10-K 1 form10k.htm PHOTOMEDEX, INC 10-K 12-31-2013 form10k.htm


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
(Mark One)
 
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2013
 
OR
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______________ to _____________
 
Commission file number: 0-11635
 
PHOTOMEDEX, INC.
(Exact name of registrant as specified in its charter)
 
Nevada
 
59-2058100
(State or other jurisdiction of incorporation or organization)
 
(I.R.S.  Employer Identification No.)

100 Lakeside Drive, Suite 100, Horsham, Pennsylvania 19044
(Address of principal executive offices, including zip code)
 
(215) 619-3600
(Issuer’s telephone number, including area code)
 
Securities registered under Section 12(b) of the Exchange Act:

 
 
Name of each exchange
Title of each class
 
on which registered
Common Stock
 
Nasdaq Global Select Market, TASE

Securities registered under Section 12(g) of the Exchange Act:
 
None
(Title of Class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 
 
Yes o No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
 
Yes o No x
 


 
 

 
 
Indicate by check mark whether the registrant:  (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days.
 
Yes x    No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
 
Yes x No o
  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

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

 
Large accelerated filer o
Accelerated filer x
 
       
 
Non-accelerated filer o
Smaller reporting company o
 

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

Yes o No x
 
The number of shares outstanding of our common stock as of June 28, 2013, was 20,722,939 shares. The aggregate market value of the common stock held by non-affiliates (11,846,911 shares), based on the closing market price ($15.94) of the common stock as of June 28, 2013, was $188,839,761.

As of March 14, 2014, the number of shares outstanding of our common stock was 18,903,245. The closing market price of our common stock as of March 14, 2014 was $16.39.
 
 
 

 
 
 
   
Page
Part I
   
     
Item 1.
1
Item 1A.
22
Item 1B.
58
Item 2.
58
Item 3.
58
Item 4
59
     
Part II
   
     
Item 5.
60
Item 6.
63
Item 7.
64
Item 7A.
83
Item 8.
83
Item 9.
83
Item 9A.
83
Item 9B.
87
     
Part III
   
     
Item 10.
87
Item 11.
93
Item 12.
102
Item 13.
104
Item 14.
104
     
Item IV
   
     
Item 15.
105
 
110
 
 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
Certain statements in this Annual Report on Form 10-K, or this Report, are "forward-looking statements." These forward-looking statements include, but are not limited to, statements about the plans, objectives, expectations and intentions of PhotoMedex, Inc., a Nevada corporation, (referred to in this Report as “we,” “us,” “our”, “registrant” or “the Company”) and other statements contained in this Report that are not historical facts. Forward-looking statements in this Report or hereafter included in other publicly available documents filed with the Securities and Exchange Commission, or the Commission, reports to our stockholders and other publicly available statements issued or released by us involve known and unknown risks, uncertainties and other factors which could cause our actual results, performance (financial or operating) or achievements to differ from the future results, performance (financial or operating) or achievements expressed or implied by such forward-looking statements. Such future results are based upon management's best estimates based upon current conditions and the most recent results of operations. When used in this Report, the words "will, " "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and similar expressions are generally intended to identify forward-looking statements, because these forward-looking statements involve risks and uncertainties. There are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements, including our plans, objectives, expectations and intentions and other factors discussed under "Risk Factors." We undertake no obligation to update such forward-looking statements. These forward-looking statements include, but are not limited to, statements about:
 
 
• 
forecasts of future business performance, consumer trends and macro-economic conditions;
 
 
• 
descriptions of market and/or competitive conditions;
 
 
• 
descriptions of plans or objectives of management for future operations, products or services;
 
 
• 
our estimates regarding the sufficiency of our cash resources, expenses, capital requirements and needs for additional financing and our ability to obtain additional financing
 
 
• 
our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;
 
 
• 
our ability to obtain and maintain regulatory approvals of our products;
 
 
anticipated results of existing or future litigation; and
 
 
• 
descriptions or assumptions underlying or related to any of the above items.
 
In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained in this Annual Report on Form 10-K might not occur. Investors are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent forward-looking statements attributable to us or to any person acting on its behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.
 
PART I
 
Business
 
Our Company
 
PhotoMedex, Inc., re-incorporated in Nevada December 30, 2010, originally formed in Delaware in 1980, is a global skin health company providing integrated disease management and aesthetic solutions to dermatologists, professional aestheticians and consumers. We provide proprietary products and services that address skin diseases and conditions including psoriasis, vitiligo, acne and photo damage. Our experience in the physician market provides the platform to expand our skin health solutions to spa markets, as well as traditional retail, online and infomercial outlets for home-use products. As a result of its December 2011 merger with Radiancy, Inc., PhotoMedex has added a range of home-use devices under the no!no!® brand, for various indications including hair removal, acne treatment, skin rejuvenation, and lower back pain. In addition, our professional product line increased its offerings for acne clearance, skin tightening, psoriasis care and hair removal sold to physician clinics and spas.
 
 
On December 13, 2011, or the Merger Date, we closed the merger with Radiancy, Inc, formerly private company. As of December 13, 2011, after giving effect to the reverse acquisition and the issuance of PhotoMedex, Inc. common stock to the shareholders of Radiancy, Inc., we had 18,820,852 shares of common stock issued and outstanding, with the Pre-merged PhotoMedex, Inc. shareholders collectively owning approximately 20% and the former Radiancy, Inc. stockholders owning approximately 80%, of the outstanding common stock of the Company. In connection with the merger, Radiancy, Inc became a majority-owned subsidiary of PhotoMedex. We refer to this transaction as the “reverse merger” in this Annual Report on Form 10-K. References to “Pre-merged PhotoMedex” and “Pre-merged Radiancy” mean PhotoMedex, Inc. and Radiancy, Inc., respectively, prior to the Merger Date.
 
On February 13, 2014, PhotoMedex, Inc., LCA-Vision Inc., a Delaware corporation (“LCA”), and Gatorade Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of PhotoMedex (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) under which PhotoMedex has agreed to acquire LCA. Pursuant to the Merger Agreement, and subject to the satisfaction or waiver of the conditions therein, Merger Sub will be merged with and into LCA (the “Merger”), with LCA surviving as a wholly-owned subsidiary of PhotoMedex. PhotoMedex will fund this transaction through a new $85 million committed senior secured credit facility including a $10 million revolving credit facility and a $75 million four-year term loan, as well as through existing cash balances. The Merger is not conditioned upon PhotoMedex receiving such financing. As of March 17, 2014, four individual lawsuits seeking to prevent this acquisition had been filed in state courts.
 
Our Key Strategies
 
Our technologies, products and research efforts are directed to addressing a worldwide aesthetic industry valued at $34 billion annually. We provide dermatologists, professional aestheticians, and consumers with the equipment and skin care products they need to treat psoriasis, vitiligo, acne, and UV damage, among other skin conditions. 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. During 2013, we began to benefit from the impact of these marketing methodologies and expertise on our XTRAC® Excimer Laser and NEOVA® topical skin care lines while continuing to realize organic and geographic growth of additional brands.
 
Skilled Direct Sales Force to Target Physician and Professional Segments
 
The merger has allowed us to blend our technologies and unique expertise in order to strengthen revenue lines, enable cross-selling and drive development opportunities for future growth. Pre-merged PhotoMedex has long been active in physician sales, having developed a portfolio of medical devices and topical formulations that are provided under various financial arrangements primarily to dermatologists and plastic surgeons as well as other aesthetic professionals at salons and med spas. These products comprise medical lasers for skin diseases such as psoriasis and vitiligo, phototherapies for acne and sun damage, therapeutic skin care and surgical laser systems, among other products. One of our competitive advantages is an experienced, 44-person, physician-targeted sales force that is currently selling into 3,000 U.S. locations. Since the December 2011 reverse merger, we are now capitalizing on this skilled sales force in order to drive greater adoption of our line of proprietary Light and Heat Energy (LHE®) products. These products, which provide skin rejuvenation, acne treatment, hair removal and other services for dermatologists and med spas, had been previously sold by a limited sales force comprising of a few individuals. We believe that the combination of this product line with Pre-merged PhotoMedex’s domestic U.S. sales infrastructure can expand the use of the LHE® products in multiple sales channels.
 
 
Expertise in Global Consumer Marketing
 
We have 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. The no!no!® products are sold at roughly 5,000 retail outlets across 55 countries, through infomercials and print, radio other television advertising worldwide, online, on home shopping channels and at stores and kiosks.
 
We have begun to capitalize upon our consumer marketing expertise to further patient awareness of our XTRAC® Excimer Laser and NEOVA® topical skin care products, which have traditionally been marketed only to physicians and aesthetic professionals. By incorporating a direct-to-consumer/patient element, we aim to increase brand awareness and direct patients into physicians’ practices in search of these products. Our experience in effectively penetrating culturally distinct regions with targeted advertising is also anticipated to further benefit the expansion of our non-device technologies into global consumer channels.
 
Blending Corporate Cultures
 
Ultimately, due to the sales channel and product line synergies between the Radiancy and Pre-merged PhotoMedex businesses, we believe that the combination of these two businesses will enable a revenue and earnings growth potential that neither firm would have been able to achieve independently. Beyond these benefits, we have also developed complementary corporate cultures, with shared commitments to innovation, product quality and a high level of customer service to address the evolving needs of customers. We also emphasize the development of products and technologies that are backed by science and clinical support. We hold more than 90 clearances from the U.S. Food and Drug Administration (FDA) under Section 510(k) of the Food, Drug and Cosmetic Act, indicating that we have permission to commercialize such products in the U.S. based on having submitted safety and efficacy information to the FDA. See Government Regulations – Regulations Relating to Products and Manufacturing discussion below.
 
Full Product Life Cycle Model
 
Since 2004, we have introduced a portfolio of professional-grade consumer products for hair removal, acne treatment, skin rejuvenation, facial skin tightening and lower back pain. These products - marketed globally under the no!no!® and kyrobak® brands - are built upon the same technology platforms that are used in medical devices for physicians and aestheticians. We have been able to bring the clinical solutions used by physicians and med spas to the consumer home-use market by successfully miniaturizing equipment into handheld or lightweight convenient-to-carry products and engaging in a multi-faceted worldwide sales and marketing strategy. Under this type of “full product life cycle model,” the development of medical technology cleared through regulatory agencies, such as the FDA, and acceptance by physicians can ultimately lead to an effective new technology for consumer use.
 
Once a product idea is generated, it is refined and tested through the development stage, which includes leveraging the knowledge of our Scientific Advisory Board; our marketing organization then works to encourage physician adoption of the new process/product. While many companies may stop at this point, our full product life cycle encourages us to continue to innovate and broaden our market opportunity by further miniaturizing professional technologies for home-use. Optimizing technologies for consumer use involves many considerations, including understanding and matching consumer expectations and providing superior customer service, eliminating the need for consumers to calibrate or safety test devices in the way that professionals are required to do for in-office capital equipment, and setting price points that are favorable for us but affordable for consumers. These key elements were the basis for Radiancy’s no!no!® product line, which received the Consumer Survey of Product Innovation’s 2011 “Product of the Year” award in the At Home Beauty Treatment category and the HSN Most Innovative Product Award for 2012.
 
 
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 are focused on addressing the above-mentioned trends by growing and expanding our three core business segments: consumer, physician recurring and professional. We possess a solid line of technology platforms that are currently driving, and are expected to continue to drive, new product introductions and consequently greater revenues. We are focused on growth both through geographic expansion and the pursuit of additional diversified marketing initiatives that are intended to increase market share and sustain the profitability that we have reported thus far.
 
Our three main sources of revenue generation form our three business segments: Consumer segment, Physician Recurring segment and Professional segment. Specific growth strategies as they relate to each of these core business channels are described below.
 
Consumer Segment
 
 
Expand into additional geographic markets. We intend to continue implementing a global multichannel sales and marketing strategy. We have sold more than 5 million no!no!® units to consumers, the majority of these over the past four years. Growth has been largely driven by North America (with a population of 529 million) and Japan (with a population of 127 million), although our products are sold across 55 countries. Between these two populations, as well as other countries, we maintain that significant further market penetration is possible. In addition, during 2013 we launched our consumer marketing platform in Germany (population of approximately 83 million people) and more recently in Brazil (population of approximately 192 million people).
 
 
 Strengthen our retail distribution channel. We intend to continue the expansion and growth of our retail presence in the US and internationally. In the US in 2013 we expanded the in-store availability of our flagship product, no!no! Hair, which is now available for sale at approximately 950 Bed Bath & Beyondstores nationwide. This adds to the Company's rapidly growing global retail footprint including more than 7,500 retail outlets worldwide.
 
 
Diversify media campaigns, extending beyond the historical overnight infomercial audience to also target short-form infomercials and daytime advertising. We will continue to diversify our media campaigns beyond the overnight infomercial audience (the 28-minute infomercial) by increasing our advertising expenditures for infomercials in short form (30 second, 1 minute, 2 minute and 5 minute) in daytime media buys. Furthermore, we continue to test and expand a variety of media messages in various formats (TV, radio, print) and in multiple languages.
 
 
Capitalize on our consumer marketing expertise to bring NEOVA® and our other products into the consumer segment. We are positioned to introduce other technologies—either via product extension from the health and wellness area of the no!no!® and kyrobak® brands or from our NEOVA® and XTRAC® technologies—using the same marketing foundation.
 
 
Build out brand extensions of the no!no!® line into additional health and wellness areas. There are several additional no!no!® brand extensions in the pipeline ready to be launched, which we believe we could do imminently should we experience any change in growth trajectory of our existing product offerings.
 
 
 
Leverage technology development in the physician and professional segments to drive new products for the consumer channel. We believe that our consumer line can continue to increase market penetration. We have expertise in adapting products for consumer markets, as we have taken proprietary technologies focused toward physicians and med spas and adapted them to the home-use market. Employing this same expertise for our pre-merged PhotoMedex product line and technologies, we expect to grow sales and increase gross margins.
 
Physician Recurring Segment
 
 
Incorporate direct-to-consumer sales strategies to educate patients about the availability of treatments for psoriasis, vitiligo and other skin care concerns and, in turn, motivate patients to seek out XTRAC® and NEOVA® technologies sold by physicians, clinicians and other aesthetic professionals. Via the reverse merger, we now have greater options to offer our physician community. We currently sell into over 3,000 physician offices. With a direct-to-patient strategy creating awareness, we believe that we can drive these revenues significantly higher given the safety and effectiveness of our technology in treating psoriasis and vitiligo compared to alternatives on the market.
 
 
°
In 2012 we launched a direct to patient and physician education campaign in the US for psoriasis and vitiligo patients. The Live Clear. Live Free. campaign is designed to accelerate awareness of the XTRAC® excimer laser treatment, improve patient care, expedite information sharing, and reduce healthcare costs for what many believe is one of the most challenging skin diseases. The national campaign includes TV, radio and direct mail marketing.  Live Clear. Live Free. brings PhotoMedex's support of practices that administer XTRAC® excimer laser therapy to a new level. The campaign also drives awareness of the standard of care for psoriasis and vitiligo, attracting physicians outside of the dermatology discipline nationwide. As more physicians offer XTRAC®, PhotoMedex continues to close the gap between advancements and availability to improve patient care and lower healthcare costs.
 
 
°
We conducted a market survey in early January 2011 of both physicians and patients of our XTRAC therapy. The results indicated that physicians were aware of the technology and felt positively about it. However, patients were largely unaware of the XTRAC treatment. When patients were made aware of the treatment, they asked where they could find it. Based on the results of the survey, we believe that we can dramatically change the dynamics of this component of our business by increasing consumer awareness.
 
 
Seek to increase insurance reimbursement for vitiligo treatments using the XTRAC lasers. The XTRAC Excimer Laser is a procedure for psoriasis that is reimbursable by almost all major insurance companies, including Medicare. Although substantial improvement in the number of companies paying health insurance claims for vitiligo has recently occurred, it still lags behind psoriasis.
 
 
Complete the clinical trial for the XTRAC device in combination with Galderma Laboratories, L.P.’s topical psoriasis medications Clobex® and Vectical®. Our XTRAC lasers are currently being studied in combination with Clobex and Vectical in a trial at the University of California, San Francisco. The trial aims to demonstrate that the combination therapy can achieve a 75% reduction or better in disease in 12 weeks and maintain that clearance for an extended period of time.
 
Professional Segment
 
 
Use pre-merged PhotoMedex’s 44-person U.S. direct sales force to increase sales of our professional products. Our current expertise in professional markets has opened channels for our LHE equipment. Historically, Pre-merged PhotoMedex marketed its products only to physicians, creating a skilled sales force with relationships in this arena.
 
 
Our Products
 
We emphasize the development of physician-endorsed skin care 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, are expected to be significant growth drivers for us. Our primary technology and product platforms are described below.
 
We evaluate four principal criteria in determining where to allocate product development resources:
 
 
demonstrable clinical efficacy and safety;
 
 
intellectual property protection;
 
 
cost of goods; and
 
 
market opportunity.
 
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 include the following:
 
 
Our Thermicon® technology and no!no!® product line;
 
 
Professional equipment built upon our Light and Heat Energy (LHE®) technology which is also incorporated into some of our consumer devices;
 
 
Our XTRAC® technology to treat psoriasis and vitiligo;
 
 
Our topical NEOVA® formulations to combat UV-induced damage causing premature skin aging;
 
 
Light-emitting diode (LED) technology used in our Omnilux™ and Lumière™ Light Therapy systems as well as in some of our consumer devices; and
 
 
Our Kyrobak® technology which incorporates Continuous Passive Motion (CPM) and Oscillation Therapy is for the relief of unspecified, lower back pain.
 
Beyond these, we provide the Iamin® line of hair care products, which are formulated with a clinically tested Copper Peptide Micronutrient technology to manage the acute post-hair transplant period and improve outcomes. These products are targeted to the hair transplant and restoration market. We also operate a surgical business, which includes the LaserPro® Diode surgical laser system and UniMax® family of laser micromanipulators for the delivery of laser energy in microsurgical procedures.
 
THERMICON® HEAT TRANSFER TECHNOLOGY
 
Our no!no!® hair removal products are 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:
 
 
 
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.
 
 
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.
 
 
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.
 
 
Low Cost of Goods to MSRP ratio. Thermicon® brand technology has an average retail price of around $270 in the US and between $300-400 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.
 
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 market 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 is still marketed even as we continue to introduce new product extensions. Going forward, we believe that the no!no! pipeline is considerable, with multiple new products and devices being developed with some that already have launched overseas. We are committed to effectively managing our product life cycle, seeking to ensure that, if there is a change in growth trajectory, we will likely possess new, enhanced technologies that are synergistic with our platform.
 
The no!no!® line of products also includes a consumables-based revenue model, which helps provide us with a growing, high-margin recurring revenue stream as consumers make repeat purchases of refill Thermicon tips, buffers and topical products.
 
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 has also been 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 but does not penetrate into the surrounding area. Heat is also produced and directed to the target with minimal effect on surrounding skin.
 
 
While there are many phototherapy options available for patients today, including laser and intense pulse light (IPL), we believe that we have optimized the light/heat relationship. Both Laser and IPL treatments filter out the heat given off by their flashes or pulses of light, primarily relying on the light energy to cause a clinical change. We believe that by not using the heat energy as well, laser and IPL technologies must be administered at high densities, which may require skin cooling techniques to protect patients from burns.
 
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.)
 
We believe that LHE can be more attractive than both laser and IPL technologies due to our cost structure, efficacy and ease of application. Medical devices that use LHE can treat a larger spot size than a laser-based system, with less discomfort and without requiring post-treatment skin cooling. As well, our research finds that our LHE approach offers meaningful results for thin and/or light hair. The technology also enables the development of smaller equipment, which is more affordable than bulky laser systems for many clinicians.
 
Benefits of the LHE approach are summarized below.
 
 
Non-invasive, non-abrasive treatments;
 
 
No down time;
 
 
Clinically proven results;
 
 
Safety and efficacy for all skin types;
 
 
Especially suited for Skin Types V-VI; and
 
 
Easy to use
 
The no!no! Skin™
 
LHE® brand technology is also used in the no!no! Skin, a handheld consumer product sold worldwide under our no!no!® brand. The no!no! Skin is a 510(k)-cleared product that has been clinically demonstrated to resolve or improve acne lesions by 81% within 24 hours. It uses the same LHE® brand technology from our physician LHE® brand products but is optimized for home use.
 
The no!no! Skin puts out wide spectrum light (from 400 to 2,000 nm) and gentle pulses of heat to penetrate blocked pores and stop acne at its source. The device seeks to pinpoint Propionibacterium acnes (P. acnes), or acne-causing bacteria, in the pore. The green light serves to stimulate the release of oxygen radicals, which attack the P. acnes. Simultaneously, the red light produces an anti-inflammatory reaction that reduces pimples’ visible swelling. The addition of heat intensifies the process and gently opens the pores to release the clog and further soothe the inflammation.
 
The no!no! GLOW applies the same LHE® brand technology from our physician LHE® devices but is optimally miniaturized for home use.
 
 
KYROBAK
 
Kyrobak uses clinically proven, proprietary technology to treat unspecified, lower back pain. The unique combination of Continuous Passive Motion (CPM) and Oscillation therapy is a non-invasive, relaxing method for long lasting relief of back pain. Used for better than 3 decades in professional rehabilitation and chiropractic settings, CPM has been proven to increase mobility of the joints, draw more oxygen and blood flow to the area, allowing the muscles to relax and release pressure between the vertebrae allowing the spine to open up and decompress.
 
Given that back pain is the leading cause of disability in Americans under the age of 45 and that it affects 25 Million Americans, from 25- 64, annually, we believe the market need is unfilled and the population underserved. Through our direct-to-consumer initiatives, we will be targeting the estimated 80% of Americans who have suffered lower back pain at least once in their lives with the Kyrobak brand device and a series of accessories poised to grow the brand further.
 
XTRAC® EXCIMER LASERS
 
XTRAC is a legacy, ultraviolet (UV) light, excimer laser technology from Pre-merged PhotoMedex. It received an FDA clearance in 2000 and has since become a widely recognized treatment among dermatologists for psoriasis and other skin diseases for which there are no cures. Excimer lasers emit very concentrated UV light and are used in ophthalmology and dermatology practices. Our XTRAC brand lasers deliver ulta narrow-band ultraviolet B (UVB) light to affected areas of the skin in order to treat an array of skin conditions, including psoriasis and vitiligo, which combined affect up to 10.5 million people in the U.S. and 190 million people worldwide.
 
Present in natural sunlight, UVB is an accepted psoriasis treatment that penetrates the skin to slow the growth of damaged skin cells. UVB therapy occurs as patients expose their affected skin to a UVB light source for a set length of time on a regular schedule. In our XTRAC system, we have refined the delivery of optimum amounts of UVB directly to skin lesions. The XTRAC lasers emit a high-intensity beam of ultra narrow-band UVB, which many studies prove can clear psoriasis faster and produce longer remissions than broad-band UVB. In comparison to broad-band UVB, narrow-band UVB also require fewer treatments to produce the desired effect.
 
We market two excimer laser brands: the XTRAC Ultra Plus and the XTRAC Velocity. The Velocity is a more advanced and faster machine, allowing clinicians to treat a greater surface area in a shorter period of time. It is designed to treat generalized psoriasis, but can be used for all disease levels (mild, moderate and severe).
 
The XTRAC products are sold to physicians primarily overseas, while in the US under a recurring revenue model, we generate incremental income on a per-use basis from these machines. We estimate that there are roughly 700 XTRAC lasers in use in the U.S., leaving considerable opportunity for growth, as the target U.S. audience for XTRAC lasers comprises approximately 3,500 dermatologists who perform disease management. This market excludes nearly 7,000 other U.S. dermatologists who are either in academia or not actively treating skin diseases.
 
To develop the XTRAC machines, our medical engineers and research team collaborated with Dr. Rox Anderson, director of the Wellman Center for Photomedicine at Massachusetts General Hospital, Harvard Medical School. The resulting device produced a monochromatic wavelength (308 nm) of UV light known to positively impact the psoriasis action spectrum.
 
We have found that XTRAC treatment leads to remission of patients’ psoriasis in an average of 8 to 12 treatments. Treatment protocols recommend that patients receive two treatments per week with a minimum of 48 hours between treatments. Our data shows that XTRAC has an 89% efficacy and produces only minimal side effects. In support of its clinical effect, the XTRAC Excimer Lasers have been cited in over 45 clinical studies and research programs, with findings published in peer-reviewed medical journals around the world. The products have also been endorsed by the National Psoriasis Foundation, and their use for psoriasis is covered by nearly all major insurance companies, including Medicare.
 
 
XTRAC is a reimbursable procedure for psoriasis under three Current Procedural Terminology (“CPT”) codes. It reimburses each treatment at approximately $175, with typical charges ranging from $150 to $250 depending on the amount of body surface being treated.
 
Psoriasis Treatment Options
 
There are essentially three main types of psoriasis treatments, as listed below.
 
 
Topical therapies:
These can include corticosteroids, vitamin D3 derivatives, coal tar, anthralin and retinoids, among others, that are sold as a cream, gel, liquid, spray, or ointment. The efficacy of topical agents varies from person to person, although these products are commonly associated with a loss of potency over time as people develop resistance.
     
 
Phototherapy:
This is the area in which we operate. Our XTRAC Excimer Lasers are FDA-cleared, fully reimbursable, National Psoriasis Foundation-endorsed phototherapy treatments for psoriasis. In addition to treatment with XTRAC machines at a clinician’s office, patients have the option of purchasing at-home UV light systems.
     
 
Systemic medications:
There are a number of prescription medications available for psoriasis, which are given either by mouth or as an injection. Generally, these drugs are administered only after both topical treatments and phototherapy have failed, or for people who have severe disease or active psoriatic arthritis.
 
Ongoing Clinical Trial
 
The XTRAC® Excimer Lasers are particularly significant and beneficial for moderate and severe psoriasis patients who prefer a noninvasive treatment approach without the side effects of invasive, systemic agents, or to patients who have developed a resistance to topical agents. In many cases, UVB phototherapy can also be combined with topical or systemic medications in order to enhance efficacy. With this in mind, our XTRAC® lasers are currently being studied in a clinical trial in combination with Galderma Laboratories, L.P.’s topical psoriasis therapies Clobex and Vectical Ointment. Clobex is a topical corticosteroid cleared to treat moderate-to-severe plaque psoriasis. It is sold as a spray, shampoo, or lotion. Vectical Ointment is a topical treatment for mild-to-moderate plaque psoriasis. The trial is led by Dr. John Koo and Dr. Ethan Levin at the University of California, San Francisco.
 
The study’s primary endpoint is to achieve a Psoriasis Area and Severity Index (PASI) score of 75 or better in 12 weeks and subsequently maintain that clearance for an extended period of time. A PASI 75 score indicates a 75% reduction in disease, and is a benchmark endpoint for most clinical trials of psoriasis. Preliminary results for the first 21 patients that completed the new XTRAC treatment protocol were reported in the Journal of Dermatological Treatment in February 19, 2014. By week 12, 76% of the patients had a reduction in Psoriasis Area and Severity Index of at least 75% (PASI-75) and 52% had a Physicians Global Assessment of “clear” or “almost clear.” If this trend continues excimer laser therapy combined with an optimized topical agent may provide an extremely effective treatment of moderate and severe psoriasis that avoids the risk of serious side effects associated with many current systemic Biologic agents.
 
Using the XTRAC Excimer Lasers to Treat Vitiligo and Other Skin Diseases
 
UV light therapy is considered to be an effective and safe treatment for many skin disorders beyond psoriasis. To this effect, the XTRAC technology is FDA cleared for the treatment of not only psoriasis but also vitiligo (a skin pigment deficiency), atopic dermatitis (eczema) and leukoderma, which is a localized loss of skin pigmentation that occurs after an inflammatory skin condition, such as a burn, intralesional steroid injection, or post dermabrasion.
 
XTRAC technology works for vitiligo patients in much the same way as for psoriasis patients, although vitiligo treatment requires more therapy sessions. The XTRAC UVB light functions to reignite the skin’s melanocytes (the cells that produce melanin), which causes pigment to return. To date, there is not sufficient data to confirm how long patients can expect their vitiligo to be in remission after XTRAC therapy. Based on anecdotal reports, we believe that re-pigmentation may last for several years.
 
 
Traditionally, vitiligo treatments have been considered cosmetic procedures, and as such, were not reimbursed by insurance companies. However, over the past two years, there has been a significant increase in insurance coverage for these procedures, although it still lags behind the widespread reimbursement for psoriasis.
 
Due to a greater prevalence of vitiligo among people with darker skin types, regions such as the Middle East, where there is also a social stigma about the condition, are considerable markets for our XTRAC lasers.
 
Awareness of the positive effects of XTRAC treatments is the greatest limiting factor in making XTRAC treatments available to those who suffer from psoriasis and vitiligo. Therefore, we have initiated a direct to patient advertising campaign aimed at motivating psoriasis and vitiligo patients to seek out XTRAC treatments from our dermatologist customers. Specific advertisements encourage prospective patients to contact the Company’s patient advocacy center through telephone or web site whereby we provide information on the treatment, insurance coverage and ultimately schedule an appointment for the prospective patient with one of our dermatologist customers for an evaluation and treatment regimen.
 
NEOVA® PHYSICIAN-DISPENSED SKIN CARE
 
Our NEOVA skin care line is 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:
 
 
Continuously repair and enhance skin’s natural processes;
 
 
Protect from UV immunosuppression;
 
 
Restore barrier function;
 
 
Promote collagen regeneration and skin elasticity; and
 
 
Assist in correcting and improving cell metabolism.
 
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.
 
Among other products, the NEOVA line includes DNA Damage Control SILC SHEER SPF 45, an award-winning tinted sunscreen that contains micronized titanium dioxide, organic blockers and DNA repair enzymes to reduce risks of skin cancer and premature aging—both of which are caused by photo damage from sun exposure. The DNA repair enzymes are clinically shown to reduce UV damage by 45% and increase UV protection by 300% in one hour.
 
NEOVA DNA Total Repair cream has been featured on The Doctors, a national daytime talk show that offers medical and health advice. The segment illustrated how the Total Repair product repairs damaged DNA in the cells of the skin in order to diminish age spots on someone who has used the cream consistently for two weeks. The guest testing the product reported that her hands had lightened considerably and some age spots had almost disappeared.
 
 
The NEOVA technology represents 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 seek to drive consumers to medical practices for NEOVA as well as to our website to buy direct.
 
We hold over 26 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.
 
Our direct-to-consumer efforts are designed to take full selling advantage of the 10,000 attentive customers a week inquiring after no!no! products. Introduced as upsells to this population, the tests have shown significant success with 26% of customers opting-in for a Neova continuity program.
 
LED TECHNOLOGY
 
Omnilux™
 
Omnilux Light Therapy uses light-emitting diode (LED) technology to treat skin conditions. Although commonly understood for their use in electronics, LEDs have gained notoriety for medical applications as well. The Omnilux LED system is FDA cleared to treat wrinkles, acne, minor muscle pain and pigmented lesions. For professional use, the Omnilux equipment entails a common base apparatus equipped with three interchangeable headlamps. Each of these lamps gives off a different wavelength of light, which allows physicians to treat more than one condition with the same piece of capital equipment. Omnilux technology is believed to be applicable to all skin types. Going forward, we believe the application of LED technology will likely continue to expand, particularly as more research is conducted on the possibilities of using LEDs to activate cancer drugs, among other medications.
 
Lumière
 
Lumière is a sister technology to Omnilux with the same patent protection. It is designed for use in non-medical applications, especially at salons and spas. Lumière combines LED technology with our DNA repair enzymes and Copper Peptide Complex, giving aesthetic professionals a complete non-invasive skin care solution. The Lumière™ light therapy equipment contains a self-service headlamp with two wavelengths built specially for salons and spas. Accompanying the LED treatment is a line of topical lotions to improve the appearance of fine lines, wrinkles, skin tone and blemishes.
 
SURGICAL PRODUCTS
 
We engage in the development, manufacture and sale of surgical products, including proprietary free-beam and Contact Laser™ Systems for surgery. We introduced Contact Laser surgery by combining proprietary Contact Laser Delivery Systems with an Nd:YAG laser unit to create a multi-specialty surgical instrument that can cut, coagulate or vaporize tissue. Our Contact Laser Delivery Systems can be used effectively with any wavelength of laser between 532nm and 1064nm, including the KTP laser (532nm), diode laser (various wavelengths) and Nd:YAG laser (1064nm). We are currently marketing such products under the trade name PhotoMedex Surgical Products.
 
Our proprietary Contact Laser probe and scalpel surface treatments provide the ability to alter selectively the temperature profile of tissue, replicating the clinical effect of many different types of lasers. Through our Contact Laser Delivery Systems, we are able to produce a wide range of temperature gradients, which address a broad range of surgical procedures within multiple specialties. Our multiple-specialty capability reduces a hospital’s need to purchase several lasers to meet its specialists’ varied requirements.
 
Our LaserPro® Diode laser system has replaced the Nd:YAG laser as the preferred host laser for our Contact Laser Delivery Systems. Our Contact Laser Delivery Systems consist of proprietary fiberoptic delivery systems which deliver the laser beam from our Diode (or Nd:YAG) laser unit via an optical fiber to the tissue, either directly or through a proprietary Laser Probe or Laser Scalpel. These delivery systems can also be used with the laser systems of certain other manufacturers.
 
 
Competition
 
The markets in which we participate are highly competitive. Certain of our competitors are larger than us and have substantially more resources. However, we believe that we are positioned to compete against a wide variety of peers, whether consumer-based companies of similar size or other companies competing in the aesthetics/physician channel. 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, such as Dezac Group, Home Skinovations Ltd., TRIA Beauty, Inc. and LumaTherm Inc. Several public companies, such as Syneron Medical Ltd. (ELOS-NASDAQ), Cynosure Inc. (CYNO-NASDAQ) and Valeant Pharmaceuticals, Inc. (VRX-NYSE), are either looking to market or are already marketing consumer aesthetics products.
 
Our no!no!® products are energy-based. As such, energy-based aesthetic products may face competition from non-energy-based medical products, such as shaving, tweezing, waxing and creams.
 
We believe that a significant barrier to entry into an applicable market is the cost basis of the product, since our products are based upon a proprietary technology that allows us to build products inexpensively. From a marketing standpoint, if competitors are developing a product that may compete with no!no!®, they then become tasked with the challenge of building the marketing for that product. We invested roughly $72 million in 2013 in marketing and advertising. Furthermore, our comprehensive intellectual property position may serve as a deterrent to companies.
 
We may also compete with pharmaceutical compounds and methodologies used to treat an array of skin conditions addressed by our professional products. Such alternative treatments may be in the form of topical products, systemic medications, and phototherapies from both large pharmaceutical and smaller laser companies. Currently, our XTRAC system is believed to be a competitive therapy to alternative treatments on the basis of its recognized clinical effect, cost-effectiveness and reimbursement. Potential competition for us in this category could come from Biogen Idec Inc. (BIIB-NASDAQ), Centocor, Inc. (a Johnson & Johnson company) and Abbott Laboratories (ABT-NYSE), which are engaged in R&D and commercialization of treatments in these areas. In some cases, these companies have already received FDA approval for products or commenced clinical trials for such treatments.
 
With regard to surgical lasers, we face substantial competition from other manufacturers of surgical laser systems, whose identity varies depending on the medical application for which the surgical system is being used and from traditional surgical methods. Other companies are developing competitive surgical systems and related technologies.
 
Manufacturing
 
We manufacture our excimer laser products and our excimer lamp product at our 11,300 sq. ft. facility in Carlsbad, California. We manufactured our surgical products at our 42,000 sq. ft. facility in Montgomeryville, Pennsylvania. Our California and Pennsylvania facilities are ISO 13485 certified. ISO 13485 is an International standardization written by the International Organization for Standardization, which publishes requirements for a comprehensive quality management system for the design and manufacture of medical devices. Certification to the standard is awarded by accredited third parties. We believe that our present manufacturing capacity at these facilities is sufficient to meet foreseeable demand for our products.
 
For our surgical products, we manufacture most of our own components and utilize certain suppliers for the manufacture of selected standard components and subassemblies, which are manufactured to our specifications. Most major components and raw materials, including optics and electro-optic devices, are available from a variety of sources. We conduct all final testing and inspection of our products. We have established a quality control program, including a set of standard manufacturing and documentation procedures intended to ensure that, where required, our products are manufactured in accordance with applicable FDA regulations and the comparable requirements of the European Community and other countries, including for example Japan and Canada.
 
 
Outsourcing and Fulfillment
 
We out-source the manufacturing of our Thermicon® and LHE® brand products while maintaining control over the production process. We believe that by outsourcing the manufacturing of each product, we can maintain low inventory levels and fixed unit costs, with minimal infrastructure, without incurring significant capital expenditures. We use third-party contract manufacturers and suppliers to obtain substantially all of the related product and packaging components and to manufacture these finished products. We believe that we have good relationships with our manufacturers and suppliers and that there are alternative sources in the event that one or more of these manufacturers or suppliers is not available or cease the conduct of its business. We continually review our manufacturing and supply needs against the capacity of our contract manufacturers and suppliers with the objective of ensuring that we are able to meet our production goals, reduce costs and operate more efficiently.
 
We contract with third-party fulfillment vendors to package and distribute our Thermicon®, LHE® and skincare products primarily from our fulfillment facilities in the United States, Canada and the United Kingdom.
 
We substantially outsource the manufacturing of our Skin Care products to OEM contract manufacturers. In addition, we currently out-source the manufacturing of our LED products. The LED product equipment is currently manufactured by an OEM manufacturer in the UK with tooling provided and owned by us. We believe that the manufacturing capacity of this supplier is sufficiently adequate for anticipated demand. Quality control is performed at the OEM manufacturer and at our facilities in the U.S. The hand-held devices and the consumable products are manufactured by an OEM manufacturer in Carlsbad, CA. We are currently reliant on a single supplier for LEDs. We have not had any difficulties in product supply of LEDs to date, but we are actively seeking an alternate supplier for the purpose of offsetting this single-supplier approach.
 
Research and Development
 
As of March 14, 2014, our research and development team, including engineers, consisted of 11 employees. We conduct research and development activities at three of our facilities located in Horsham, Pennsylvania, Carlsbad, California and Hod Hasharon, Israel. Our research and development expenditures were approximately $3.3 million in 2013, $2.9 million in 2012 and $1.1 million in 2011.
 
Our research and development activities are focused on:
 
 
the utilization of existing technologies to develop additional consumer and professional applications and products;
 
 
the application of our XTRAC system to the treatment of inflammatory skin disorders;
 
 
the development of complementary devices to further improve the phototherapy treatments performed with our XTRAC and other light-based systems;
 
 
the development of new skin health and hair care products; and
 
 
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.
 
 
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. The patents in our Skin Care product line relate to use of our copper and manganese peptide-based technology for a variety of healthcare applications and to the composition of certain biologically active, synthesized compounds. Our strategy has been to apply for and maintain patent protection for certain compounds and their discovered uses that are believed to have potential commercial value in countries that offer significant market potential. As of December 31, 2013, we had 144 issued patents and 44 patent applications. In the U.S. alone, our business is protected by 41 patents.
 
We have licensed certain of our proprietary technology to third parties. We seek licenses from third parties for technology that can broaden our product and service offerings. For example, we secured a license from the Mount Sinai School of Medicine, New York, New York, which granted us exclusive rights to a patent directed to the use of excimer lasers in the treatment of vitiligo.
 
We also rely 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.
 
Many of our products and services are offered under trademarks and service marks, both registered and unregistered. We believe our trademarks encourage customer loyalty and aid in the differentiation of our products from competitors’ products, especially in our skincare products. Accordingly, we had 221 trademarks, either registered or being registered, in markets around the world that we intend to maintain in support of our products. These include 44 trademarks issued in the U.S. (including 32 for Pre-merged PhotoMedex) and 177 trademarks issued in the rest of the world (including 138 for Pre-merged PhotoMedex).
 
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 XTRAC system, LED devices, surgical lasers 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 XTRAC system for the treatment of psoriasis, vitiligo, atopic dermatitis and leukoderma and to market our LED products for a variety of indications for use. Additionally, the FDA has issued clearances to commercially market our Contact Laser System (which includes the system’s laser unit, laser probes, laser scalpels and fiberoptic delivery systems) in a variety of surgical specialties and procedures in gynecology, gastroenterology, urology, pulmonology, general and plastic surgery, cardiothoracic surgery, ENT surgery, ophthalmology, neurosurgery and head and neck surgery. The FDA granted these clearances under Section 510(k) on the basis of substantial equivalence to other laser or electrosurgical cutting 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. In August 2003, the FDA granted 510(k) clearance for a significantly modified version of our XTRAC laser, which we have marketed as the XTRAC XL Plus™ Excimer Laser System. In October 2004, the FDA granted clearance for the XTRAC Ultra™ (AL 8000) Excimer Laser System and, in March 2008, we received 510(k) clearance for the XTRAC Velocity™ (AL 10000) Excimer Laser System.
 
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 are also subject to the radiological health provisions of the FDA Act and the general and laser-specific radiation safety regulations administered by the Center for Devices and Radiological Health, or CDRH, of the FDA. These regulations require laser manufacturers to file initial, new product, supplemental and annual reports, to maintain quality control, product testing and sales records, to incorporate certain design and operating features (depending on the class of product) in lasers sold to end users pursuant to a performance standard and to certify and appropriately label each laser sold as belonging to one of four classes, based on the level of radiation from the laser that is accessible to users. Moreover, we are obligated to repair, replace, or refund the cost of certain electronic products that are found to fail to comply with applicable federal standards or otherwise are found to be defective. The CDRH is empowered to seek fines and other remedies for violations of the regulatory requirements. To date, we have filed the documentation with the CDRH for our laser products requiring such filing and have not experienced any difficulties or incurred significant costs in complying with such regulations.
 
 
We have received approval from the European Union to affix the CE Mark to our XTRAC laser system, VTRAC™ lamp system, Omnilux LED system and our diode laser system. 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 between $5,500 to $11,000 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.
 
Third-Party Reimbursement
 
Our ability to market our phototherapy products successfully depends in large part on the extent to which various third parties are willing to reimburse patients or providers for the cost of medical procedures utilizing our treatment products. These third parties include government authorities, private health insurers and other organizations, such as health maintenance organizations. Third-party payors are systematically challenging the prices charged for medical products and services. They may deny reimbursement if they determine that a prescribed device is not used in accordance with cost-effective treatment methods as determined by the payor, or is experimental, unnecessary or inappropriate. Accordingly, if less costly drugs or other treatments are available, third-party payors may not authorize, or may limit, reimbursement for the use of our products, even if our products are safer or more effective than the alternatives. Additionally, they may require changes to our pricing structure and revenue model before authorizing reimbursement.
 
Reimbursement systems in international markets vary significantly by country and by region within some countries, and reimbursement approvals must be obtained on a country-by-country basis. Many international markets have government-managed healthcare systems that control reimbursement for new devices and procedures. In most markets, there are private insurance systems, as well as government-managed systems. Our XTRAC products remain substantially without approval for reimbursement in many international markets under either government or private reimbursement systems. Since our skincare products are primarily for cosmetic applications, reimbursement is not a critical factor in growing revenues for this product segment.
 
Many private plans key their reimbursement rates to rates set by the Centers for Medicare and Medicaid Services under three distinct CPT codes based on the total skin surface area being treated.
 
 
As of December 31, 2013, the national rates were as follows:
  
 
96920 – designated for: the total area less than 250 square centimeters. CMS assigned a 2014 national payment of approximately $153.32 per treatment;
 
 
96921 – designated for: the total area 250 to 500 square centimeters. CMS assigned a 2014 national payment of approximately $169.08 per treatment; and
 
 
96922 – designated for: the total area over 500 square centimeters. CMS assigned a 2014 national payment of approximately $234.64 per treatment.
 
The national rates are adjusted by overhead factors applicable to each state.
 
Employees
 
As of March 14, 2014, we had 168 full-time employees, which consisted of two executive officers, 19 senior managers, 71 sales and marketing staff, 30 people engaged in operations, 11 customer-field service personnel, 11 engaged in research and development, including 6 engineers, and 24 finance and administration staff. We intend to hire additional sales personnel as the development of our business makes such action appropriate. The loss of the services of key employees could have a material adverse effect on our business. Since there is intense competition for qualified personnel knowledgeable in our industry, no assurances can be given that we will be successful in retaining and recruiting needed personnel.
 
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 14 to the consolidated financial statements.
 
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 http://phx.corporate-ir.net/phoenix.zhtml?c=107542&p=irol-sec as soon as reasonably practicable after we electronically file such reports with, or furnish them to, the SEC.
 
Risk Factors
 
The following discussion of risk factors contains forward-looking statements as discussed on page 1. These risk factors may be important to understanding any statements in this Report or elsewhere. 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 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 experienced significant disruption since 2008, including volatility in securities prices and diminished liquidity and credit availability. Furthermore, the economic slowdown during this period in the United States and other countries weakened consumer confidence and led to significant reductions in the amounts persons and businesses spent on consumer products and other expenditures. In part, as a result, certain of the Company’s operations and revenues declined. 
 
If adverse general economic conditions continue, 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.
 
Most of the Company’s sales related to its no!no!® line of products are on an open credit basis. The Company monitors individual customer payment capability in granting such open credit arrangements, seeks to limit such open credit to amounts the Company believes the customers can pay, and maintains reserves it believes are adequate to cover exposure for doubtful accounts. Beyond its open credit arrangements, the Company has also 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 due to the current 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.
 
The Company may need to raise additional funds to pursue its growth strategy or continue its operations, and 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 the capital expenditures required to finance working capital requirements, continue its expansion, to 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 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 cosmetic industry is subject to continuous technological development and product innovation. If the Company does not continue to innovate in developing new cosmetic 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. While the Company has reduced its cosmetic research and development expenditures in an effort to focus its resources on selling and marketing its existing no!no!® line of products, if the Company is unable to develop and commercialize new cosmetic products and identify new markets for such products and technology, its cosmetic products and technology could become obsolete and the Company’s revenues and operating results could be adversely affected.
 
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.
 
Our no!no!® hair removal products compete directly with branded, premium retail products such as Philips and Braun and other light based products of public companies such as Syneron, Valeant and Cynosure. In addition, due to regulatory restrictions concerning claims about the efficacy of personal care products, we may have difficulty differentiating our products from other competitive products, and competing products entering the personal care market could harm our revenue. Also, our no!no!® line of products are energy based. As such, energy-based aesthetic products may face competition from non-energy-based medical products, such as Botox, an injectable compound used to reduce wrinkles and collagen injections. Other alternatives to the use of our no!no!® line of products include electrolysis, a procedure involving the application of electric current to eliminate hair follicles and chemical peels. In addition, we may also face competition from manufacturers of other products that have not yet been developed.
 
We also 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, vitiligo 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:
 
 
broad product offerings, which address the needs of physicians and hospitals in a wide range of procedures;
 
 
greater experience in, and resources for, launching, marketing, distributing and selling products, including strong sales forces and established distribution networks;
 
 
existing relationships with physicians and hospitals;
 
 
more extensive intellectual property portfolios and resources for patent protection;
 
 
greater financial and other resources for product research and development;
 
 
greater experience in obtaining and maintaining FDA and other regulatory clearances or approvals for products and product enhancements;
 
 
established manufacturing operations and contract manufacturing relationships;
 
 
significantly greater name recognition and more recognizable trademarks; and
 
 
established relationships with healthcare providers and payors.
 
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.
 
Because a substantial portion of the Company’s revenue is generated from its consumer business, if it fails to accurately forecast consumer demand and trends in consumer preferences, or if there is a decline in discretionary consumer spending, then the Company’s revenues and profitability could decline.
 
Consumers in the aesthetic and skincare products industry have tastes, preferences and loyalties that are subject to change. If we do not keep up with consumer preferences and trends, or if we do not accurately forecast such preferences and trends, sales revenues in the Company’s consumer business may decline or our reputation may suffer. The success of our consumer product business depends to a significant extent upon discretionary consumer spending, which is subject to a number of factors, including general economic conditions, consumer confidence, employment levels, business conditions, interest rates, availability of credit, inflation and taxation. Adverse trends in any of these economic indicators may cause consumer spending to decline further, which could hurt its sales and profitability.
 
The Company’s laser treatments of psoriasis, vitiligo, atopic dermatitis and leukoderma, the Company’s skincare products and its PTL (Photo Therapeutics Ltd.) 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 its XTRAC system and certain of its other products. It is still not established that the PTL devices targeted for the consumer market will be widely accepted in that market. 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 skincare and PTL businesses.
 
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.
 
While the Company has engaged in clinical studies for its psoriasis treatment and, based on these studies, it has gained FDA clearance, appropriate Current Procedural Terminology, or CPT, reimbursement codes for treatment and suitable reimbursement rates for those codes, from the Centers for Medicare & Medicaid Services, or CMS, we may face other hurdles to market acceptance. For example, practitioners in significant numbers may wait to see longer-term studies; or it may become necessary to conduct studies corroborating the role of the XTRAC system as a first-line or second-line therapy for treating psoriasis; or patients simply may not elect to undergo psoriasis treatment using the XTRAC system.
 
Beginning in early 2010, Dr. John Y.M. Koo, the director of the Psoriasis Treatment Center at the University of California San Francisco Medical Center, initiated a clinical study to demonstrate the effectiveness of the XTRAC Velocity in combination with the drugs Clobex® and Vectical®, both from Galderma, for patients with severe psoriasis. This study may or may not result in demonstrating the effectiveness of those products in combination, or the treatment protocol and the treatment protocol may or may not gain FDA clearance. Even if the treatment protocol is successful and gains FDA clearance, limitation of supply of one or both drugs by Galderma, and lack of viable substitutes therefore, may adversely impact use of or compliance with the treatment protocol as a therapy for treatment of psoriasis. Further, the FDA limits claimed indications for use to those found in the “Instructions for Use Statement” in a device’s 510(k) clearance letter. The FDA may view certain of the Company’s claims of treatment as outside the scope of the device’s cleared indications for use.
 
If the FDA determines that the clinical studies were not conducted in accordance with applicable FDA requirements, the FDA could take regulatory and/or legal enforcement actions against the Company and/or its products and could attempt to withdraw premarket 510(k) clearance.
 
Whether a treatment may be delegated and, if so, to whom and to what extent, are matters that may vary state by state, as these matters are within the province of the state medical boards. In states that may be more restrictive in such delegation, a physician may decline to adopt the XTRAC system into his or her practice, deeming it to be fraught with too many constraints and finding other outlets for the physician’s time and staff time to be more remunerative. There can be no assurance that the Company will be successful in persuading such medical boards that a liberal standard for delegation is appropriate for the XTRAC system, based on its design for ease and safety of use. If the Company is not successful, it may find that even if a geographic region has wide insurance reimbursement, the region’s physicians may decline to adopt the XTRAC system into their practices.
 
The Company therefore cannot assure you that the marketplace will be receptive to its excimer laser technology or skincare products over competing products, services and therapies or that a cure will not be found for the underlying diseases the Company is focused on treating. 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.
 
The success of the Company’s XTRAC system and other treatment products depends on third-party reimbursement of patients’ costs, which could result in potentially reduced prices or reduced demand and, in relevant part, adversely affect the Company’s revenues and business operations.
 
The Company’s ability to market the XTRAC system and other treatment products successfully will depend in large part on the extent to which various third parties are willing to reimburse patients or providers for the costs of medical procedures utilizing such products. These third parties include government authorities, private health insurers and other organizations, such as health maintenance organizations, whose patterns of reimbursement may change as a result of new standards for reimbursement determined by these third parties or because of the programs and policies enacted under the Patient Protection and Affordable Care Act of 2010.
 

Third-party payors are systematically challenging the prices charged for medical products and services. They may deny reimbursement if they determine that a prescribed device is not used in accordance with cost-effective treatment methods as determined by the payor, or is experimental, unnecessary or inappropriate. Further, although third parties may approve reimbursement, such approvals may be under terms and conditions that discourage use of the XTRAC system. Accordingly, if less costly drugs or other treatments are available, third-party payors may not authorize or may limit reimbursement for the use of the Company’s products, even if its products are safer or more effective than the alternatives.
 
In addition, medical insurance policies and treatment coverage may be affected by the parameters of the Patient Protection and Affordable Care Act of 2010. While the Act’s stated purpose is to expand access to coverage, it also mandates certain requirements regarding the types and limitations of insurance coverage. Some of these requirements have already been enacted, while others are scheduled to roll out over the next several years. There can be no guarantee that the changes in coverage under the Act will not have an effect on the type and level of reimbursement for our products.
 
Although the Company has received reimbursement approvals from an increasing number of private healthcare plans, we cannot give assurance that private plans will continue to adopt or maintain favorable reimbursement policies or to accept the XTRAC system in its clinical role as a second-line therapy in the treatment of psoriasis. Additionally, third-party payors may require further clinical studies or changes to the Company’s pricing structure and revenue model before authorizing reimbursement.
 
As of December 31, 2013, the Company estimates, based on published coverage policies and on payment practices of private and Medicare insurance plans, that more than 90% of the insured population in the U.S. is covered by insurance coverage or payment policies that reimburse physicians for using the XTRAC system for treatment of psoriasis. Based on these reports and estimates, the Company is continuing the implementation of a roll-out strategy under revised user models for the XTRAC system in the U.S. in selected areas of the country where reimbursement is widely available. The success of the roll-out depends on increasing physician and patient awareness and demand for the treatment. The Company can give no assurance that health insurers will not adversely modify their reimbursement policies for the use of the XTRAC system in the future.
 
The Company intends to seek coverage and reimbursement for the use of the XTRAC system to treat other inflammatory skin disorders after additional clinical studies are initiated. There can be no assurances that the Company will be in a position to continue to expand coverage for vitiligo or to seek reimbursement for the use of the XTRAC system to treat atopic dermatitis or leukoderma, or, if the Company does, that any health insurers will agree to any reimbursement policies.
 
Any failure in our customer education efforts could significantly reduce product marketing.
 
It is important to the success of our marketing efforts to educate physicians and technicians how to properly use the XTRAC system. We rely on physicians to spend their time and money to attend our pre-sale educational sessions. If physicians and technicians use the XTRAC system improperly, they may have unsatisfactory patient outcomes or cause patient injury, which may give rise to negative publicity or lawsuits against us, any of which could have a material adverse effect on our reputation, revenues and profitability.
 
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.
 

If revenue from a significant customer declines, the Company may have difficulty replacing the lost revenue, which would negatively affect its results and operations.
 
Excluding niche marketing efforts, the Company’s skincare business targets its sales in the U.S. market to physicians, who then mark the products up for sale to their patients. No single physician practice in itself is generally responsible for a significant proportion of the Company’s sales. The Company finds as well that a few physicians re-sell our products not just to their own patients, but also at discounted prices on the internet. These practices undercut the sales of other physicians and violate the Company’s internet sales policy, but this policy can be difficult to enforce.
 
In its international businesses, the Company depends for a material portion of its sales in the international arena on several key sub-distributors, and especially on The Lotus Global Group, Inc., doing business as GlobalMed Technologies Co., or GlobalMed, which is the Company’s master distributor over most of the international arena for devices (excluding our no!no!® line of products). If the Company loses GlobalMed or one of these sub-distributors, the Company’s sales of phototherapy and surgical lasers are likely to suffer in the short term, which could have a negative effect on its revenues and profitability.
 
In addition to its sales through online and infomercial outlets, the Company’s no!no! brand products are also marketed through certain major retailers, including HSN, Nordstrom’s and Bed, Bath and Beyond. None of these retailers accounts for more than 10% of the sales of this product line in the United States. However, the loss of one or more of these retailers, without replacement by a comparable sales channel, could have a near-term impact on sales of the no!no! products and an effect on the Company’s revenues and profitability.
 
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 or its sales force, its business, prospects and brand may be materially and adversely affected.
 
Sales made through retailers and distributors constitute a significant part of the Company’s sales revenue. These retailers and distributors are not obligated to sell its products, and may choose to end their relationship with us. Even if we maintain a business relationship with such retailers and distributors, they may sell competing products or may not be able to sell our products. Maintaining business relationships with these retailers and distributors and their continued success is important to maintaining the Company’s revenues and profitability.
 
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:
 
 
sell products that compete with its products in breach of their non-competition agreements with the Company;
 
 
violate laws or regulations;
 
 
fail to adequately promote its products; or
 
 
fail to provide proper service to its retailers or end-users.
 
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.
 
 
Because the Company’s Japanese market for the no!no!® brand of products accounts for a significant part of its business, adverse conditions or risks relating to Japan may harm its business.
 
On November 21, 2013 the Company’s majority-owned subsidiary, Radiancy, Inc., 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 the year, 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.
 
The Company and Radiancy are now seeking a new distribution partner for the Japanese markets. Meanwhile, retail sales to consumers of the no!no! brand products remain strong, and Ya-Man has continued to market and sell its inventory of those products in Japan in accordance with the terms of its agreement with Radiancy. However, the Company has no assurance that a new distributor will continue to purchase these products at the same levels as Ya-Man, will purchase the Company’s new products, or that an agreement with a new distributor will be made on the same terms as the previous agreement with Ya-Man, or at all. The potential loss of this market may result in lower sales and profits. If the Company is unable to replace these sales, in Japan or through other markets, it may have an adverse material negative effect on its future operating results.
 
Other factors that could impact the Company’s results in the market include:
 
 
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;
 
 
the Japanese economy may be adversely affected and consumer spending may be impaired as a result of the recent and potential future earthquakes, tsunami and other natural disasters in Japan;
 
 
significant weakening of the Japanese yen;
 
 
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
 
 
increased competitive pressures from other home use aesthetic device companies who actively seek to solicit its distributors to join their businesses.
 
A number of the Company’s product sales depend on search engines and other online sources to attract visitors to its websites, and if the Company is unable to attract these visitors and convert them into customers in a cost-effective manner, its business and financial results may be harmed.
 
A major part of the Company’s direct response campaign for its no!no!® line of products’ success depends on its ability to attract online consumers to its websites and convert them into customers in a cost-effective manner, which depends, in part, on search engines and other online sources for its website traffic. Our subsidiary’s name, Radiancy, is included in search results as a result of both paid-search listings, where the Company purchases specific search terms that will result in the inclusion of its listing, and algorithmic searches that depend upon the searchable content on its sites. Search engines and other online sources revise their algorithms from time to time in an attempt to optimize their search results.
 
If one or more of the search engines or other online sources on which the Company relies for website traffic were to modify its general methodology for how it displays its websites, resulting in fewer consumers clicking through to its websites, the Company’s sales could suffer. If any free search engine on which the Company relies begins charging fees for listing or placement, or if one or more of the search engines or other online sources on which it relies for purchased listings, modifies or terminates its relationship with the Company, its expenses could rise, it could lose customers, and traffic to its websites could decrease.
 
 
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:
 
 
management, communication and integration problems resulting from cultural differences and geographic dispersion;
 
 
compliance with foreign laws, including laws regarding importation and registration of products;
 
 
compliance with foreign regulatory requirements and the ability of GlobalMed to establish additional regulatory clearances necessary to expand distribution of the Company’s products in countries outside of the United States;
 
 
competition from companies with international operations, including large international competitors and entrenched local companies;
 
 
difficulties in protecting intellectual property rights in international jurisdictions;
 
 
political and economic instability in some international markets;
 
 
sufficiency of qualified labor pools in various international markets;
 
 
currency fluctuations and exchange rates; and
 
 
potentially adverse tax consequences or an inability to realize tax benefits.
 
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. In addition, the Company has a relationship with GlobalMed, whereby it provides the Company with certain non-U.S. regulatory support. To the extent that the Company discontinues its relationship with GlobalMed, or if GlobalMed is otherwise unable to provide the Company with the resources and assistance that the Company needs, the Company may have a difficult time expanding into international markets in an effective manner.
 
 
Conditions in Israel affect our operations related to our no!no!® line of products and may limit the Company’s ability to produce and sell its products.
 
Radiancy, Inc. is a majority owned subsidiary of the Company. All of Radiancy’s research and development activities, a portion of the manufacturing and other critical business operations 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 Radiancy, 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 from its Israeli subcontractors to us. We cannot assure you that ongoing hostilities related to Israel will not have a material adverse effect on its business or our share price.
 
The Company’s Israeli-based facilities or manufacturing subcontractors could also be subject to catastrophic loss such as fire, flood, or earthquake. Any such loss at any of its facilities could disrupt its operations, delay production, shipments and revenue and result in significant expense to repair and replace its facilities.
 
The operations of the Company’s subsidiary Radiancy (Israel) Ltd. may be disrupted by the obligation of its personnel to perform military service.
 
Many of the Company’s employees that are located in Israel are 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. 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, our Israeli-based operations could be disrupted by the absence for a significant period of one or more of its executive officers or a significant number of its other employees due to reserve duty.
 
If the Company fails to manage its sales and marketing force or to market and distribute its products effectively, the Company may experience diminished revenues and profits.
 
There are significant risks involved in integrating, building and managing the Company’s sales and marketing force and marketing its products, including the Company’s ability:
 
 
to hire, as needed, a sufficient number of qualified sales and marketing personnel with the aptitude, skills and understanding to market its XTRAC system, its skincare products, its Omnilux products and its surgical products effectively;
 
 
to adequately train its sales and marketing force in the use and benefits of all its products and services, thereby making them more effective promoters;
 
 
to manage its sales and marketing force and its ancillary channels (e.g., telesales) such that variable and semi-fixed expenses grow at a lesser rate than its revenues;
 
 
to set the prices and other terms and conditions for treatments using the XTRAC system in a complex legal environment so that they will be accepted as attractive skin health and appropriate alternatives to conventional modalities and treatments; and
 
 
to cope with employee turnover among the sales force in the skin health business, in which there is substantial competition for talented sales representatives.
 
To increase acceptance and utilization of its XTRAC system, the Company may have to expand its sales and marketing programs in the U.S. While the Company may be able to draw on currently available personnel within its organization to meet this need, the Company also expects that it will have to increase the number of representatives devoted to the sales and marketing programs and to broaden, through such representatives, the talents it has at its disposal. In some cases, the Company may look outside its organization for assistance in marketing its products.
 
 
In similar fashion, the Company cannot predict how successful it may be in marketing its skin health, hair care and wellness products in the U.S., nor can the Company predict the success of any new skin health and hair care products that it may introduce. Despite an increased focus on developing alternate channels for many of the Company’s skin health, hair care, and wellness 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, hair care, and wellness products.
 
The Company may be unsuccessful in accessing the home-use consumer market with its skin health, hair care, and wellness products. Distribution through the consumer market will be principally through mass-retail chains and e-commerce and electronic media. While the Company expects the volumes will be higher, the margins may be lower. It may also prove difficult to obtain long-term commitments from the retailers. If the Company is unable to secure distribution partners or obtain favorable pricing or long-term commitments, the Company’s efforts in the home-use consumer market may be unsuccessful.
 
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 of its no!no!® product’s 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 for its XTRAC system or achieve market acceptance and growth for its skincare 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 disrupted which could harm its operating results.
 
The Company’s possession and use of personal information presents risks and expenses that could harm its business. Unauthorized disclosure or manipulation of such data, whether through breach of its network security or otherwise, could expose the Company to costly litigation, damage its reputation and possibly result in a lower revenue stream and the loss of some of its customers.
 
Maintaining the Company’s network security is of critical importance because the online e-commerce systems 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. In addition, employee error, malfeasance or other errors in the storage, use or transmission of personal information could result in a breach of customer or employee privacy. The Company employs contractors and temporary and part-time employees who may have access to the personal information of customers and employees. It is possible such individuals could circumvent its controls, which could result in a breach of customer privacy.
 
Possession and use of personal information in conducting its business subject the Company to legislative and regulatory burdens that could require notification of data breach, restrict its use of personal information and hinder its ability to acquire new customers or market to existing customers. The Company and its subsidiaries have incurred, and will continue to incur, expenses to comply with privacy and security standards and protocols imposed by law, regulation, industry standards or contractual obligations.
 
If third parties improperly obtain and use the personal information of the Company and its subsidiaries’ customers, we may be required to expend significant resources to resolve these problems. A major breach of its network security and systems could have serious negative consequences for its businesses, including possible fines, penalties and damages, reduced customer demand for its products and services, harm to its reputation and brand and loss of the Company or its subsidiary’s ability to accept and process customer credit card orders.
 
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 products. 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.
 
In addition, if private carriers continue to approve favorable reimbursement policies for psoriasis and the Company’s marketing programs are successful in increasing utilization of its XTRAC system, the Company expects to experience growth in the number of its employees and customers and the scope of its operations.
 
 
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 its sales are processed by the Company through credit cards or automated payment systems to pay for its products and services. 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 practice in internet sales. The Company employs technology solutions to help it detect fraudulent transactions. However, the failure to detect or control payment fraud could cause the Company to lose sales and revenue.
 
Any significant interruptions in the operations of its third-party call centers could cause the Company to lose sales and disrupt its ability to process orders and deliver its solutions in a timely manner.
 
The Company relies on third-party call centers to sell its products, respond to customer service and technical support requests and process orders. Any significant interruption in the operation of these facilities, including an interruption caused by its failure to successfully expand or upgrade its systems or to manage these expansions or upgrades, could reduce its ability to receive and process orders and provide products and services, which could result in lost and cancelled sales and damage to the Company’s brand and reputation.
 
As the Company grows, it will need more capacity from those existing call centers, or the Company will need to identify and contract with new call centers. The Company may not be able to continue to locate and contract for call center capacity on favorable terms, or at all. Additionally, the rates those call centers charge the Company may increase, or those call centers may not continue to provide service at the current levels.
 
If the Company’s third-party call center operators do not convert inquiries into sales at expected rates, its ability to generate revenue could be impaired. Training and retaining qualified call center operators is challenging, and if the Company does not adequately train its third party call center operators, they will not convert inquiries into sales at an acceptable rate.
 
The Company is reliant on a limited number of suppliers for production of key products.
 
Production of the Company’s XTRAC system requires specific component parts obtained from the Company’s suppliers. Production of the Company’s surgical laser systems requires some component parts that may become harder to procure as the design of a system ages. Similarly, the Company’s skincare products may require compounds that can be efficiently produced only by a limited number of suppliers. The Company has one primary supplier of LEDs for its PTL business and relies on contract manufacturers. While the Company believes that it could find alternate suppliers, in the event that its suppliers fail to meet its needs, a change in suppliers or any significant delay in the Company’s ability to have access to such resources could have a material adverse effect on its delivery schedules, business, operating results and financial condition. Moreover, in the event the Company can no longer utilize this supplier or acquire this resource and must identify a new supplier or substitute a different resource, such change may trigger an obligation for the Company to comply with additional FDA regulatory requirements including, but not limited to, pre-marketing authorization and QSR requirements.
 
 
Finally, the Company’s no!no! brand products are sourced from one main supplier.  The Company believes there are other, potential sources for the manufacture of these products. However, should our main supplier be unable to meet our production demands or cease doing business, we may encounter difficulty in transitioning our products to another manufacturer, and that other manufacturer or manufacturers may not be able to meet our production requirements. Any change in supplier or any significant delay in transition to a new supplier may have a material adverse effect on the delivery schedules for these products, our ability to meet customer demand, business, operating results and financial condition.
 
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. For example, the development of a cure for psoriasis, vitiligo, atopic dermatitis or leukoderma would eliminate the need for the Company’s XTRAC system for these diseases and would require the Company to focus on other uses of its technology, which would have a material adverse effect on its business and prospects.
 
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:
 
 
create greater awareness of its products and brand name;
 
 
determine the appropriate creative message and media mix for future expenditures; and
 
 
effectively manage advertising costs, including creative and media costs, to maintain acceptable costs in relation to sales levels and operating margins.
 
The Company’s 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 not be able to increase its net sales at the same rate as it increases its advertising expenditures or 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.
 
 
The Company periodically updates the content of its infomercials and revises its product offerings. If customers are not as receptive to new infomercial content or product offerings, the Company’s sales through its infomercial sales channel will decline. In addition, if there is a marked increase in the price that the Company pays for its media time, the cost-effectiveness of its infomercials will decrease. If the Company’s infomercials are broadcast during times when viewership is low, this could also result in a decrease of the cost-effectiveness of such broadcasts, which could cause its results of operations to suffer. Also, to the extent the Company has committed in advance for broadcast time for its infomercials, the Company would have fewer resources available for potentially more effective distribution channels.
 
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 an unconditional full 60-days money-back guarantee. 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. In addition, the fact that the Company trains technicians whom it does not supervise in the use of its XTRAC system during patient treatment may expose the Company to third-party claims if those doing the training are accused of providing inadequate training. The Company presently maintains liability insurance with coverage limits of at least $5,000,000 per occurrence, 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 provides 12-month product warranties, and offers longer warranty available for purchase, against technical defects of its no!no!® line of hair removal products and other consumer products. Its product warranty requires the Company to repair defective parts of its products, and if necessary, replace defective components. Historically, the Company has received a limited number of warranty claims for these products. The costs associated with such warranty claims have 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, 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 litigation brought by or against it. Such litigation is 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 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 litigations, and any adverse results in any such litigations 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.
 
Litigation is inherently unpredictable and may:
 
 
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;
 
 
cause the Company to change its business operations to avoid perceived risks associated with such litigation; and
 
 
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.
 
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 depends on its executive officers and key personnel to implement its business strategy and could be harmed by the loss of their services.
 
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 of the Company’s management and other employees may voluntarily terminate their employment with the Company at any time. The loss of the services of these or other 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. 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.
 
In addition, the Company depends on its ability to attract and retain other highly skilled personnel, including research scientists. Competition for qualified personnel is intense, and the process of hiring and integrating such qualified personnel is often lengthy.
 
Additionally, the Company does not currently maintain “key person” life insurance on the lives of its 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.
 
It may be difficult for any of the Company’s stockholders to effect service of process against the Company or its officers and directors.
 
Certain of the Company’s operating subsidiaries’ assets are located outside the United States, including Israel, United Kingdom, Brazil and India. 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 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 the Company’s officers and directors that reside outside the United States of criminal penalties, under the United States federal securities laws or otherwise.
 
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 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. The Company estimated that it would have approximately $56.8 million of U.S. net operating loss carryforwards that can 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. 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 such balances of the $53.5 million 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 Code (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.
 
Radiancy will incur increased costs as a result of being a majority-owned subsidiary of a public company.
 
As a result of the merger, Radiancy, Inc. is now a majority-owned subsidiary of the Company. Radiancy Ltd., a wholly owned subsidiary of Radiancy, Inc., continued to own 137,056 shares of Radiancy common stock, or approximately 1.8% of Radiancy, immediately following the merger. As a subsidiary of a public company, Radiancy will incur significant legal, accounting and other expenses that it did not incur as a private company. The U.S. Sarbanes-Oxley Act of 2002, Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and related rules of the SEC, regulate corporate governance practices of public companies.
 
Radiancy expects that compliance with these public company requirements will increase its costs and make some activities more time-consuming. For example, Radiancy will be subject to the Company’s internal controls and disclosure controls and procedures. These requirements will require Radiancy to carry out activities it has not done previously. Furthermore, if Radiancy and/or the Company identify any issues in complying with Radiancy’s requirements (for example, if a material weakness or significant deficiency in internal control over financial reporting is identified), we could incur additional costs rectifying those issues, and the existence of those issues could adversely affect our reputation or investor perceptions of us.
 
 
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. The Company is unable to file patent applications covering all of its products in every country and as a result its patents are also limited in scope and geographic coverage and may not protect the Company from competing products in those markets.
 
The Company will rely on certain of its PTL patents to protect the home-use market for two of its PTL hand-held devices. If the patents prove unenforceable or circumventable, the Company may not attain growth and may lose market share from these PTL products.
 
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 are limited in scope and geographic coverage and may not significantly distinguish the Company from its competition. The Company’s trade secrets are also limited in scope and geographic coverage and may not adequately protect the Company from products offered by our competitors.
 
The Company owns several key federal and international trademark registrations and has federal trademark applications pending in the United States and abroad for additional trademarks. Even if federal registrations are granted to the Company, its trademark rights may be challenged. Further, as registration is usually a requirement for protection in most foreign countries, if the Company has not registered its marks, it may not have any enforceable rights. It is also possible that its competitors will adopt trademarks similar to the Company’s, thus impeding its ability to build brand identity and possibly leading to customer confusion. Third parties could register trademarks that are similar to the Company’s in the United States and overseas. The Company could incur substantial costs in prosecuting or defending trademark infringement suits. If the Company fails to effectively enforce its trademark rights, its competitive position and brand recognition may be diminished.
 
Furthermore, the Company’s skincare business seeks to establish customer loyalty, in part, by means of its use of trademarks. It can be difficult and costly to defend trademarks from encroachment, especially on the Internet, or misappropriation overseas. Third parties may also challenge the validity of the Company’s trademarks. In either eventuality, the Company’s customers may become confused and direct their purchases to competitors. 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 the Company’s own. Without the protection afforded by the Company’s patent, trade secret and proprietary information rights, the Company may face direct competition from others commercializing their products using the Company’s technology, which may have a material adverse effect on the Company’s business and its prospects. Trade secrets and other proprietary information which are not protected by patents are also critical to the Company’s business. The Company attempts to protect its trade secrets by, among other steps, entering into confidentiality agreements with third parties, employees and consultants. However, such other steps may be ineffective, may be found to be invalid by the laws of a particular state or country, and these agreements can be breached and, if they are and even if the Company is able to prove the breach or that its technology has been misappropriated under applicable state law, there may not be an adequate remedy available 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 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 its 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 the no!no!® family of products, 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 more lengthy, 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 our 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 61% of the total sales of this line of products for the year ended December 31, 2013, does not currently require FDA marketing clearance. Accordingly, our 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, we are subject to limitations on the advertising claims we are allowed to make regarding the hair removal and hair reduction effects of our products.
 
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, such as medical lasers, 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.
 
 
Noncompliance with applicable medical device controls or requirements and electronic product requirements causes the medical devices and/or electronic products to violate FDA law, which may expose the Company to legal action initiated by the Department of Justice (on behalf of the FDA) and/or various forms of FDA enforcement and compliance actions. These legal, enforcement and compliance actions include, but are not limited to the issuance of Warning Letters, untitled letters, recalls, fines, penalties, injunctions, seizures, prosecutions, adverse publicity (FDA press release), or other adverse actions.
 
Additionally, the Company must have the appropriate FDA clearances and/or approvals in order to lawfully market devices and or/drugs. The FDA may disagree that the Company has such clearance and/or approvals for all of its products.
 
Healthcare policy changes, including pending proposals to reform the U.S. healthcare system, may have a material adverse effect on the Company.
 
Healthcare costs have risen significantly over the past decade. There have been and continue to be proposals by legislators, regulators and third-party payors to keep these costs down. Certain proposals, if passed, would impose limitations on the prices the Company will be able to charge for its products, or the amounts of reimbursement available for its products from governmental agencies or third-party payors. These limitations could have a material adverse effect on the Company’s financial position and results of operations.
 
Changes in the healthcare industry in the U.S. and elsewhere could adversely affect the demand for the Company’s products as well as the way in which the Company conducts its business. From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the clearance or approval, manufacture and marketing of medical devices. On March 23, 2010, health reform legislation was approved by Congress and has been signed into law, but the legislation has been subject to judicial challenge and political opposition. The reform legislation provides that most individuals must have health insurance, will establish new regulations on health plans, and create insurance pooling mechanisms and other expanded public health care measures. The Company anticipates that out of the reform legislation will come a reduction in Medicare spending on services provided by hospitals and other providers and a form of sales or excise tax on the medical device manufacturing sector.
 
In addition, 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. The Company received clearance from the FDA for the use of the XTRAC system to treat psoriasis based upon the Company’s study of a limited number of patients. Safety and efficacy data presented to the FDA for the XTRAC system was based on studies on these patients. For the treatment of vitiligo, atopic dermatitis and leukoderma, the Company has received clearance from the FDA for the use of the XTRAC system based primarily on a showing of substantial equivalence to other previously cleared predicate devices. However, the Company may discover that physicians will expect clinical data on such treatments with the XTRAC system. The Company also may find that data from longer-term psoriasis patient follow-up studies may be inconsistent with those indicated by the Company’s relatively short-term data. If longer-term patient studies or clinical experience indicate that treatment with the XTRAC system does not provide patients with sustained benefits or that treatment with the Company’s product 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.
 
Certain indications for use for the PTL light-based products are permitted in Europe and elsewhere in the world, but are not approved or cleared for marketing in the U.S. Such approvals/clearances in the U.S. could be costly and take significant time to obtain. If the Company is ultimately not approved or cleared to market the devices for these additional indications for use in the U.S., it is uncertain whether the products will be successful in the U.S.
 
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:
 
 
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;
 
 
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;
 
 
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
 
 
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.
 
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, the Company’s laser products are considered medical devices and are subject to extensive regulation in the U.S. and in foreign countries where we intend to do business. In addition, 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. As the Company seeks to expand sales of its skincare products outside the U.S., we may encounter requirements that we did not anticipate or that we may not be able to satisfy.
 
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 XTRAC system for use in treating psoriasis, vitiligo, atopic dermatitis and leukoderma, and 510(k) clearances for its Omnilux devices as well as extensive 510(k) clearances for its surgical products, 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 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 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 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.
 
Certain indications for use for the Company’s PTL light-based products are permitted in Europe and elsewhere in the world, but are not cleared or approved for marketing in the U.S. Such clearances or approvals could be costly and take significant time to obtain. If the Company is not approved or cleared to market the indications for use in the U.S., it is uncertain whether the products will be successful in the U.S.
 
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.
 
The Company has introduced its XTRAC system into markets in more than 30 countries in Europe, the Middle East, the Far East Asia, Southeast Asia, Australia, South Africa and parts of Central and South America. The Company intends to expand the number of countries in these markets where the Company distributes its products through the network of distributors which PTL and GlobalMed have built. The Company cannot be certain that its distributors will be successful in marketing XTRAC systems in these or other countries or that its distributors will purchase XTRAC systems beyond their current contractual obligations or in accordance with the Company’s expectations.
 
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 Lumiere Excel and Lumiere Spa products are LED therapy products sold to tanning salons and spas. In 2011, the Texas Department of State Health Services (DSHS) challenged the Company’s and its customers’ right to make certain marketing claims for its Lumiere LED products. Texas DSHS had requested that the Company seek FDA feedback on the regulatory/marketing status of the Lumiere products. Prior to the Company engaging the FDA on this topic, the FDA issued a December 21, 2011 letter to the Indoor Tanning Association indicating that products, similar to the Lumiere, require 510(k) clearance. Despite the fact that the FDA issued a November 18, 2004 letter stating that the Lumiere did not require 510(k) clearance, the Company is in the early stages of obtaining a 510(k) clearance for the Lumiere products to continue marketing them. In March, 2012, the Company sent letters to all Lumiere customers throughout the United States, requested that they discontinue using any promotional literature made by PhotoMedex that includes therapeutic claims for red-light therapy now prohibited by the FDA (as described in the letter from FDA to the Indoor Tanning Association). The Company has, as of February 2012, suspended the marketing of, and shipments of throughout the United States, pending resolution of the Lumiere issues.
 
 
In January 2012, the FDA issued a Warning Letter to PhotoMedex, which further documented the findings from the FDA Inspection and the issues regarding certain marketing claims made at the time of the inspection in 2011 for one particular product family. The Warning Letter is a publicly available document. Considerable follow-up activities and consultation with outside counsel have since been employed to address the issues identified in the Warning Letter. Subsequently the FDA conducted an inspection of one of the Company’s facilities in the fourth quarter of 2012, to follow-up to the Inspection in 2011 and the above-mentioned Warning Letter issued in January 2012. A new Form FDA-483 (list of inspectional observations) related to complete closure of certain good manufacturing practice issues identified in the previous inspection and Warning Letter was issued to the Company during the follow-up inspection. The January 2012 Warning Letter and follow-up inspection in the fourth quarter 2012 were closed by FDA in March 2013. A second facility of PhotoMedex was inspected by FDA in September 2013. Form FDA-483 was issued, with all issues addressed and closed by FDA in January 2014. All pending regulatory matters have been successfully closed with FDA as of March, 2014.
 
The FDA determines whether a product is a cosmetic or a drug to a large extent based upon the claims made for the product. Because there is a degree of subjectivity in determining whether marketing materials or statements constitute product claims and whether they involve improper drug claims, our claims and our interpretation of applicable regulations may be challenged, which could harm our business.
 
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:
 
 
warning letters or untitled letters issued by the FDA;
 
 
fines, civil penalties, injunctions and criminal prosecution;
 
 
unanticipated expenditures to address or defend such actions;
 
 
delays in clearing or approving, or refusal to clear or approve, our products;
 
 
withdrawal or suspension of clearance or approval of our products by the FDA or other regulatory bodies;
 
 
product recall or seizure;
 
 
orders for physician or customer notification or device repair, replacement or refund;
 
 
interruption of production; and
 
 
operating restrictions.
 
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 Acquisition or Merger of other entities
 
The business operations of PhotoMedex and any other company acquired by or merged into PhotoMedex (the “target company”) in the future may not be successfully integrated and therefore PhotoMedex may not be able to realize the anticipated benefits of the acquisition or merger.
 
Realization of the anticipated benefits of an acquisition or merger will depend on PhotoMedex’s ability to successfully integrate the businesses and operations of PhotoMedex and the target company. PhotoMedex will be required to devote significant management attention and resources to integrating its business practices, operations and support functions. The challenges we may encounter include the following:
 
 
preserving customer, supplier and other important relationships and resolving potential conflicts that may arise as a result of the merger;
 
 
consolidating and integrating duplicative facilities and operations, including back-office systems necessary for internal and disclosure controls and timely financial reporting;
 
 
addressing differences in business cultures, preserving employee morale and retaining key employees while maintaining focus on providing consistent, high-quality customer service and meeting the operational and financial goals of the Company; and
 
 
adequately addressing business integration issues.
 
The process of integrating the target company’s operations could cause an interruption of, or loss of momentum in, PhotoMedex’s business and financial performance, and in the business and financial performance of the target company as well. The diversion of management’s attention and any delays or difficulties encountered in connection with the merger or acquisition and the integration of the two companies’ operations could have an adverse effect on the business, financial results, financial condition, or stock price of PhotoMedex. The integration process may also result in additional and unforeseen expenses. There can be no assurance that the contemplated operating efficiencies, synergies in technology, and cross-benefits in sales and marketing activities anticipated from the merger will be realized.
 
 
The ability of PhotoMedex and/or the target company to use their net operating loss carryforwards to offset future taxable income.
 
The ability of PhotoMedex and/or the target company to use their net operating loss carryforwards to offset future taxable income for U.S. federal income, U.K. business or another country’s business or income tax purposes may be limited as a result of “ownership changes” of PhotoMedex or the target company caused by the merger. In addition, the amount of such NOL carryforwards could be subject to adjustment in the event of an IRS examination.
 
With regard to U.S. federal income taxation, 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.
 
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 Code (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.
 
Similar rules and limitations may apply for U.S. state income tax purposes or for the purposes of other countries’ business or income taxes.
 
PhotoMedex may incur substantial expenses related to any merger or acquisition and the integration of the target company’s business operations.
 
PhotoMedex may incur substantial expenses related to any acquisition or merger, both in connection with the acquisition or merger and in the integration of the target company’s business operations into PhotoMedex, both in the year of acquisition or merger and in subsequent years. There are a large number of processes, policies, procedures, operations, technologies and systems that may need to be integrated, including purchasing, accounting and finance, sales, payroll, pricing, revenue management, marketing and benefits. While a certain level of expenses may be assumed to be incurred in any acquisition or merger, there are many factors beyond PhotoMedex’s control that could affect the total amount or the timing of such integration expenses. Moreover, many of the expenses that may be incurred are, by their nature, difficult to estimate accurately. Such expenses may also continue for several years following the acquisition or merger, due to ongoing transitions and processes. These expenses could, particularly in the near term, exceed the savings that PhotoMedex expects to achieve from the elimination of duplicative expenses and the realization of economies of scale and cost savings in any acquisition or merger.
 
The need to integrate PhotoMedex’s and the target company’s respective workforces and other factors of production and distribution following the merger presents the potential for delay in achieving expected efficiencies, synergies and other cross-benefits that could adversely affect PhotoMedex’s operations.
 
The successful integration of any target company and achievement of the anticipated benefits of an acquisition or merger depend in part on integrating the target company’s and PhotoMedex’s employees into a mutually tolerant, collaborative and cross-pollinating team. Failure to do so presents the potential for delays in achieving expected synergies and other benefits of integration that could adversely affect both PhotoMedex’s and the target company’s operations.
 
 
PhotoMedex or the target company may be unable to retain key employees.
 
The success of PhotoMedex following any acquisition or merger will depend in part upon its ability to retain key employees of PhotoMedex and the target company. Key employees may depart because of issues relating to the uncertainty and difficulty of any remaining integration issues or a desire not to remain with PhotoMedex or the target company following the merger. Accordingly, no assurance can be given that PhotoMedex and the target company would be able to retain key employees to the same extent as prior to the acquisition or merger.
 
Risk Factors Relating to the Merger with LCA
 
In addition to the general risk factors stated beginning on page 51, PhotoMedex faces certain additional risk factors with regard to the proposed acquisition of LCA.
 
PhotoMedex may not obtain financing for the acquisition of LCA.
 
PhotoMedex has obtained an $85 million financing commitment from J.P. Morgan Chase Bank, N.A.. The commitment is contingent upon certain stated conditions, including conditions related to the conduct and results of PhotoMedex’s business. If there are changes in the operations of PhotoMedex prior to the acquisition of LCA, J.P. Morgan Chase may not provide the funding under the commitment. Even if funding is not received from J.P. Morgan Chase, PhotoMedex may still be obligated to consummate the merger. In that event PhotoMedex may need to rely on alternative sources of financing, which it may not be able to obtain on a reasonable terms, and/or may need to rely on its cash reserves, which may divert funding from other needs of PhotoMedex. Additionally, the failure to obtain financing from J.P. Morgan Chase may cause PhotoMedex to not be able to complete the acquisition of LCA.
 
Failure to complete the merger could negatively impact the stock prices and the future business and financial results of PhotoMedex and LCA.
 
There is no assurance that the proposals relating to the merger will be approved by LCA’s shareholders, and there is no assurance that PhotoMedex and LCA will receive any necessary regulatory approvals or satisfy the other conditions to the completion of the merger. If the merger is not completed for any reason, PhotoMedex and will be subject to the risk of having had the focus of its management directed toward the merger and integration planning and diverted from its core business and other opportunities that could have been beneficial to it.
 
In addition, PhotoMedex would not realize any of the expected benefits of having completed the merger and would continue to face risks that it currently faces as an independent company.
 
If the merger is not completed, the price of PhotoMedex common stock may decline to the extent that the current market price of that stock reflects a market assumption that the merger will be completed and that the related benefits and synergies will be realized, or as a result of the market’s perceptions that the merger was not consummated due to an adverse change in PhotoMedex’s or LCA’s business. In addition, PhotoMedex’s business may be harmed, and the prices of PhotoMedex stock may decline as a result, to the extent that employees, customers, suppliers, and others believe that it cannot compete in the marketplace as effectively without the merger or otherwise remain uncertain about its future prospects in the absence of the merger.
 
In addition, if the merger is not completed and the PhotoMedex board of directors determines to seek another merger or business combination, there can be no assurance that a transaction creating PhotoMedex stockholder value comparable to the value perceived to be created by the merger will be available to PhotoMedex.
 
Even if the merger were completed, PhotoMedex may not be able to successfully integrate the business of LCA and realize the anticipated benefits of the merger. In such situation, the risks described above may also apply.
 
The merger agreement provides LCA a 30-day “go shop” window.
 
The merger agreement provides LCA a 30-day “go shop” window in which it may solicit, initiate, encourage, or facilitate other acquisition proposals with any third party, subject to exceptions set forth in the merger agreement.  As a result, there is no guarantee that a competing, higher or more advantageous offer will not be made to LCA, and that the acquisition of LCA by PhotoMedex will proceed.
 
 
Limitation on use of net operating losses
 
The ability of PhotoMedex and LCA to use their respective net operating loss (“NOL”) carryforwards to offset future taxable income in a separate or combined tax filing for U.S. federal income tax purposes may be limited as a result of the merger. In particular, LCA’s ability to use its NOL carryforwards will be limited as a result of its “ownership change” following the merger. In addition, the amount of such NOL carryforwards could be subject to adjustment in the event of an IRS examination. There can be no assurance that the benefit of such NOL carryforwards will be fully realized.
 
If the merger closes, LCA will undergo an “ownership change” under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). If a corporation undergoes such an “ownership change”, the amount of its pre-change NOL that may be utilized to offset future taxable income is subject to an annual limitation. 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.
 
Litigation or governmental order may prevent the completion of the acquisition.
 
Litigation against PhotoMedex, Gatorade Acquisition Corp., LCA and/or the directors of PhotoMedex, Gatorade Acquisition Corp. or LCA could result in an injunction preventing completion of the merger, the payment of damages in the event the merger is completed and/or may adversely affect the combined company’s business, financial condition or results of operations following the merger. As of March 17, 2014, four such suits have been brought in either the Court of Chancery for the State of Delaware and in the Court of Common Pleas for Hamilton County, Ohio, seeking injunctive relief and unspecified damages (see Legal Proceedings – page 58 for further information).
 
One of the conditions to the closing of the merger is that no order issued by a governmental authority of competent jurisdiction or law or other legal restraint or prohibition making the merger illegal or permanently restraining, enjoining, or otherwise prohibiting or preventing the consummation of the merger or the other transactions contemplated by the merger agreement be in effect. Consequently, if any plaintiffs in a litigation against PhotoMedex, Gatorade Acquisition Corp. or LCA, or any of their respective directors, secures injunctive or other relief prohibiting, delaying, or otherwise adversely affecting the defendants’ ability to complete the merger, then such injunctive or other relief may prevent the merger from becoming effective within the expected time frame or at all. If completion of the merger is prevented or delayed, it could result in substantial costs to PhotoMedex and LCA. In addition, PhotoMedex and LCA could incur significant costs in connection with the lawsuits, including costs associated with the indemnification of LCA’s directors and officers.
 
Following the merger, the combined company may be unable to retain key employees.
 
The success of PhotoMedex after the merger will depend in part upon its ability to retain key LCA and PhotoMedex employees. Key employees may depart either before or after the merger because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with PhotoMedex or LCA following the merger. While PhotoMedex has retained the services of certain key LCA employees under new Employment Agreements with PhotoMedex post-merger, there can be no assurance given that PhotoMedex and LCA will be able to retain key employees to the same extent as in the past.
 
 
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:
 
 
the present macro-economic uncertainty in the global economy and financial industry and governmental monetary and fiscal programs to stimulate better economic conditions;
 
 
healthcare reform and reimbursement policies;
 
 
demand for the Company’s products;
 
 
changes in the Company’s pricing policies or those of its competitors;
 
 
increases in the Company’s manufacturing costs;
 
 
the number, timing and significance of product enhancements and new product announcements by the Company and its competitors;
 
 
the termination or expiration of significant royalty-generating licensing contracts to which the Company is party;
 
 
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;
 
 
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;
 
 
Acts of terrorism in Israel or in other countries in which we do business;
 
 
developments in existing or new litigation; and
 
 
product quality problems, personnel changes and changes in the Company’s business strategy.
 
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:
 
 
conversion of outstanding stock options or warrants;
 
 
announcements by the Company or its competitors of new contracts, products, or technological innovations;
 
 
developments in existing or new litigation;
 
 
changes in government regulations;
 
 
fluctuations in the Company’s quarterly and annual operating results; and
 
 
general market and economic conditions.
 
 
In addition, the stock markets have, in recent years, experienced significant price fluctuations. These fluctuations often have been unrelated to the operating performance of the specific companies whose stock is traded. Market fluctuations, as well as economic conditions, have adversely affected, and may continue to adversely affect, the market price of the Company’s common stock.
 
The Company’s program to repurchase its securities, partially in relation to short-selling of its securities, may not be successful to stem such short-selling.
 
The Company embarked on a program of limited repurchases of its securities in 2012 and 2013. Short-selling of its securities was believed to have caused investors with a long-term interest in the Company to demand that the company share their long-term view. The Company believes that the effects of its repurchase program will demonstrate the long-term view of its long-term investors. However, there can be no guarantee that the program will be regarded as successful. 
 
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 14, 2014, the Company had outstanding stock options to purchase an aggregate of 1,192,679 shares of common stock and warrants to purchase an aggregate of 1,058,679 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 14, 2014, our directors, executive officers and holders of more than 5% of our common stock, together with their affiliates, beneficially own, in the aggregate, approximately 46.8% 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:
 
 
delaying, deferring or preventing a change in corporate control;
 
 
impeding a merger, consolidation, takeover or other business combination involving us; or
 
 
discouraging a potential acquiror from making a tender offer or otherwise attempting to obtain control of us.
 
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.
 
Unresolved Staff Comments
 
There are no unresolved comments from the staff of the Securities and Exchange Commission.
 
Properties
 
We leased a 42,000 sq. ft. facility in Montgomeryville, Pennsylvania that housed our executive offices and our domestic revenue segments and surgical laser manufacturing operations. The lease terminated February 2014 and the inventory was moved to a third party warehouse. We lease a 10,672 sq. ft. facility in Horsham, Pennsylvania that houses our executive offices and marketing. The term of the lease runs through November 30, 2015. In addition, we lease a 7,140 sq. ft. facility in Orangeburg, New York that houses parts of sales and operations. The term of the lease runs until September 30, 2016.
 
We lease a 17,222 sq. ft. building in Hod-Hasharon, Israel, that is used for marketing, operations and research and development. The term of the lease runs until April 19, 2014. We have an option to extend the lease for this office in Hod-Hasharon for a period of 3 months commencing April 20, 2014, and we may exercise this option up to four times.
 
We lease an 11,300 sq. ft. facility consisting of office, manufacturing and warehousing space in Carlsbad, California. The lease expires on September 30, 2015. Our Carlsbad facility houses the manufacturing and development operations for our excimer laser business.
 
Legal Proceedings
 
During the year ended December 31, 2013, Radiancy, Inc., a wholly-owned subsidiary of PhotoMedex, commenced legal action against Viatek Consumer Products Group, Inc., over Viatek’s Pearl and Samba hair removal products which Radiancy believes infringe the intellectual property covering its no!no! hair removal devices. The first suit, which was filed in the United States Federal Court, Southern District of New York, includes claims against Viatek for patent infringement, trademark and trade dress infringement, and false and misleading advertising. A second suit against Viatek was filed in Canada, where the Pearl is offered on that country’s The Shopping Channel, alleging trademark and trade dress infringement, and false and misleading advertising. Viatek’s response contains a variety of counterclaims and affirmative defenses against both Radiancy and its parent company PhotoMedex, including, among other counts, claims regarding the invalidity of Radiancy’s patents and antitrust allegations regarding Radiancy’s conduct.
 
As of March 17, 2014, the case has proceeded into the discovery phase of the litigation. Radiancy, and PhotoMedex, have moved to dismiss PhotoMedex from the case, and to dismiss the counterclaims and affirmative defenses asserted by Viatek. Radiancy has also moved for sanctions against Viatek for failure to provide meaningful and timely responses to Radiancy’s discovery requests. No decision has yet been rendered on these motions. At this time, the amount of any loss, or range of loss, cannot be reasonably estimated as the case is still in the early stages of discovery to determine the validity of any claim or claims made by Viatek. Therefore, the Company has not recorded any reserve or contingent liability related to this particular legal matter. However, in the future, as the case progresses, the Company may be required to record a contingent liability or reserve for this matter.
 
 
On December 20, 2013, PhotoMedex, Inc. was served with a putative class action lawsuit filed in the United States District Court for the Eastern District of Pennsylvania against the Company and its two top executives, Dolev Rafaeli, Chief Executive Officer, and Dennis M. McGrath, President and Chief Financial Officer. The suit, filed by Mr. Guy Ratz, a former employee of Radiancy (Israel) Ltd., a wholly-owned subsidiary of the Company, alleges various violations of the Federal securities laws between November 7, 2012 and November 14, 2013, including that the Company and its officers made false and misleading statements or failed to disclose material facts concerning the Company’s business. Two other shareholders filed suit through other firms; the Asbestos Workers Local 14 Pension Fund was appointed the lead plaintiff in this case. The complaint seeks certification of the putative class as well as an unspecified amount of monetary damages, pre-and post-judgment interest and attorneys’ fees, expert witness fees and other costs. The Company and its officers intend to vigorously defend themselves against this lawsuit. At this time, the amount of any loss, or range of loss, cannot be reasonably estimated as the cases have only been initiated and no discovery has been conducted to determine the validity of any claim or claims made by plaintiffs. Therefore, the Company has not recorded any reserve or contingent liability related to these particular legal matters. However, in the future, as the cases progress, the Company may be required to record a contingent liability or reserve for these matters.
 
Four putative class-action lawsuits have been filed in connection with PhotoMedex’s proposed acquisition of LCA-Vision, Inc. Two of those suits have been filed in the Court of Chancery of the State of Delaware and two have been filed in the Court of Common Pleas of Hamilton County, Ohio. All cases assert claims against LCA-Vision, Inc., its chief executive officer and directors, PhotoMedex, and Gatorade Acquisition Corp., a wholly owned subsidiary of PhotoMedex. The complaints allege that the proposed acquisition undervalues LCA and deprives LCA’s shareholders of the opportunity to participate in LCA’s long-term financial prospects, that the “go shop” provisions of the Merger Agreement are intended to prevent LCA from soliciting or receiving competing offers, that LCA’s Board has breached its fiduciary duties and failed to maximize that company’s stockholder value, and that LCA, PhotoMedex, and Gatorade have aided and abetted the LCA defendants’ alleged breaches of duty. The complaints seek injunctive relief, unspecified damages, and other relief. As of March 17, 2014, defendants have not responded to the complaints in any of the actions. Defendants intend to vigorously defend themselves in the lawsuits. At this time, the amount of any loss, or range of loss, cannot be reasonably estimated as the cases have only been initiated and no discovery has been conducted to determine the validity of any claim or claims made by plaintiffs. Therefore, the Company has not recorded any reserve or contingent liability related to these particular legal matters. However, in the future, as the cases progress, the Company may be required to record a contingent liability or reserve for these matters.
 
We and certain of our subsidiaries are involved in certain other legal actions and claims, including product liability, consumer, commercial, tax and governmental matters, which arise from time to time in the ordinary course of our business. We believe, based on discussions with legal counsel, that these other litigations and claims will likely be resolved without a material effect on our consolidated financial position, results of operations or liquidity. However, litigation is inherently unpredictable, and excessive verdicts can result from litigation. Although we believe we have substantial defenses in these matters, we may, in the future, incur judgments or enter into settlements of claims that could have a material adverse effect on our results of operations in a particular period.
 
Mine Safety Disclosures
 
None.
 
 
PART II
 
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
As of March 14, 2014, we had 18,903,245 shares of common stock issued and outstanding, including 183,826 shares of issued and outstanding restricted stock. This did not include (i) options to purchase 1,192,679 shares of common stock, of which 367,679 were vested as of March 14, 2014, or (ii) warrants to purchase up to 1,058,679 shares of common stock, all of which warrants were vested.
 
Our common stock is listed on the Nasdaq Global Select Market (“Nasdaq”) under the symbol "PHMD." The following table sets forth, for the periods indicated, the high and low closing sale prices per share of our common stock:
 
   
High
   
Low
 
Year Ended December 31, 2013:
           
Fourth Quarter
  $ 15.86     $ 11.53  
Third Quarter
    16.59       14.62  
Second Quarter
    16.95       14.71  
First Quarter
    16.47       13.95  
Year Ended December 31, 2012:
               
Fourth Quarter
  $ 15.05     $ 11.18  
Third Quarter
    14.55       10.93  
Second Quarter
    18.34       10.69  
First Quarter
    14.55       10.83  
 
On March 14, 2014, the last reported sale price for our common stock on Nasdaq was $16.39 per share. As of March 14, 2013, we had approximately 658 stockholders of record, without giving effect to determining the number of stockholders who held shares in “street name” or other nominee accounts.
 
Dividend Policy
 
We have not declared or paid any dividend on our common stock, since our inception. We do not anticipate that any dividends on our common stock will be declared or paid in the future.
 
 
Overview of Equity Compensation Plans
 
The following is a summary of all of our equity compensation plans, including plans that were assumed through acquisitions and individual arrangements that provide for the issuance of equity securities as compensation, as of December 31, 2013. See Notes 1 and 11 to the consolidated financial statements for additional discussion.
 
   
EQUITY COMPENSATION PLAN INFORMATION
 
   
 
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights
   
Weighted-
Average Exercise
Price of
Outstanding
Options,
Warrants and
Rights
   
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(excluding securities
reflected in column (A))
 
   
(A)
   
(B)
   
(C)
 
Equity compensation plans approved by security holders
    2,191,357     $ 18.15       1,210,078  
                         
Equity compensation plans not approved by security holders
      -         -         -  
                         
Total
    2,191,357     $ 18.15       1,210,078  
 
Options have been granted to employees and/or consultants out of our 2005 Equity Compensation Plan. Options to our outside directors will be made from our 2000 Non-Employee Director Stock Option Plan. Most warrants issued by us have been to investors or placement agents, and no warrants have been issued pursuant to equity compensation plans. Additionally, all outstanding options were granted as compensation for benefits inuring to us other than for benefits from capital-raising activities. With limited exceptions under Nasdaq membership requirements, we intend in the future to issue options pursuant to equity compensation plans which have already been approved by our stockholders.
 
Recent Issuances of Unregistered Securities
 
None.
 
 
Purchases of Equity Securities
 
On August 18, 2012, the Board of Directors approved a stock repurchase program up to a maximum to $25 million. In August 2013, the Board of Directors has authorized an additional $30 million share re-purchase program of its common shares in the open market over the next twelve months, at such times and prices as determined appropriate by the Company's management in collaboration with the Board of Directors. To date, we have repurchased 2,933,288 shares at an average price of $13.98 per share for a total of $41,150 million. The shares will be purchased with cash on hand.
 
Period
 
(a)
Total Number
of Shares Purchased
   
(b)
Average Price Paid per Share
   
(c)
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (1)
   
(d)
Maximum Number
(or Approximate
Dollar Value of
Shares) that may Yet
Be Purchased Under
the Plans or
Programs (1)
 
October 1, 2013 – October 31, 2013
    0       0       0       N/A  
November 1, 2013 – November 30, 2013
    314,500     $ 12.23       314,500       N/A  
December 1, 2013 – December 31, 2013
    658,270       12.46       604,145       N/A  
Total
    972,770     $ 12.38       918,645     $ 13,849,611  

(1) Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for a description of our stock repurchase program.
 
 
Selected Financial Data
 
You should read the following selected historical consolidated financial data in conjunction with our consolidated financial statements included elsewhere in this Report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning in Item 7 below. The selected historical consolidated statements of operations data for the years ended December 31, 2013, December 31, 2012 and December 31, 2011, and the selected historical consolidated balance sheet data as of December 31, 2013 and December 31, 2012, are derived from our audited consolidated financial statements included in this Report. The selected historical consolidated statements of operations data for the years ended December 31, 2010 and December 31, 2009 and the selected historical consolidated balance sheet data as of December 31, 2011, December 31, 2010 and December 31, 2009 are derived from our audited consolidated financial statements not included in this Report. The historical results presented here are not necessarily indicative of future results. Results of the operations of Pre-merged PhotoMedex are not included in the Statements of Operations prior to the reverse merger on December 13, 2011. The financial position of the Company reflects the completion of the reverse acquisition only in the Balance Sheets at December 31, 2013, 2012 and 2011.
 
   
Year Ended December 31,
 
   
(In thousands, except per-share data)
 
   
2013
   
2012
   
2011
   
2010
   
2009
 
Statement of Operations Data:
                             
Revenues
  $ 224,664     $ 220,651     $ 132,082     $ 70,071     $ 16,037  
Costs of revenues
    45,035       46,642       26,296       16,465       6,181  
Gross profit
    179,629       174,009       105,786       53,606       9,856  
Selling, general and administrative
    154,278       143,817       107,377       34,596       7,568  
Engineering and product development
    3,306       2,914       1,057       839       711  
Income (loss) from operations before financing income (expense) and interest
    22,045       27,278       (2,648 )     18,171       1,577  
Interest and other financing income (expenses), net
    702       (351 )     (68 )     (283 )     65  
Income (loss) before tax expense (benefit)
    22,747       26,927       (2,716 )     17,888       1,642  
Income tax (expense) benefit
    (4,370 )     (4,438 )     2,022       (6,287 )     3,643  
Net income (loss)
  $ 18,377     $ 22,489     $ ( 694 )   $ 11,601     $ 5,285  
                                         
Net income (loss) per share:
                                       
Basic
  $ 0.90     $ 1.10     $ (0.06 )   $ 1.13     $ 0.51  
Diluted
  $ 0.89     $ 1.08     $ (0.06 )   $ 0.99     $ 0.45  
Shares used in computing net income (loss) per share
                                       
Basic
    20,455       20,356       11,602       10,256       10,332  
Diluted
    20,657       20,764       11,602       11,725       11,646  
Balance Sheet Data (At Period End):
                                       
Cash, cash equivalents and short-term deposits
  $ 59,501     $ 62,348     $ 16,549     $ 22,081     $ 10,449  
Working capital
    83,058       95,677       30,768       27,511       12,949  
Total assets
    220,929       211,890       144,331       46,387       24,833  
Long-term debt (net of current portion)
    82       -       8       -       -  
Long-term liabilities
    3,640       4,067       2,405       837       402  
Stockholders’ equity
  $ 160,361     $ 167,327     $ 110,725     $ 28,900     $ 16,907  
 
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
The following financial data, in this narrative, are expressed in thousands, except for the earnings per share. The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and related notes included elsewhere in this Report.
 
Introduction, Outlook and Overview of Business Operations
 
Our current strategic focus is built upon four key components:
 
 
Skilled direct sales force to target Physician and Professional Segments;
 
 
Expertise in global consumer marketing;
 
 
A full product life cycle model representing the ability to develop and commercialize innovative products from concept through regulatory and physician acceptance, and ultimately marketed directly to the consumer as dictated by normal product life-cycle evolution; and
 
 
Establishing XTRAC centers of excellence in key markets by acquiring a fully paid infrastructure of existing clinics with established high customer service standards and culture.
 
We believe that we are one of only a few aesthetic companies to have succeeded in taking professional technologies geared toward physicians and med spas and adapting them for the home-use market. Our professional- and consumer-use products are listed below, noting that this is not an exhaustive listing of our product portfolio but represents our current key areas of focus.
 
Key Technology Platforms
 
 
Thermicon® brand Heat Transfer Technology. In this technique, a patented thermodynamic wire gently singes and burns off the hair above the skin’s surface. It conducts heat pulses, which enables longer-lasting hair removal. This technology drives our home-use no!no! Hair Removal 8800™ device, which is designed to reduce hair growth. Product variations include devices designed for men and for sensitive, small areas such as the face, among other versions.
 
 
LHE® brand Technology. LHE® combines direct heat and a full-spectrum light source to give a greater treatment advantage for psoriasis and acne care, skin tightening, skin rejuvenation, wrinkle reduction, collagen renewal, vascular and pigmented lesion treatments, and hair removal. Using LHE®, the Mistral intelligent phototherapy medical device can treat a larger spot size than a laser with less discomfort. In addition, our research finds that LHE offers meaningful results for thin, light hair. The technology is used in the no!no! Skin™, a handheld consumer product sold worldwide under the no!no!® brand. The no!no! Skin™ is a 510(k)-cleared product that has been clinically shown to reduce acne by 81% over 24 hours. The technology is also used in the no!no! Glow™, a miniaturized LHE device also delivering ant-aging benefits.
 
 
Kyrobak®. Kyrobak uses clinically proven, proprietary technology to treat unspecified, lower back pain. The unique combination of Continuous Passive Motion (CPM) and Oscillation therapy is a non-invasive, relaxing method for long lasting relief of back pain. Used for better than 3 decades in professional rehabilitation and chiropractic settings, CPM has been proven to increase mobility of the joints, draw more oxygen and blood flow to the area, allowing the muscles to relax and release pressure between the vertebrae allowing the spine to open up and decompress.
 
 
 
XTRAC® Excimer Laser. XTRAC received an FDA clearance in 2000 and has since become a widely recognized treatment among dermatologists for psoriasis and other skin conditions for which there are no cures. The machine delivers narrow ultraviolet B (“UVB”) light to affected areas of skin, leading to psoriasis remission in an average of 8 to 12 treatments and of vitiligo after 48 treatments. XTRAC is endorsed by the National Psoriasis Foundation, and its use for psoriasis is covered by nearly all major insurance companies, including Medicare. More than half of all major insurance companies now offer reimbursement for vitiligo as well, a figure that is increasing.
 
 
NEOVA®. This line of topical formulations is designed to prevent premature skin aging due to UV-induced DNA damage. The therapy seeks to repair photo-damaged skin using a novel combination of two key ingredients: DNA repair enzymes and our Copper Peptide Complex®. The NEOVA line includes DNA Damage Control SILC SHEER SPF 45, an award-winning tinted sunscreen. The DNA repair enzymes of this sunscreen are clinically shown to reduce UV damage by 45% and increase UV protection by 300% in one hour.
 
 
Light-emitting Diode (LED) Technology. PhotoMedex’s LED technology is used in both its Omnilux™ and Lumière Light Therapy systems. Omnilux is FDA cleared to treat wrinkles, acne, minor muscle pain and pigmented lesions, and is applicable to all skin types. Lumière is designed for use in non-medical applications and combines the LED light with a line of topical lotions to improve the appearance of fine lines, wrinkles, skin tone and blemishes, giving aesthetic professionals a complete non-invasive skin care solution.
 
Our revenue generation is categorized as Consumer, Physician Recurring or Professional. Each segment benefits from the combination of our proprietary global consumer marketing engine with our direct sales force for U.S. physicians.
 
Consumer
 
The global consumer market is our largest business unit due to our success at bringing professional technologies into the home-use arena. Cumulatively, we have sold more than 5 million no!no!® products to consumers, the majority of whom have been in Japan and North America.
 
Even at this level of sales, we believe we have ample opportunity for further expansion, as Japan’s 2013 population was over 127 million people and North America’s was approximately 529 million people—far greater than the 5million who have already purchased our products. In addition, we have recently launched our consumer marketing platform in Germany (population of approximately 83 million people) and to the recent launch in Brazil (population of approximately 198 million people)
 
Our consumer marketing platform is built upon a proprietary direct-to-consumer sales engine and creative marketing programs that drive brand awareness.
 
Sales Channels
 
Our multi-channel marketing and distribution model consists of television, online, print and radio direct-response advertising, as well as high-end retailers. We believe that this marketing and distribution model, through which each channel complements and supports the others, provides:
 
 
greater brand awareness across channels;
 
 
cost-effective consumer acquisition and education;
 
 
premium brand building; and
 
 
improved convenience for consumers.
 
Direct to Consumer. Our direct-to-consumer channel consists of sales generated through infomercials, websites and call centers. We utilize several forms of advertising to drive our direct-to-consumer sales and brand awareness, including print, online, television and radio.
 
 
Retailers and Home Shopping Channels. Our retailers and home shopping channels enable us to provide additional points of contact to educate consumers about our solutions, expand our presence beyond our direct to consumer activity and further strengthen and enhance our brand image.
 
Distributors. In some territories, we operate through exclusive distribution agreements with leading distribution companies that are dominant in their respective market and have the ability to promote our products through their existing retail and home shopping networks.
 
Markets
 
North America. Our consumer distribution segment in North America had sales of approximately $147.7 million, $141.5 million and $89.6 million for the years ended December 31, 2013, 2012 and 2011, respectively. We use a mix of direct-to-consumer advertising that includes infomercials, commercials, catalog and internet-based marketing campaigns, coupled with select retail resellers, such as Neiman Marcus, Henri Bendel, Planet Beauty, Bed, Bath & Beyond and others; home shopping channels such as HSN; and online retailers such as Dermadoctor.com and Drugstore.com. We believe these channels complement each other, as consumers that have seen our direct-to-consumer advertising may purchase at our retailers, and those who have seen our solutions demonstrated at our retailers may purchase solutions through our websites or call centers.
 
International (excluding North America). Outside North America sales were approximately $40.6 million, $47.0 million and $36.0 million for the years ended December 31, 2013, 2012 and 2011, respectively. We utilize various sales and marketing methods including sales by direct-to-consumer, sales to retailers and home shopping channels. Our main international markets are Japan, United Kingdom Argentina and Australia with the recent additions of Germany and Brazil.
 
Physician Recurring
 
Physician recurring sales primarily include those generated from two of our product lines: (1) XTRAC® lasers, a noninvasive, FDA-cleared solution for psoriasis and vitiligo, and (2) NEOVA® skin care, a topical therapy combining DNA repair enzymes and copper peptide complexes to prevent premature skin aging. Both XTRAC and NEOVA represent recurring revenue streams with significant market opportunities. In addition, our expertise in direct-to-consumer advertising and innovative marketing programs is anticipated to drive greater brand awareness and adoption for both XTRAC and NEOVA products.
 
XTRAC®
 
The XTRAC business is considered a recurring revenue stream given its pay-per-use model, where the machines are provided to professionals who then pay us based on the number of treatments administered with the device.
 
NEOVA®
 
Sales of the NEOVA skin care products at present are driven by physicians, who act as spokespersons to their patients in support of the NEOVA line. We have historically marketed to physicians in the dermatology and plastic surgery field, but plan to supplement these efforts with a direct-to-consumer approach to lead patients into those practices. NEOVA addresses a sizeable global market for anti-aging skin care products.
 
Professional
 
Sales under the professional business segment are mainly generated from capital equipment, such as our XTRAC-Velocity and VTRAC equipment, our LHE® brand products and our Omnilux and Lumière Light Therapy systems.
 
 
We view this segment as an area of opportunity for us since the reverse acquisition with Radiancy, Inc. or Radiancy, completed on December 13, 2011. We now possess a greatly expanded product offering for the physician community. In addition, following the December 2011 reverse acquisition, we inherited from Pre-merged PhotoMedex a 48-person, experienced direct sales force that already reaches a network of approximately 3,000 physician locations in the U.S. We are now also distributing through this direct sales force the LHE-based professional products in addition to our other equipment to physicians, dermatologists, salons, spas, and other aesthetic practitioners. We view this fully trained sales staff as a resource in expanding the Professional segment of our revenues.
 
Sales and Marketing
 
As of December 31, 2013, our sales and marketing personnel consisted of 68 full-time positions.
 
Critical Accounting Policies
 
The discussion and analysis of our financial condition and results of operations in this Report are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and disclosures at the date of the financial statements. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to revenue recognition, accounts receivable, inventories, impairment of property and equipment and of intangibles and accruals for warranty claims. We use authoritative pronouncements, historical experience and other assumptions as the basis for making estimates. Actual results could differ from those estimates.
 
Management believes that the following critical accounting policies affect our more significant judgments and estimates in the preparation of our Consolidated Financial Statements. These critical accounting policies and the significant estimates made in accordance with these policies have been discussed with our Audit Committee.
 
Revenue Recognition.  We recognize revenues from the product sales when the following four criteria have been met: (i) the product has been shipped and we have no significant remaining obligations; (ii) persuasive evidence of an arrangement exists; (iii) the price to the buyer is fixed or determinable; and (iv) collection is probable. Revenues from product sales are recorded net of provisions for estimated chargebacks, rebates, expected returns and cash discounts.
 
We ship most of our products FOB shipping point, although from time to time certain customers, for example governmental customers, will insist upon FOB destination. Among the factors we take into account when determining the proper time at which to recognize revenue are when title to the goods transfers and when the risk of loss transfers. Shipments to distributors or physicians that do not fully satisfy the collection criterion are recognized when invoiced amounts are fully paid or fully assured.
 
For revenue arrangements with multiple deliverables within a single contractually binding arrangement (usually sales of products with separately priced extended warranty), each element of the contract is accounted for as a separate unit of accounting when it provides the customer value on a stand-alone basis and there is objective evidence of the fair value of the separate, but related, unit.
 
With respect to sales arrangements under which the buyer has a right to return the related product, revenue is recognized only if all the following are met: the price is fixed or determinable at the date of sale; the buyer has paid, or is obligated to pay and the obligation is not contingent on resale of the product; the buyer's obligation would not be changed in the event of theft or physical destruction or damage of the product; the buyer has economic substance; we do not have significant obligations for future performance to directly bring about resale of the product by the buyer; and the amount of future returns can be reasonably estimated.
 
We provide a provision for product returns based on the experience with historical sales returns, in accordance with ASC Topic 605-15 with respect to sales of product when right of return exists. As of December 31, 2013, accrued sales returns provision was $16,042 or 7.1% of total recognized revenues of $224,664. As of December 31, 2012, accrued sales returns provision was $11,901 or 5.4% of total recognized revenues of $220,651. The return provisions are influenced by product mix and in 2013 there was higher rate toward the direct channel.
 
 
Revenues received with respect to extended warranty on consumer products are recognized over the duration of the warranty period. As of December 31, 2013, deferred revenues for the extended warranties amounted to $8,496 or 3.8% on total recognized revenues. As of December 31, 2012, deferred revenues for the extended warranties amounted to $7,766 or 3.5% on total recognized revenues. During 2013, we began to sell extended warranties in both UK and Germany.
 
We have two distribution channels for our phototherapy treatment equipment. We either (i) sell our lasers through a distributor or directly to a physician or (ii) place our lasers in a physician’s office (at no charge to the physician) and generally charge the physician a fee for an agreed upon number of treatments. In some cases, the customer and we stipulate to a quarterly or other periodic target of procedures to be performed, and accordingly revenue is recognized ratably over the period.
 
When we place a laser in a physician’s office, we generally recognize service revenue based on the number of patient treatments performed, or purchased under a periodic commitment, by the physician. Treatments to be performed through random laser-access codes that are sold to physicians free of a periodic commitment, but not yet used, are deferred and recognized as a liability until the physician performs the treatment. Unused treatments remain an obligation of the Company because the treatments can only be performed on equipment which we own and place with the customer. Once the treatments are delivered to a patient, this obligation has been satisfied. We defer substantially all sales of treatment codes ordered by and delivered to its customers within the last two weeks of the period in determining the amount of procedures performed by its physician-customers. Management believes this approach closely approximates the actual amount of unused treatments that existed at the end of a period. As of December 31, 2013, we have deferred treatment code revenues of $172 or 1.1% of total recognized treatment revenues of $15,489. As of December 31, 2012, we have deferred treatment code revenues of $504 or 6.0% of total recognized treatment revenues of $8,441. As of December 31, 2011, we have deferred treatment code revenues of $539. Recognized treatment revenues for the year ended December 31, 2011 was $298. As we completed the reverse acquisition on December 13, 2011, Pre-merged PhotoMedex revenues are included only from the completion date forward.
 
Revenue from maintenance service agreements is deferred and recognized on a straight-line basis over the term of the agreements. Revenue from billable services, including repair activity, is recognized when the service is provided.
 
Inventory.  We account for inventory at the lower of cost or market. Cost is determined to be purchased cost for raw materials and the production cost (materials, labor and indirect manufacturing cost) for work-in-process and finished goods. For our consumer and LHE products, cost is determined on the weighted-average method. For the pre-merged PhotoMedex’s products, cost is determined on the first-in, first-out method. Throughout the laser manufacturing process, the related production costs are recorded within inventory. Work-in-process is immaterial, given the typically short manufacturing cycle, and therefore is disclosed in conjunction with raw materials. We perform full physical inventory counts for XTRAC and cycle counts on the other inventory to maintain controls and obtain accurate data.
 
Our XTRAC laser is either (i) sold to distributors or physicians directly or (ii) placed in a physician's office and remains our property. The cost to build a laser, whether for sale or for placement, is accumulated in inventory. When a laser is placed in a physician’s office, the cost is transferred from inventory to “lasers in service” within property and equipment. At times, units are shipped to distributors, but revenue is not recognized until all of the Criteria have been met, and until that time, the unit is carried on our books as inventory. Revenue is not recognized from these distributors until payment is either assured or paid in full.
 
Reserves for slow-moving and obsolete inventories are provided based on historical experience and product demand. Management evaluates the adequacy of these reserves periodically based on forecasted sales and market trends.
 

Allowance for Doubtful Accounts.  Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. From time to time, our customers dispute the amounts due to us, and, in other cases, our customers experience financial difficulties and cannot pay on a timely basis. In certain instances, these factors ultimately result in uncollectible accounts. The determination of the appropriate reserve needed for uncollectible accounts involves significant judgment. Such factors include changes in the financial condition of our customers as a result of industry, economic or customer-specific factors. A change in the factors used to evaluate collectability could result in a significant change in the reserve needed. As of December 31, 2013 and 2012, allowance for doubtful accounts was $10,734 and $6,917 or 4.8% and 3.1%, respectively of the total recognized revenues of each year. The allowance for doubtful accounts provisions are influenced by product mix and in 2013 there was higher rate toward the direct channel.
 
Property and Equipment.  As of December 31, 2013 and 2012, we had net property and equipment of $10,489 and $6,759, respectively. The most significant component relates to the XTRAC lasers placed by us in physicians’ offices. We own the equipment and charge the physician on a per-treatment basis for use of the equipment. The recoverability of the net carrying value of the lasers is predicated on continuing revenues from the physicians’ use of the lasers. If the physician does not generate sufficient treatments, then we may remove the laser from the physician’s office and redeploy elsewhere. XTRAC lasers placed in service are depreciated on a straight-line basis over the estimated useful life of five-years. For other property and equipment depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, primarily three to seven years for computer hardware and software, furniture and fixtures, automobiles and machinery and equipment. Leasehold improvements are amortized over the lesser of the useful lives or lease terms. Useful lives are determined based upon an estimate of either physical or economic obsolescence, or both.
 
Goodwill and Intangibles Assets.  Our balance sheet includes goodwill and other intangible assets which affect the amount of future period amortization expense and possible impairment expense that we will incur. Management’s judgments regarding the existence of impairment indicators are based on various factors, including market conditions and operational performance of our business. As of December 31, 2013 and 2012, we had $45,463 and $48,027 of goodwill and other intangibles, accounting for 21% and 24% of our total assets, respectively. The goodwill is not amortizable; the other intangibles are. The determination of the value of such intangible assets requires management to make estimates and assumptions that affect our consolidated financial statements. We test our goodwill for impairment, which was acquired as part of the reverse acquisition on December 13, 2011, at least annually. This test is usually conducted in December of each year in connection with the annual budgeting and forecast process. Also, on a quarterly basis, we evaluate whether events have occurred that would negatively impact the realizable value of our intangibles or goodwill.
 
We reorganized our business into three operating units which resulted in a change in reporting segments effective December 13, 2011. For the purposes of goodwill impairment testing, our reporting units are defined as Consumer, Physician Recurring and Professional Equipment. The balance of our goodwill for each of our segments as of December 31, 2013 is as follows: Consumer $20,850, Physician Recurring $4,080 and Professional Equipment $0. We completed our annual goodwill impairment analysis as of December 31, 2013. Our assessment concluded that there was not any impairment of goodwill. Our analysis employed the use of both a market and income approach, with each method given equal weighting. Significant assumptions used in the income approach include growth and discount rates, margins and the Company’s weighted average cost of capital. We used historical performance and management estimates of future performance to determine margins and growth rates. Discount rates selected for each reporting unit varied. Our weighted average cost of capital included a review and assessment of market and capital structure assumptions. Of the two reporting units with goodwill, Consumer has a fair value that is in excess of its carrying value by approximately 435%, while Physician Recurring has a fair value that is approximately 50% in excess of its carrying value. Considerable management judgment is necessary to evaluate the impact of operating changes and to estimate future cash flows. Changes in our actual results and/or estimates or any of our other assumptions used in our analysis could result in a different conclusion.
 
 
In connection with the reverse acquisition of Pre-merged PhotoMedex on December 31, 2011, we acquired certain intangibles recorded at fair value as of the date of acquisition. The balances of these acquired intangibles, net of amortization, were:
 
   
December 31, 2013
 
Customer Relationships
  $ 5,107  
Tradename
    4,594  
Product and Core Technologies
    10,832  
Goodwill
    24,930  
Total
  $ 45,463  
 
Income taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process requires us to estimate our actual current tax exposure and make an assessment of temporary differences resulting from differing treatment of items, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we establish a valuation allowance. After evaluating the effects of the reverse merger and integration of Radiancy’s business on its net operating losses in the U.K., management determined that the NOLs remain usable against future income of the U.K. subsidiary. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the consolidated statement of operations. Significant management judgment is required in determining our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. In the event that we generate taxable income in the jurisdictions in which we operate and in which we has net operating loss carry-forwards, we may be required to adjust our valuation allowance.
 
We implemented ASC Topic 740-10, “Income Taxes” which clarify the accounting for uncertainty in tax positions. ASC Topic 740-10 requires that we recognize in our financial statements the impact of a tax position, if that position will more likely than not be sustained upon examination, based on the technical merits of the position, without regard the likelihood that the tax position may be challenged. If an uncertain tax position meets the “more-likely-than-not” threshold, the largest amount of tax benefit that is greater than 50% likely to be recognized upon ultimate settlement with the taxing authority is recorded.
 
Stock-based compensation. We account for stock based compensation to employees in accordance with “Share-Based Payment” accounting standard. The standard requires estimating the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in our consolidated statement of operations.
 
The fair value of employee stock options is estimated using a Black-Scholes valuation model. Compensation costs are recorded using the graded vesting attribution method over the vesting period, net of estimated forfeitures. The total share-based compensation expense was $4,985 and $6,197 for the years ended December 31, 2013 and 2012, respectively.
 
 
Results of Operations
 
Revenues
 
The following table illustrates revenues from our three business segments for the periods listed below:
 
   
For the Year Ended December 31,
 
   
2013
   
2012
   
2011
 
Consumer
  $ 188,259     $ 188,425     $ 125,581  
Physician Recurring
    28,548       21,284       829  
Professional
    7,857       10,942       5,672  
                         
Total Revenues
  $ 224,664     $ 220,651     $ 132,082  
 
We completed the reverse acquisition on December 13, 2011 and as such, our Pre-merged PhotoMedex revenues are included only from the completion date forward. There are, therefore, no corresponding activities from the Pre-Merged PhotoMedex in the results up to and including December 13, 2011.
 
Consumer Segment
 
The following table illustrates the key changes in the revenues of the Consumer segment, by sales channel, for the periods reflected below:
 
   
For the Year Ended December 31,
 
   
2013
   
2012
   
2011
 
Direct-to-consumer
  $ 130,785     $ 125,208     $ 75,904  
Distributors
    15,553       24,851       28,948  
Retailers and home shopping channels
    41,921       38,366       20,729  
                         
Total Consumer Revenues
  $ 188,259     $ 188,425     $ 125,581  
 
For the year ended December 31, 2013, consumer products revenues were $188,259 compared to $188,425 in the year ended December 31, 2012. The revenues remained consistent between the years but the sales channels changed mainly due to the following reasons:
 
 
Direct to Consumer. Revenues for the year ended December 31, 2013 were $130,785 compared to $125,208 for the year ended December 31, 2012. The increase of 4% was mainly due to our successful marketing programs which have led to year-over-year revenue growth. Additionally, in 2013, we launched marketing programs in Germany, resulting in approximately $712 in revenues, and Brazil, resulting in approximately $421 in revenues, for the year ended December 31, 2013.
 
 
Retailers and Home Shopping Channels. Revenues for the year ended December 31, 2013 were $41,921 compared to $38,366 for the year ended December 31, 2012. The increase of 9% was also mainly due to our successful marketing programs to the various home shopping channel customers, mainly in the United States (“US”) and the United Kingdom (“UK”)  and to the additional retailers added to this channel.
 
 
Distributors Channels. Revenues for the year end December 31, 2013 were $15,553 compared to $24,851 for the same period in 2012. The decrease in revenues of 37% was due to our distributor in Japan who modified its business model during 2013, affecting its role in the supply chain between its manufacturers and the Japan retailers they supply and causing revenues from our Japan distributor to decrease to $10,920 from $19,276. During the fourth quarter of 2013, we cancelled our distribution agreement with the Japan distributor.
 
 
For the year ended December 31, 2012, consumer products revenues were $188,425 compared to $125,581 in the year ended December 31, 2011. The increase of 50% in the year was mainly due to the following reasons:
 
 
Direct to Consumer. Revenues for the year ended December 31, 2012 were $125,208 compared to $75,904 for the year ended December 31, 2011. The increase of 65% was mainly due to our successful marketing programs which have led to rapid year-over-year revenue growth. Additionally, in May 2011, we launched marketing programs in the UK resulting in approximately $21,884 in revenues for the year ended December 31, 2012 compared to $3,413 in revenues for the year ended December 31, 2011.
 
 
Retailers and Home Shopping Channels. Revenues for the year ended December 31, 2012 were $38,366 compared to $20,729 for the year ended December 31, 2011. The increase of 85% was also mainly due to our successful marketing programs to the various home shopping channel customers, mainly in the US and the UK.
 
 
Distributors Channels. Revenues for the year end December 31, 2012 were $24,851 compared to $28,948 for the same period in 2011. The decrease in revenues of 14% was mainly attributed to a key partner’s desire to reduce its inventory levels on all product lines carried over from 2011 and into 2012.
 
The following table illustrates the key changes in the revenues of the Consumer segment, by markets, for the periods reflected below:
 
   
For the Year Ended December 31,
 
   
2013
   
2012
   
2011
 
North America
  $ 147,682     $ 141,478     $ 89,571  
International
    40,577       46,947       36,010  
                         
Total Consumer Revenues
  $ 188,259     $ 188,425     $ 125,581  
 
Physician Recurring Segment
 
The following table illustrates the key changes in the revenues of the Physician Recurring segment for the periods reflected below:
 
   
For the Year Ended December 31,
 
   
2013
   
2012
   
2011
 
XTRAC Treatments
  $ 15,489     $ 8,441     $ 298  
Neova skincare
    8,243       8,156       385  
Other
    4,816       4,687       146  
                         
Total Physician Recurring Revenues
  $ 28,548     $ 21,284     $ 829  
 
All revenues in this segment are generated through the Pre-merged PhotoMedex products. Since we completed the reverse acquisition on December 13, 2011 and in accordance with United States generally accepted accounting principles (“GAAP”) revenues for the year ended December 31, 2011 include only the period of December 14, 2011 through December 31, 2011. There are, therefore, no corresponding activities up to and including December 13, 2011.
 
 
XTRAC Treatments
 
Recognized treatment revenue for the year ended December 31, 2013 was $15,489, which approximates 221,000 treatments with prices between $65 and $95 per treatment compared to recognized treatment revenue for the year ended December 31, 2012 was $8,441, which approximates 125,000 treatments with prices between $65 and $85 per treatment. Recognized treatment revenue for the period, beginning with the merger date on December 13, 2011 through December 31, 2011, was $298. Increases in procedures are dependent upon building market acceptance with our physician partners and their patients that the XTRAC procedures will be of clinical benefit and will be generally reimbursed by insurers.
 
We have a program to support certain physicians who may be denied reimbursement by private insurance carriers for XTRAC treatments. We recognize service revenue during this program from the sale of XTRAC procedures or equivalent treatments to physicians participating in this program only to the extent the physician has been reimbursed for the treatments. In addition, we defer substantially all sales of treatment codes ordered by and delivered to the customer within the last two weeks of the period in determining the amount of procedures performed by our physician-customers. Management believes this approach closely approximates the actual amount of unused treatments that existed at the end of a period. For the year ended December 31, 2013, we recognized net revenues of $312 under this approach. For the year ended December 31, 2012, we deferred net revenues of $283 under this approach.
 
NEOVA skincare
 
For the year ended December 31, 2013 revenues were $8,243 compared to $8,156 for the year ended December 31, 2012. For the period beginning with the merger date on December 13, 2011 through December 31, 2011 revenues were $385. These revenues are generated from the sale of various skin, hair and wound care products to physicians in both the domestic and international markets.
 
Surgical products
 
For the year ended December 31, 2013, revenues were $2,094 compared to $2,147 for the year ended December 31, 2012. For the period beginning with the Merger Date on December 13, 2011 through December 31, 2011 revenues were $101. These revenues are generated from the sale of various related laser fibers and laser disposables in both the domestic and international markets.
 
The following table illustrates the key changes in the revenues of the Physicians Recurring segment, by markets, for the periods reflected below:
 
   
For the Year Ended December 31,
 
   
2013
   
2012
   
2011
 
North America
  $ 25,260     $ 18,607     $ 806  
International
    3,288       2,677       23  
                         
Total Physicians Recurring Revenues
  $ 28,548     $ 21,284     $ 829  
 
 
Professional Segment
 
The following table illustrates the key changes in the revenues of the Professional segment for the periods reflected below:
 
   
For the Year Ended December 31,
 
   
2013
   
2012
   
2011
 
Dermatology equipment
  $ 3,962     $ 4,174     $ 429  
LHE equipment
    2,240       4,241       5,000  
Omnilux/Lumiere equipment
    1,510       2,124       150  
Surgical lasers
    145       403       93  
                         
Total Professional Revenues
  $ 7,857     $ 10,942     $ 5,672  
 
The Dermatology equipment, Omnilux/Lumiere equipment and Surgical laser revenues in this segment are all generated through the Pre-merged PhotoMedex products. Since we completed the reverse acquisition on December 13, 2011 and in accordance with United States generally accepted accounting principles (“GAAP”) revenues for these product lines for the year ended December 31, 2011 include only the period of December 14, 2011 through December 31, 2011. There are, therefore, no corresponding activities up to and including December 13, 2011.
 
Dermatology equipment
 
For the years ended December 31, 2013 and 2012, dermatology equipment revenues were $3,962 and $4,174, respectively. Included in the December 31, 2012 amount were domestic XTRAC laser sales of $899 on 20 lasers sold. There were no domestic XTRAC laser sales for the year ended December 31, 2013. We sell the laser directly to the customer for certain reasons, including the costs of logistical support and customer preference. Our preference is to consign lasers to customers which will thrive under the per-procedure model. Internationally, we sold 115 systems for the year ended December 31, 2013, 64 of which were VTRAC systems, a lamp-based alternative UVB light source that has a wholesale sales price that is below our competitors’ international dermatology equipment and below that of our XTRAC laser. We sold 121 systems for the year ended December 31, 2012, 82 of which were VTRAC systems. The international sales of our XTRAC and VTRAC systems were $3,275 for the year ended December 31, 2012.
 
For the period beginning with the merger date on December 13, 2011 through December 31, 2011 dermatology equipment revenues were $429. Included in this were domestic XTRAC laser sales of $304 on 4 lasers sold. The international sales of our XTRAC and VTRAC systems were $125 for the year ended December 31, 2011. We sold 5 systems for the year ended December 31, 2011, all of which were VTRAC systems, a lamp-based alternative UVB light source that has a wholesale sales price that is below our competitors’ international dermatology equipment and below our XTRAC laser.
 
LHE® brand products
 
LHE® brand products revenues include revenues derived from the sales of mainly Mistral™, Kona™, FSD™, SpaTouch Elite™ and accessories. These devices are sold to physicians, spas and beauty salons.
 
For the years ended December 31, 2013 and 2012, LHE® brand products revenues were $2,240 and $4,241, respectively. For the year ended December 31, 2011 revenues were $5,000.
 
Omnilux/Lumiere equipment
 
For the years ended December 31, 2013 and 2012 Omnilux/Lumiere equipment revenues were $1,510 and $2,124, respectively. For the period beginning with the merger date on December 13, 2011 through December 31, 2011, Omnilux/Lumiere equipment revenues were $150. These revenues are generated from the sale of LED devices. The Omnilux units are sold for medical applications and the Lumière is a sister technology to Omnilux with the same patent protection, but It is designed for use in non-medical applications, especially at salons and spas.

 
Surgical lasers
 
Surgical lasers revenues include revenues derived from the sales of surgical laser systems. For the years ended December 31, 2013 and 2012 surgical lasers revenues were $145, representing five laser systems, and $403, representing 13 laser systems. For the period beginning with the merger date on December 13, 2011 through December 31, 2011, surgical lasers revenues were $93, comprising of three laser systems.
 
The following table illustrates the key changes in the revenues of the Professional segment, by markets, for the periods reflected below:
 
   
For the Year Ended December 31,
 
   
2013
   
2012
   
2011
 
North America
  $ 2,012     $ 3,026     $ 2,624  
International
    5,845       7,916       3,048  
                         
Total Professional Revenues
  $ 7,857     $ 10,942     $ 5,672  
 
Cost of Revenues: all segments
 
The following table illustrates cost of revenues from our three business segments for the periods listed below: