products which have been designated as exempt from premarket 510(k) notification requirements. The marketing and
sale of the no!no!® family of consumer products in the United States (excluding no!no! Skin and no!no! Glow which have FDA
clearance), a market that accounted for approximately 89% of the total sales of this line of products for the year ended December 31,
2016, does not currently require FDA marketing clearance. Accordingly, the no!no!® line of products does not currently have
any FDA-cleared indications as to their efficacy in terms of long-term or permanent hair removal or reduction in hair re-growth.
Accordingly, the sale of these products is subject to limitations on the advertising claims allowed to be made regarding the hair
removal and hair reduction effects of these products. This product line was sold to ICTV Brands on January 23, 2017; $4.5 million
of the purchase price is in the form of a continuing royalty to be paid by the purchaser post-closing. The ability of ICTV Brands
to effectively market the no!no! family of consumer products, and thus to pay the royalty to the Company, may be affected by the
limitations on advertising inherent to these products and on any changes to the regulation of these products by the FDA.
The Company’s failure
to comply with U.S. federal, state and foreign governmental regulations could lead to the issuance of warning letters or untitled
letters, the imposition of injunctions, suspensions or loss of regulatory clearance or approvals, product recalls, or corrective
action, termination of distribution, product seizures or civil penalties. In the most extreme cases, criminal sanctions or closure
of the manufacturing facility are possible.
If required, clinical trials necessary
to support a 510(k) notice or PMA application will be expensive and will require the enrollment of large numbers of patients, and
suitable patients may be difficult to identify and recruit. Delays or failures in our clinical trials will prevent us from commercializing
any modified or new products and will adversely affect our business, operating results and prospects.
Initiating and completing
clinical trials necessary to support a 510(k) notice or a PMA application will be time-consuming and expensive and the outcome
uncertain. Moreover, the results of early clinical trials are not necessarily predictive of future results, and any product the
Company advances into clinical trials may not have favorable results in early or later clinical trials.
Conducting successful
clinical studies will require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and
recruit. Patient enrollment in clinical trials and completion of patient participation and follow-up depend on many factors, including
the size of the patient population, the nature of the trial protocol, the attractiveness of, or the discomforts and risks associated
with, the treatments received by patients enrolled as subjects, the availability of appropriate clinical trial investigators, support
staff, and proximity of patients to clinical sites and ability to comply with the eligibility and exclusion criteria for participation
in the clinical trial and patient compliance. For example, patients may be discouraged from enrolling in our clinical trials if
the trial protocol requires them to undergo extensive post-treatment procedures or follow-up to assess the safety and effectiveness
of our products or if they determine that the treatments received under the trial protocols are not attractive or involve unacceptable
risks or discomforts. Patients may also not participate in our clinical trials if they choose to participate in contemporaneous
clinical trials of competitive products. In addition, patients participating in clinical trials may die before completion of the
trial or suffer adverse medical events unrelated to investigational products.
Development of sufficient
and appropriate clinical protocols to demonstrate safety and efficacy may be required and the Company may not adequately develop
such protocols to support clearance and approval. Further, the FDA may require the Company to submit data on a greater number of
patients than it originally anticipated and/or for a longer follow-up period or change the data collection requirements or data
analysis for any clinical trials. Delays in patient enrollment or failure of patients to continue to participate in a clinical
trial may cause an increase in costs and delays in the approval and attempted commercialization of our products or result in the
failure of the clinical trial. The FDA may not consider our data adequate to demonstrate safety and efficacy. Such increased costs
and delays or failures could adversely affect our business, operating results and prospects.
The Company’s medical device operations
are subject to pervasive and continuing FDA regulatory requirements.
Medical devices regulated
by the FDA are subject to “general controls” which include: registration with the FDA; listing commercially distributed
products with the FDA; complying with good manufacturing practices under the quality system regulations; filing reports with the
FDA of and keeping records relative to certain types of adverse events associated with devices under the medical device reporting
regulation; assuring that device labeling complies with device labeling requirements; reporting certain device field removals and
corrections to the FDA; and obtaining premarket notification 510(k) clearance for devices prior to marketing. Some devices known
as “510(k)-exempt” can be marketed without prior marketing clearance or approval from the FDA. In addition to the “general
controls,” some Class II medical devices are also subject to “special controls,” including adherence to a particular
guidance document and compliance with the performance standard. Instead of obtaining 510(k) clearance, some Class III devices are
subject to premarket approval (PMA). In general, obtaining premarket approval to achieve marketing authorization from the FDA is
a more onerous process than seeking 510(k) clearance.
Many medical devices are
also regulated by the FDA as “electronic products.” In general, manufacturers and marketers of “electronic products”
are subject to certain FDA regulatory requirements intended to ensure the radiological safety of the products. These requirements
include, but are not limited to, filing certain reports with the FDA about the products and defects/safety issues related to the
products as well as complying with radiological performance standards.
The medical device industry
is now experiencing greater scrutiny and regulation by Federal, state and foreign governmental authorities. Companies in our industry
are subject to more frequent and more intensive reviews and investigations, often involving the marketing, business practices,
and product quality management including standards for device recalls and product labeling. Such reviews and investigations may
result in the civil and criminal proceedings; the imposition of substantial fines and penalties; the receipt of Warning Letters,
untitled letters, demands for recalls or the seizure of our products; the requirement to enter into corporate integrity agreements,
stipulated judgments or other administrative remedies, and result in our incurring substantial unanticipated costs and the diversion
of key personnel and management’s attention from their regular duties, any of which may have an adverse effect on our financial
condition, results of operations and liquidity, and may result in greater and continuing governmental scrutiny of our business
in the future.
The Company must also
have the appropriate FDA clearances and/or approvals from other governmental entities in order to lawfully market devices and or/drugs.
The FDA, federal, state or foreign governments and agencies may disagree that the Company has such clearance and/or approvals for
all of its products and may take action to prevent the marketing and sale of such devices until such disagreements have been resolved.
Additionally, Federal,
state and foreign governments and entities have enacted laws and issued regulations and other standards requiring increased visibility
and transparency of our Company’s interactions with healthcare providers. For example, the U.S. Physician Payment Sunshine
Act requires us to disclose payments and other transfers of value to all U.S. physicians and U.S. teaching hospitals at the U.S.
federal level made after August 1, 2013. Failure to comply with these legal and regulatory requirements could impact our business,
and we have had and will continue to spend substantial time and financial resources to develop and implement enhanced structures,
policies, systems and processes to comply with these legal and regulatory requirements, which may also impact our business.
Healthcare policy changes may have a
material adverse effect on the Company.
Healthcare costs have
risen significantly over the past decade. As a result, there have been and continue to be proposals Federal, state and foreign
governments and regulators as well as third-party insurance providers to limit the growth of these costs. Among these proposals
are regulations that could impose limitations on the prices the Company will be able to charge for its products, the amounts of
reimbursement available for its products from governmental agencies or third-party payors, requirements regarding the usage of
comparative studies, technology assessments and healthcare delivery structure reforms to determine the effectiveness and select
the products and therapies used for treatment of patients. While we believe our products provide favorable clinical outcomes, value
and cost efficiency, the resources necessary to demonstrate this value to our customers, patients, payors, and regulators is significant
and may require longer periods of time and effort in which to obtain acceptance of our products. There is no assurance that our
efforts will be successful, and these limitations could have a material adverse effect on the Company’s financial position
and results of operations.
These changes and additional
proposed changes in the future could adversely affect the demand for the Company’s products as well as the way in which the
Company conducts its business. For example, the Patient Protection and Affordable Care Act and Health Care and Education Affordability
Reconciliation Act of 2010 were enacted into law in the U.S. in March 2010. The law imposed on medical device manufacturers a 2.3
percent excise tax on U.S. sales of Class I, II and III medical devices beginning in January 2013, which includes certain products
marketed and sold by the Company, as well as requiring research into the effectiveness of treatment modalities and instituting
changes to the reimbursement and payment systems for patient treatments. In addition, governments and regulatory agencies continue
to study and propose changes to the laws governing the clearance or approval, manufacture and marketing of medical devices, which
could adversely affect our business and results of operations.
FDA regulations and guidance
are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. The FDA is currently
exploring ways to modify its 510(k) clearance process. In addition, due to changes at the FDA in general, it has become increasingly
more difficult to obtain 510(k) clearance as data requirements have increased. It is impossible to predict whether legislative
changes will be enacted or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may
be. However, any changes could make it more difficult for the Company to maintain or attain clearance or approval to develop and
commercialize our products and technologies.
Various healthcare reform
proposals have also emerged at the state level. The Company cannot predict what healthcare initiatives, if any, will be implemented
at the federal or state level, or the effect any future legislation or regulation will have on the Company. However, an expansion
in government’s role in the U.S. healthcare industry may lower reimbursements for the Company’s products, reduce medical
procedure volumes and adversely affect the Company’s business, possibly materially. In addition, if the excise taxes contained
in the House or Senate health reform bills are enacted into law, the Company’s operating expenses resulting from such an
excise tax and results of operations would be materially and adversely affected.
If the
effectiveness and safety of the Company’s devices are not supported by long-term data, the Company’s revenues could
decline.
The Company’s products
may not be accepted in the market if the Company does not produce clinical data supported by the independent efforts of clinicians,
and if that data indicates that treatment with the Company’s products does not provide patients with sustained benefits or
that treatment with the Company’s products is less effective or less safe than the Company’s current data suggests,
the Company’s revenues could decline. In addition, the FDA could then bring legal or regulatory enforcement actions against
the Company and/or its products including, but not limited to, recalls or requirements for pre-market 510(k) authorizations. The
Company can give no assurance that its data will be substantiated in studies involving more patients. In such a case, the Company
may never achieve significant revenues or profitability, and with regard to its consumer products line, which was sold to ICTV
Brands on January 23, 2017, the Company may not collect the $4.5 million of the purchase price which is in the form of a continuing
royalty from the sale of these products by ICTV Brands, due to the inability of ICTV Brands to effectively market the no!no! family
of consumer products.
If the Company is found to be promoting
the use of its devices for unapproved or “off-label” uses or engaging in other noncompliant activities, the Company
may be subject to recalls, seizures, fines, penalties, injunctions, adverse publicity, prosecution, or other adverse actions, resulting
in damage to its reputation and business.
The Company’s labeling,
advertising, promotional materials and user training materials must comply with the FDA and other applicable laws and regulations,
including the prohibition of the promotion of a medical device for a use that has not been cleared or approved by the FDA. Obtaining
510(k) clearance or PMA approval only permits the Company to promote its products for the uses specifically cleared by the FDA.
Use of a device outside its cleared or approved indications is known as “off-label” use. Physicians and consumers may
use the Company’s products off-label because the FDA does not restrict or regulate a physician’s choice of treatment
within the practice of medicine nor is there oversight on patient use of over-the-counter devices. Although the Company may request
additional cleared indications for our current products, the FDA may deny those requests, require additional expensive clinical
data to support any additional indications or impose limitations on the intended use of any cleared product as a condition of clearance.
Even if regulatory clearance or approval of a product is granted, such clearance or approval may be subject to limitations on the
intended uses for which the product may be marketed and reduce our potential to successfully commercialize the product and generate
revenue from the product.
If the FDA determines
that the Company’s labeling, advertising, promotional materials, or user training materials, or representations made by Company
personnel, include the promotion of an off-label use for the device, or that the Company has made false or misleading or inadequately
substantiated promotional claims, or claims that could potentially change the regulatory status of the product, the agency could
take the position that these materials have misbranded the Company’s devices and request that the Company modifies its labeling,
advertising, or user training or promotional materials and/or subject the Company to regulatory or legal enforcement actions, including
the issuance of an Untitled Letter or a Warning Letter, injunction, seizure, recall, adverse publicity, civil penalties, criminal
penalties, or other adverse actions. It is also possible that other federal, state, or foreign enforcement authorities might take
action if they consider the Company’s labeling, advertising, promotional, or user training materials to constitute promotion
of an unapproved use, which could result in significant fines, penalties, or other adverse actions under other statutory authorities,
such as laws prohibiting false claims for reimbursement. In that event, we would be subject to extensive fines and penalties and
the Company’s reputation could be damaged and adoption of the products would be impaired. Although the Company intends to
refrain from statements that could be considered off-label promotion of its products, the FDA or another regulatory agency could
disagree and conclude that the Company has engaged in off-label promotion. For example, the Company has made statements regarding
some of its devices that the FDA may view as off-label promotion. In addition, any such off-label use of the Company’s products
may increase the risk of injury to patients, and, in turn, the risk of product liability claims, and such claims are expensive
to defend and could divert the Company’s management’s attention and result in substantial damage awards against the
Company.
The Company currently
markets the no!no!® product for hair removal. Based on previous feedback received from the FDA, this product is not considered
a medical device so long as the Company does not promote the product for medical claims. Promotion of this product for claims beyond
those agreed upon by the FDA may subject the product to regulation by the FDA, and may require clearance of a 510(k) notice to
continue marketing the product.
The Company may be subject, directly
or indirectly, to federal and state healthcare fraud and abuse laws and regulations and could face substantial penalties if the
Company is unable to fully comply with such laws.
While the Company does
not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors, many healthcare
laws and regulations apply to the Company’s business. For example, the Company could be subject to healthcare fraud and abuse
and patient privacy regulation and enforcement by both the federal government and the states in which the Company conducts its
business. The healthcare laws and regulations that may affect the Company’s ability to operate include:
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the federal healthcare programs’ Anti-Kickback Law, which prohibits, among other things, persons or entities from soliciting, receiving, offering or providing remuneration, directly or indirectly, in return for or to induce either the referral of an individual for, or the purchase order or recommendation of, any item or service for which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs;
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federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent, or are for items or services not provided as claimed and which may apply to entities like the Company to the extent that the Company’s interactions with customers may affect their billing or coding practices;
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the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which established new federal crimes for knowingly and willfully executing a scheme to defraud any healthcare benefit program or making false statements in connection with the delivery of or payment for healthcare benefits, items or services, as well as leading to regulations imposing certain requirements relating to the privacy, security and transmission of individually identifiable health information; and
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state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers, and state laws governing the privacy of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
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Recently, the medical device
industry has been under heightened scrutiny as the subject of government investigations and regulatory or legal enforcement actions
involving manufacturers who allegedly offered unlawful inducements to potential or existing customers in an attempt to procure
their business, including arrangements with physician consultants. If the Company’s operations or arrangements are found
to be in violation of any of the laws described above or any other governmental regulations that apply to the Company, the Company
may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from the Medicare and Medicaid programs
and the curtailment or restructuring of its operations. Any penalties, damages, fines, exclusions, curtailment or restructuring
of the Company’s operations could adversely affect its ability to operate its business and its financial results. The risk
of the Company being found in violation of these laws is increased by the fact that many of these laws are broad and their provisions
are open to a variety of interpretations. Any action against the Company for violation of these laws, even if the Company successfully
defends against that action and the underlying alleged violations, could cause the Company to incur significant legal expenses
and divert its management’s attention from the operation of its business. If the physicians or other providers or entities
with whom the Company does business are found to be non-compliant with applicable laws, they may be subject to sanctions, which
could also have a negative impact on the Company’s business.
The Company or its subsidiaries’
failure to obtain or maintain necessary FDA clearances or approvals, or equivalents thereof in the U.S. and relevant foreign markets,
could hurt our ability to distribute and market our products.
In both the Company’s
and its subsidiaries’ United States and foreign markets, the Company and its subsidiaries are affected by extensive laws,
governmental regulations, administrative determinations, court decisions and similar constraints. Such laws, regulations and other
constraints may exist at the federal, state or local levels in the United States and at analogous levels of government in foreign
jurisdictions.
For example, certain of
the Company’s skincare products and product candidates may fall under the regulatory purview of various centers at the FDA
and in other countries by similar health and regulatory authorities.
In addition, the formulation,
manufacturing, packaging, labeling, distribution, importation, sale and storage of the Company’s and its subsidiaries’
products are subject to extensive regulation by various federal agencies, including, but not limited to, the FDA, the FTC, State
Attorneys General in the United States, the Ministry of Health, Labor and Welfare in Japan, as well as by various other federal,
state, local and international regulatory authorities in the countries in which its products are manufactured, distributed or sold.
If the Company or its manufacturers fail to comply with those regulations, the Company and its subsidiaries could become subject
to significant penalties or claims, which could harm its results of operations or its ability to conduct its business. In addition,
the adoption of new regulations or changes in the interpretations of existing regulations may result in significant compliance
costs or discontinuation of product sales and may impair the marketing of its products, resulting in significant loss of net sales.
The Company’s failure to comply with federal or state regulations, or with regulations in foreign markets that cover its
product claims and advertising, including direct claims and advertising by the Company or its subsidiaries, may result in enforcement
actions and imposition of penalties or otherwise harm the distribution and sale of its products. Further, the Company and its subsidiaries’
businesses are subject to laws governing our accounting, tax and import and export activities. Failure to comply with these requirements
could result in legal and/or financial consequences that might adversely affect its sales and profitability. Each medical device
that the Company wishes to market in the U.S. must first receive either 510(k) clearance or premarket approval from the FDA unless
an exemption applies. Either process can be lengthy and expensive. The FDA’s 510(k) clearance process may take from three
to twelve months, or longer, and may or may not require human clinical data. The premarket approval process is much more costly
and lengthy. It may take from eleven months to three years, or even longer, and will likely require significant supporting human
clinical data. Delays in obtaining regulatory clearance or approval could adversely affect the Company’s revenues and profitability.
Although the Company has obtained 510(k) clearances for its LHE devices as these clearances may be subject to revocation if post-marketing
data demonstrates safety issues or lack of effectiveness. Similar clearance processes may apply in foreign countries. Further,
more stringent regulatory requirements or safety and quality standards may be issued in the future with an adverse effect on the
Company’s business.
Although cosmetic products
such as those contained in the Company’s former Neova product division are not subject to any FDA premarket approval or clearance
process, they must, nonetheless, comply with the FDA’s formulation, manufacturing and labeling requirements or such products
may be considered adulterated or misbranded by the agency which could subject the Company to potential regulatory or legal enforcement
actions. Similar, or more stringent, requirements may apply in foreign jurisdictions as well. The Company may also find that if
its cosmetic products compete with a third-party’s drug product, competitive and regulatory pressure may be applied against
the cosmetic products. Some cosmetic products may be viewed by the FDA or international regulatory agencies as drugs or devices
to a large extent based upon the promotional claims or ingredients. Because there is a degree of subjectivity in determining whether
marketing materials or statements constitute product claims and whether they involve drug claims, the Company’s claims and
interpretation of applicable regulations may be challenged, which could harm its business.
Sunscreen products such
as those contained in the Company’s former Neova product division that contain ingredients or make claims beyond those identified
by the FDA in its sunscreen monograph and corresponding guidance documents are considered over-the-counter drugs. The cosmetics
containing sunscreen ingredients are required to conform with the FDA’s sunscreen monograph as well as other international
regulatory requirements for sunscreen products. The FDA may view some of the Company’s sunscreen products as new drugs if
the FDA determines that its formula and/or claims are not in compliance with the monograph or applicable guidance. In addition,
certain countries may impose additional regulatory requirements upon these products in order for these products to be marketed
and sold in those countries.
The Company has modified some of its
products and sold them under prior 510(k) clearances. The FDA could decide the modifications required new 510(k) clearances and
require the Company to cease marketing and/or recall the modified products.
Any modification to one
of the Company’s 510(k) cleared devices that could significantly affect its safety or effectiveness, or that would constitute
a major change in its intended use, requires a new 510(k) clearance or a pre-market approval. The Company may be required to submit
pre-clinical and clinical data depending on the nature of the changes and the product. The Company may not be able to obtain additional
510(k) clearances or pre-market approvals for modifications to, or additional indications for, its existing products in a timely
fashion, or at all. Delays in obtaining future clearances or approvals would adversely affect its ability to introduce new or enhanced
products into the market in a timely manner, which in turn would harm its revenue and operating results. The Company has modified
some of its marketed devices, but the Company has determined, and may make such additional determinations in the future, that new
510(k) clearances or pre-market approvals are not required. The FDA requires every manufacturer to make this determination in the
first instance, but the FDA may review the manufacturer’s decision. The Company cannot be certain that the FDA would agree
with any of its prior or future decisions not to seek new 510(k) clearances or pre-market approvals. If the FDA requires the Company
to seek new 510(k) clearance or a pre-market approval for any modification, the Company also may be required to cease marketing,
distributions and/or recall the modified device until the Company obtains such 510(k) clearance or pre-market approval, and may
be subject to significant regulatory fines or penalties. The FDA could also bring legal or regulatory enforcement action against
the Company or its products.
Any recall or FDA requirement
that the Company seek additional approvals or clearances could result in significant delays, fines, increased costs associated
with modification of a product, loss of revenue and potential operating restrictions imposed by the FDA. New submissions to obtain
510(k) clearance or PMA approval could require additional pre-clinical and/or clinical testing which could be expensive and time
consuming.
There is no guarantee that the FDA will
grant 510(k) clearance or PMA approval of our future products and failure to obtain necessary clearances or approvals for our future
products would adversely affect our ability to grow our business.
Some of the Company’s
new or modified products may require the FDA clearance of a 510(k) notice. In addition some of the products may require clinical
trials to support regulatory approval and we may not successfully complete these clinical trials. The FDA may not approve or clear
these products for the indications that are necessary or desirable for successful commercialization. Indeed, the FDA may refuse
requests for 510(k) clearance or premarket approval of new products. Failure to receive clearance or approval for new products
would have an adverse effect on the Company’s ability to expand our business.
The results of the Company’s clinical
trials may not support our product candidate claims or may result in the discovery of adverse side effects.
Even if any of the Company’s
clinical trials are completed as planned, it cannot be certain that study results will support product candidate claims or that
the FDA or foreign regulatory authorities will agree with our conclusions regarding them. Success in pre-clinical evaluation and
early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the later trials
will replicate the results of prior trials and pre-clinical studies. The clinical trial process may fail to demonstrate that our
product candidates are safe and effective for the proposed indicated uses, which could cause us to abandon a product candidate
and may delay development of others. Any delay or termination of our clinical trials will delay the filing of our product submissions
and, ultimately, our ability to commercialize our product candidates and generate revenues. It is also possible that patients enrolled
in clinical trials will experience adverse side effects that are not currently part of the product candidate’s profile.
The Company’s market acceptance
in international markets requires regulatory approvals from foreign governments and may depend on third party reimbursement of
participants’ cost.
Even if the Company obtains
and maintains the necessary foreign regulatory registrations or approvals, market acceptance of the Company’s products in
international markets may be dependent, in part, upon the availability of reimbursement within applicable healthcare payment systems.
Reimbursement and healthcare payment systems in international markets vary significantly by country, and include both government-sponsored
healthcare and private insurance. The Company may seek international reimbursement approvals for its products, but the Company
cannot assure you that any such approvals will be obtained in a timely manner, if at all. Failure to receive international reimbursement
approvals in any given market could have a material adverse effect on the acceptance or growth of the Company’s products
in that market or others.
If the Company or its third-party manufacturers
or suppliers fail to comply with the FDA’s Quality System Regulation or any applicable state equivalent, the Company’s
manufacturing operations could be interrupted and the Company’s potential product sales and operating results could suffer.
The Company and some of
its third-party manufacturers and suppliers are required to comply with some or all of the FDA’s drug Good Manufacturing
Practices or its QSR, which delineates the design controls, document controls, purchasing controls, identification and traceability,
production and process controls, acceptance activities, nonconforming product requirements, corrective and preventive action requirements,
labeling and packaging controls, handling, storage, distribution and installation requirements, records requirements, servicing
requirements, and statistical techniques potentially applicable to the production of the Company’s medical devices. The Company
and its manufacturers and suppliers are also subject to the regulations of foreign jurisdictions regarding the manufacturing process
if the Company markets its products overseas. The FDA enforces the QSR through periodic and announced or unannounced inspections
of manufacturing facilities. The Company’s facilities have been inspected by the FDA and other regulatory authorities, and
the Company anticipates that it and certain of its third-party manufacturers and suppliers will be subject to additional future
inspections. If the Company’s facilities or those of its manufacturers or suppliers are found to be in non-compliance or
fail to take satisfactory corrective action in response to adverse QSR inspectional findings, FDA could take legal or regulatory
enforcement actions against the Company and/or its products, including but not limited to the cessation of sales or the recall
of distributed products, which could impair the Company’s ability to produce its products in a cost-effective and timely
manner in order to meet its customers’ demands. The Company may also be required to bear other costs or take other actions
that may have a negative impact on its future sales and its ability to generate profits.
Current regulations depend
heavily on administrative interpretation. If the FDA does not believe that the Company is in substantial compliance with applicable
FDA regulations, the agency could take legal or regulatory enforcement actions against the Company and/or its products. The Company
is also subject to periodic inspections by the FDA, other governmental regulatory agencies, as well as certain third-party regulatory
groups. Future interpretations made by the FDA or other regulatory bodies made during the course of these inspections may vary
from current interpretations and may adversely affect the Company’s business and prospects. The FDA’s and foreign regulatory
agencies’ statutes, regulations, or policies may change, and additional government regulation or statutes may be enacted,
which could increase post-approval regulatory requirements, or delay, suspend, prevent marketing of any cleared / approved products
or necessitate the recall of distributed products. The Company cannot predict the likelihood, nature or extent of adverse governmental
regulation that might arise from future legislative or administrative action, either in the U.S. or abroad.
Recently, the medical
device industry has been under heightened FDA scrutiny as the subject of government investigations and enforcement actions. If
the Company’s operations and activities are found to be in violation of any FDA laws or any other governmental regulations
that apply to the Company, the Company may be subject to penalties, including civil and criminal penalties, damages, fines and
other legal and/or agency enforcement actions. Any penalties, damages, fines, or curtailment or restructuring of the Company’s
operations or activities could adversely affect its ability to operate its business and its financial results. The risk of the
Company being found in violation of FDA laws is increased by the fact that many of these laws are broad and their provisions are
open to a variety of interpretations. Any action against the Company for violation of these laws, even if the Company successfully
defends against that action and its underlying allegations, could cause the Company to incur significant legal expenses and divert
its management’s attention from the operation of its business. Where there is a dispute with a federal or state governmental
agency that cannot be resolved to the mutual satisfaction of all relevant parties, the Company may determine that the costs, both
real and contingent, are not justified by the commercial returns to the Company from maintaining the dispute or the product.
Various claims, design
features or performance characteristics of Company drugs, medical devices and cosmetic products, that the Company regarded as permitted
by the FDA without marketing clearance or approval, may be challenged by the FDA or state regulators. The FDA or state regulatory
authorities may find that certain claims, design features or performance characteristics, in order to be made or included in the
products, may have to be supported by further studies and marketing clearances or approvals, which could be lengthy, costly and
possibly unobtainable.
The Company has no outstanding
Warning Letters from the FDA.
If the Company fails to comply with ongoing
regulatory requirements, or if it experiences unanticipated problems with products, these products could be subject to restrictions
or withdrawal from the market.
The Company is also subject
to similar state requirements and licenses. Failure by the Company to comply with statutes and regulations administered by the
FDA and other regulatory bodies, discovery of previously unknown problems with its products (including unanticipated adverse events
or adverse events of unanticipated severity or frequency), manufacturing problems, or failure to comply with regulatory requirements,
or failure to adequately respond to any FDA observations concerning these issues, could result in, among other things, any of the
following actions:
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warning letters or untitled letters issued by the FDA;
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fines, civil penalties, injunctions and criminal prosecution;
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unanticipated expenditures to address or defend such actions;
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delays in clearing or approving, or refusal to clear or approve, our products;
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withdrawal or suspension of clearance or approval of our products by the FDA or other regulatory bodies;
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product recall or seizure;
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orders for physician or customer notification or device repair, replacement or refund;
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interruption of production; and
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operating restrictions.
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If any of these actions
were to occur, it would harm the Company’s reputation and adversely affect its business, financial condition and results
of operations.
The Company’s medical products
may in the future be subject to product recalls that could harm its reputation, business and financial results.
The FDA has the authority
to require the recall of commercialized medical device products in the event of material deficiencies or defects in design or manufacture.
In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability
that the device would cause serious injury or death. Manufacturers may, under their own initiative, recall a product if any material
deficiency in a device is found. A government-mandated or voluntary recall by the Company or one of its distributors could occur
as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of
any of the Company’s products would divert managerial and financial resources and have an adverse effect on its financial
condition and results of operations. The FDA requires that certain classifications of recalls be reported to the FDA within ten
(10) working days after the recall is initiated. Companies are required to maintain certain records of recalls, even if they are
not reportable to the FDA. The Company may initiate voluntary recalls involving its products in the future that the Company determines
do not require notification of the FDA. If the FDA disagrees with the Company’s determinations, they could require the Company
to report those actions as recalls. A future recall announcement could harm the Company’s reputation with customers and negatively
affect its sales. In addition, the FDA could take enforcement action for failing to report the recalls when they were conducted.
No recalls of the Company’s medical products have been reported to the FDA.
If the Company’s medical products
cause or contribute to a death or a serious injury, or malfunction in certain ways, we will be subject to medical device reporting
regulations, which can result in voluntary corrective actions or agency enforcement actions.
Under the FDA medical
device reporting regulations, medical device manufacturers are required to report to the FDA information that a device has or may
have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or contribute to
death or serious injury if the malfunction of the device or one of our similar devices were to recur. If the Company fails to report
these events to the FDA within the required timeframes, or at all, the FDA could take enforcement action against the Company. Any
such adverse event involving its products also could result in future voluntary corrective actions, such as recalls or customer
notifications, or agency action, such as inspection or enforcement action. Any corrective action, whether voluntary or involuntary,
as well as defending ourselves in a lawsuit, will require the dedication of the Company’s time and capital, distract management
from operating our business, and may harm its reputation and financial results.
Risk Factors Relating to an Investment in
our Securities
Potential fluctuations in the Company’s
operating results could lead to fluctuations in the market price for the Company’s common stock.
The Company’s results
of operations are expected to fluctuate significantly from quarter to quarter, depending upon numerous factors, including:
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the entry into a new line of business - the real estate investment market - by the Company, and the subsequent need to gain expertise in the operations particular to that line of business
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the present macro-economic uncertainty in the global economy and financial industry and governmental monetary and fiscal programs to stimulate better economic conditions;
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the collection by the Company of the remaining $6.5 million of the purchase price from ICTV Brands, Inc. the purchaser of the consumer products line;
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healthcare reform and reimbursement policies;
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demand for the Company’s products, including the Company’s ability to redevelop its LHE product line;
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changes in the Company’s pricing policies or those of its competitors;
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increases in the Company’s manufacturing costs;
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the number, timing and significance of product enhancements and new product announcements by the Company and its competitors;
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the expiration of certain of the Company’s patents, the issuance of certain the Company’s patent applications, and/or if certain of the Company’s patent applications fail to issue and prosecution has terminated;
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the Company’s ability to develop, introduce and market new and enhanced versions of its products on a timely basis considering, among other things, delays associated with the FDA and other regulatory approval processes and the timing and results of future clinical trials;
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acts of terrorism in Israel or in other countries in which we do business;
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developments in existing or new litigation; and
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product quality problems, personnel changes and changes in the Company’s business strategy.
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Variations in the above
operating factors could lead to significant fluctuations in the market price of the Company’s stock.
The Company’s stock price has been
and continues to be volatile.
The market price for the
Company’s common stock could fluctuate due to various factors. In addition to other factors described in this section, these
factors may include, among others:
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conversion of outstanding stock options or warrants;
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announcements by the Company or its competitors of new contracts, products, or technological innovations;
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developments in existing or new litigation;
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changes in government regulations;
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fluctuations in the Company’s quarterly and annual operating results; and
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general market and economic conditions.
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In addition, the stock
markets have, in recent years, experienced significant volume and price fluctuations. These fluctuations often have been unrelated
to the operating performance of the specific companies whose stock is traded. Market prices and the trading volume of our stock
may continue to experience significant fluctuations due to matters described in this Item 1A, as well as economic and political
conditions in the United States and worldwide, investors’ attitudes towards our business prospects and products, and changes
in the interests of the investing community. As a result, the market price of the Company’s common stock has been and may
continue to be adversely affected and our shareholders may not be able to sell their shares or to sell them at desired prices.
Notice of Delisting or Failure to Satisfy a Continued Listing
Rule or Standard; Transfer of Listing.
On September 29, 2015, the Company received
written notification from The NASDAQ Stock Market LLC that the closing bid price of its common stock had been below the minimum
$1.00 per share for the previous 30 consecutive business days, and that the Company is therefore not in compliance with the requirements
for continued listing on the NASDAQ Global Select Market under NASDAQ Marketplace Rule 5450(a)(1). The Notice provides the Company
with an initial period of 180 calendar days, or until March 28, 2016, to regain compliance with the listing rules. The Company
would regain compliance if the closing bid price of its common stock is $1.00 per share or higher for a minimum period of ten consecutive
business days during this compliance period, as confirmed by written notification from NASDAQ. If the Company does not achieve
compliance by March 28, 2016, NASDAQ would provide notice that its securities were subject to delisting from the NASDAQ Global
Select Market. As of March 28, 2016, the Company’s bid price remained under $1.00 per share.
On March 10, 2016, trade in the Company’s
common stock transferred to the NASDAQ Capital Market. This move to the Capital Market will not affect the trading of the Company's
common stock. The NASDAQ Capital Market is a continuous trading market that operates in substantially the same manner as the NASDAQ
Global Select Market, but with less stringent listing requirements. The Company's common shares will continue to trade on NASDAQ
under the symbol "PHMD."
On March 30, 2016, the Company was notified
by NASDAQ that its request for a six month extension of time in which to comply with the bid price requirement had been granted.
The transfer of its stock from the NASDAQ Global Select Market to the NASDAQ Capital Market was part of the process to request
and receive such an extension. PhotoMedex considered a range of available options to regain compliance with this continued listing
standard, and had provided written notice to NASDAQ of its intention to cure the minimum bid price deficiency during a second grace
period by carrying out a reverse stock split, if necessary. At its 2015 annual meeting, PhotoMedex shareholders granted authority
to the board of directors to implement, as needed, a reverse split in a ratio up to one common share for each five shares outstanding.
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.
On November 18, 2016, the
Company received written notification (the “Notice”) from NASDAQ that the Company’s stockholder equity reported
on its Form 10-Q for the period ended September 30, 2016 had fallen below the minimum requirement of $2.5 million, and that the
Company is therefore not in compliance with the requirements for continued listing on the NASDAQ Capital Market under NASDAQ Marketplace
Rule 5550(b)(1). The Notice provided the Company with a period of 45 calendar days, or until January 2, 2017, to submit a plan
to regain compliance with the listing rules; that plan was filed with NASDAQ on January 10, 2017 under a one-week extension due
to the holiday period.
NASDAQ has granted the
Company an extension of time to comply with the Rule until March 10, 2017, by which time the Company must complete its review and
reconciliation of the post-Asset Sale financials and file with the Securities and Exchange Commission and NASDAQ a report on Form
8-K evidencing compliance with the Rule by disclosing:
(i) the original
deficiency letter from NASDAQ dated November 17, 2004;
(ii) a description
of the completed transaction or event that enabled the Company to satisfy the stockholders’ equity requirement for continued
listing;
(iii) either an
affirmative statement that, as of the date of the report the Company believed that it had regained compliance with the stockholders’
equity requirement based upon the completed transaction or event OR a balance sheet no older than 60 days with pro forma adjustments
for any significant transactions or event occurring on or before the report date that evidences compliance with the stockholders'
equity requirement, as well as a disclosure that the Company believes it also satisfies the stockholders’ equity requirement
as of the report date; and
(iv) a disclosure
stating that NASDAQ will continue to monitor the Company’s ongoing compliance with the stockholders’ equity requirement
and, if at the time of the Company’s next periodic report the Company does not evidence compliance, the Company may be subject
to delisting.
On March 15, 2017, the
Company received notice from NASDAQ that it had granted the Company an additional extension of time to comply with the Rule until
March 31, 2017, at which time it was expected to enter into an agreement regarding a transaction with First Capital Real Estate
Operating Partnership, L.P. and its affiliates. NASDAQ may grant a further extension to May 17, 2017, by which time the Company
must complete its review and reconciliation of the post-Asset Sale financials, complete the pending transaction with First Capital,
and file with the Securities and Exchange Commission and NASDAQ a report on Form 8-K evidencing compliance with the Rule, as set
forth above.
If the Company fails to
evidence compliance with the Rule upon filing its periodic report for the period ended March 31, 2017 with the United States Securities
and Exchange Commission and NASDAQ, the Company may be subject to delisting. In the event the Company does not satisfy the terms,
NASDAQ will provide written notification to the Company that its securities will be delisted. At that time, the Company may appeal
the delisting notice to a Listing Qualifications Panel.
Because our business will be smaller
following the sale of the Consumer Products Division, there is a possibility that our common stock may be delisted from The NASDAQ
Capital Market if we fail to satisfy the continued listing standards of that market.
As noted above, the Company
received notice from NASDAQ that the Company no longer satisfied the $2.5 million stockholders’ equity requirement for continued
listing on The NASDAQ Capital Market. Following the sale of the Radiancy Business the Company’s business will be smaller
and, therefore, it may fail to satisfy or regain the continued listing standards of The NASDAQ Capital Market. In the event that
the Company is unable to satisfy the continued listing standards of The NASDAQ Capital Market, its common stock may be delisted
from that market. Any delisting of its common stock from the NASDAQ Capital Market could adversely affect the Company’s ability
to attract new investors, decrease the liquidity of its outstanding shares of common stock, reduce the Company’s flexibility
to raise additional capital, reduce the price at which the common stock trades and increase the transaction costs inherent in trading
such shares with overall negative effects for the Company’s shareholders. In addition, delisting of the Company’s common
stock could deter broker-dealers from making a market in or otherwise seeking or generating interest in the common stock, and might
deter certain institutions and persons from investing in those securities at all. For these reasons and others, delisting could
adversely affect the price of the Company’s common stock and its business, financial condition and results of operations.
We will continue to incur the expenses
of complying with public company reporting requirements following the sale of the Neova and Consumer Products divisions.
After the sale of the
Neova products and Consumer Products divisions, the Company will continue to be required to comply with the applicable reporting
requirements of the Securities Exchange Act of 1934, as amended (the “
Exchange Act
”), even though compliance
with such reporting requirements is economically burdensome.
Shares eligible for future sale by the
Company’s current or future stockholders may cause the Company’s stock price to decline.
If the Company’s
stockholders or holders of the Company’s other securities sell substantial amounts of the Company’s common stock in
the public market, including shares issued in completed acquisitions or upon the exercise of outstanding options and warrants,
then the market price of the Company’s common stock could fall.
Issuance of shares of the Company’s
common stock upon the exercise of options or warrants will dilute the ownership interest of the Company’s existing stockholders
and could adversely affect the market price of the Company’s common stock.
As of March 30, 2017,
the Company had outstanding stock options to purchase an aggregate of 134,150 shares of common stock and warrants to purchase an
aggregate of 64,500 shares of common stock. The exercise of the stock options and warrants and the sales of stock issuable pursuant
to them would further reduce a stockholder’s percentage voting and ownership interest. Further, the stock options and warrants
are likely to be exercised when the Company’s common stock is trading at a price that is higher than the exercise price of
these options and warrants and the Company would be able to obtain a higher price for the Company’s common stock than the
Company would receive under such options and warrants. The exercise, or potential exercise, of these options and warrants could
adversely affect the market price of the Company’s common stock and the terms on which the Company could obtain additional
financing. The ownership interest of the Company’s existing stockholders may be further diluted through adjustments to certain
outstanding warrants under the terms of their anti-dilution provisions.
Securities analysts may not initiate
coverage for the Company’s common stock or may issue negative reports and this may have a negative impact on the market price
of the Company’s common stock.
The trading market for
the Company’s common stock may be affected in part by the research and reports that industry or financial analysts publish
about the Company or the Company’s business. It may be difficult for companies such as the Company, with smaller market capitalizations,
to attract a sufficient number of securities analysts that will cover the Company’s common stock. If one or more of the analysts
who elect to cover the Company downgrades the Company’s stock, the Company’s stock price would likely decline rapidly.
If one or more of these analysts ceases coverage of the Company, the Company could lose visibility in the market, which in turn
could cause its stock price to decline. This could have a negative effect on the market price of the Company’s stock.
Our management will have broad discretion
over the use of the proceeds from the future sale of the securities.
In connection with the
future sale of our securities, our management will have broad discretion to use the net proceeds from such sale, and investors
will be relying on the judgment of our management regarding the application of such proceeds. Our management might not be able
to yield a significant return, if any, on any investment of the net proceeds.
The Company has not paid dividends in the past and does not
expect to pay dividends in the future.
The Company has never
declared or paid cash dividends on its capital stock. The Company currently intends to retain all future earnings for the operation
and expansion of its business and, therefore, does not anticipate declaring or paying cash dividends in the foreseeable future.
The payment of dividends
will be at the discretion of the Company’s board of directors and will depend on the Company’s results of operations,
capital requirements, financial condition, prospects, contractual arrangements, any limitations on payments of dividends present
in any of the Company’s future debt agreements and other factors the Company’s board of directors may deem relevant.
If the Company does not pay dividends, a return on your investment will only occur if the Company’s stock price appreciates.
The Company’s future capital needs
could result in dilution of your investment.
The Company’s board
of directors may determine from time to time that there is a need to obtain additional capital through the issuance of additional
shares of the Company’s common stock or other securities. These issuances would likely dilute the ownership interests of
the Company’s current investors and may dilute the net tangible book value per share of the Company’s common stock.
Investors in subsequent offerings may also have rights, preferences and privileges senior to the Company’s current stockholders
which may adversely impact the Company’s current stockholders.
Our directors, executive officers and
principal stockholders currently have substantial control over us and could delay or prevent a change in corporate control.
As of March 30, 2017,
our directors, executive officers and holders of more than 5% of our common stock, together with their affiliates, beneficially
own, in the aggregate, approximately 22.4% of our outstanding common stock. As a result, these stockholders, if they were to act
together, could have significant influence over the outcome of matters submitted to our stockholders for approval, including the
election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders,
if they were to act together, could have significant influence over the management and affairs of our company. Accordingly, this
concentration of ownership might harm the market price of our common stock by:
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delaying, deferring or preventing a change in corporate control;
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impeding a merger, consolidation, takeover or other business combination involving us; or
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discouraging a potential acquiror from making a tender offer or otherwise attempting to obtain control of us.
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Nevada law and the Company’s charter
documents contain provisions that could delay or prevent actual and potential changes in control, even if they would benefit stockholders.
As of December 30,
2010, the Company became a corporation chartered in the State of Nevada. The Company is subject to provisions of the Nevada corporate
statutes which prohibit a business combination between a corporation and an interested stockholder, which is generally a stockholder
holding 10% or more of a company’s stock.
The Company’s articles
of incorporation authorize the issuance of preferred shares which may be issued with dividend, liquidation, voting and redemption
rights senior to our common stock without prior approval by the stockholders. The preferred stock may be issued for such consideration
as may be fixed from time to time by the Board of Directors. The Board of Directors may issue such shares of preferred stock in
one or more series, with such designations, preferences and rights or qualifications, limitations or restrictions thereof as shall
be stated in the resolution of resolutions.
The issuance of preferred
stock could adversely affect the voting power and other rights of the holders of common stock. Preferred stock may be issued quickly
with terms calculated to discourage, make more difficult, delay or prevent a change in control of the Company or make removal of
management more difficult. As a result, the Board of Directors’ ability to issue preferred stock may discourage the potential
hostile acquirer, possibly resulting in beneficial negotiations. Negotiating with an unfriendly acquirer may result in, among other
things, terms more favorable to the Company and its stockholders. Conversely, the issuance of preferred stock may adversely affect
any market price of, and the voting and other rights of the holders of the common stock. The Company presently has no plans to
issue any preferred stock.
These and other provisions
in the Nevada corporate statutes and our charter documents could delay or prevent actual and potential changes in control, even
if they would benefit the Company’s stockholders.