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PHMD > SEC Filings for PHMD > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for PHOTOMEDEX INC

Form 10-Q for PHOTOMEDEX INC


13-Nov-2012

Quarterly Report


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

The following discussion of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and notes to condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. These forward-looking statements include, but are not limited to, statements about the plans, objectives, expectations and intentions of PhotoMedex, Inc., a Nevada corporation (referred to in this Report as "we," "us," "our," "PhotoMedex," or "registrant") and other statements contained in this Report that are not historical facts. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that characterize our business. In particular, we encourage you to review the risks and uncertainties described in Item 1A "Risk Factors" included elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2011. These risks and uncertainties could cause actual results to differ materially from those projected in forward-looking statements contained in this report or implied by past results and trends. Forward-looking statements are statements that attempt to forecast or anticipate future developments in our business, financial condition or results of operations and statements - see "Cautionary Note Regarding Forward-Looking Statements" that appears at the end of this discussion. These statements, like all statements in this report, speak only as of their date (unless another date is indicated), and we undertake no obligation to update or revise these statements in light of future developments.

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

Introduction, Outlook and Overview of Business Operations

Our current strategic focus is built upon three key components - skilled direct sales force to target Physician and Professional Segments; expertise in global consumer marketing and a full product-life-cycle model representing the ability to develop and commercialize innovative products from concept thru regulatory and physician acceptance, and ultimately marketed directly to the consumer as dictated by normal product life-cycle evolution.

We believe that we are one of only a few aesthetic dermatology 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 enable longer-lasting hair removal. This technology drives our home-use no!no! Hair Removal 8800™ device, which is designed to reduce hair growth. Product variations include devices designed for men and for sensitive, small areas such as the face, among other versions.

• 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 also used in the no!no! Skin™, a handheld consumer product sold worldwide under the no!no!® brand. The no!no! Skin™ is a 510(k)-cleared product that has been clinically shown to reduce acne by 81% over 24 hours.

• XTRAC® Excimer Laser. XTRAC received FDA clearance in 2000 and has since become a widely recognized treatment among dermatologists for psoriasis and other skin conditions for which there are no cures. The machine delivers narrow ultraviolet B ("UVB") light to affected areas of skin, leading to psoriasis remission in an average of 8 to 12 treatments and of vitiligo after 48 treatments. XTRAC is endorsed by the National Psoriasis Foundation, and its use for psoriasis is covered by nearly all major insurance companies, including Medicare. Nearly 65% of companies now offer reimbursement for vitiligo as well, a figure that is increasing.

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• NEOVA®. This line of topical formulations is designed to prevent premature skin aging due to UV-induced DNA damage. The therapy seeks to repair photo-damaged skin using a novel combination of two key ingredients: DNA repair enzymes and our Copper Peptide Complex®. The NEOVA line includes DNA Damage Control SILC SHEER SPF 45, an award-winning tinted sunscreen. The DNA repair enzymes of this sunscreen are clinically shown to reduce UV damage by 45% and increase UV protection by 300% in one hour.

• Light-emitting Diode (LED) Technology. Our LED technology is used in both its Omnilux™ and Lumičre™ Light Therapy systems. Omnilux is FDA cleared to treat wrinkles, acne, minor muscle pain and pigmented lesions, and is applicable to all skin types. Lumičre 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 either 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 3.0 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 2010 population was over 127 million people and North America's was approximately 400 million people-far greater than the more than three million who have already purchased our products.

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.

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Markets

North America. Our consumer distribution segment in North America had sales of approximately $33.6 million and $23.3 million for the three months ended September 30, 2012 and 2011, respectively. Our consumer distribution segment in North America had sales of approximately $104.7 million and $70.1 million for the nine months ended September 30, 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 and others; home shopping channels such as HSN; and online retailers such as Amazon, Dermadoctor.com and Drugstore.com. We believe these channels complement each other, as consumers that have seen our direct-to-consumer advertising may purchase at our retailers, and those who have seen our solutions demonstrated at our retailers may purchase solutions through our websites or call centers.

International (excluding North America). In the international consumer segment, sales were approximately $16.0 million and $10.3 million for the three months ended September 30, 2012 and 2011, respectively. In the international consumer segment, sales were approximately $37.6 million and $29.7 million for the nine months ended September 30, 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. Our distribution has become geographically diverse over the past year; for example, as revenues have increased, our Japanese distributor, Ya-Man, Ltd., accounted for approximately 14% and 10% of our total revenues for the three and nine months ended September 30, 2012, compared to 24% and 23% of total revenues for the three and nine months ended September 30, 2011.

Physician Recurring

Physician recurring sales primarily entail those generated under two of our product lines: (1) the XTRAC, a noninvasive, FDA-cleared solution for psoriasis and vitiligo, and (2) the NEOVA, 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 Velocity and VTRAC equipment, our LHE® brand products and our Omnilux and Lumičre Light Therapy systems.

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

Sales and Marketing

As of September 30, 2012, our sales and marketing personnel consisted of 67 full-time positions.

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Critical Accounting Policies and Estimates

There have been no changes to our critical accounting policies and estimates in the three and nine months ended September 30, 2012. Critical accounting policies and the significant estimates made in accordance with them are regularly discussed with our Audit Committee. Those policies are discussed under "Critical Accounting Policies" in our "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2011.

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

Revenues

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

                         For the Three Months Ended           For the Nine Months Ended
                                September 30,                       September 30,
                          2012                2011              2012               2011
Consumer              $      49,638       $      33,632     $     142,303       $   99,718
Physician Recurring           5,121                   -            15,467                -
Professional                  1,922               1,113             8,090            3,615

Total Revenues        $      56,681       $      34,745     $     165,860       $  103,333

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 were no corresponding revenues for the periods ended September 30, 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 Three Months Ended            For the Nine Months Ended
                                                     September 30,                        September 30,
                                               2012                2011               2012               2011
Direct-to-consumer                         $      30,001       $      18,614     $       95,211       $   57,945
Distributors                                       9,388               8,492             21,088           25,826
Retailers and home shopping channels              10,249               6,526             26,004           15,947

Total Consumer Revenues                    $      49,638       $      33,632     $      142,303       $   99,718

For the three months ended September 30, 2012, consumer products revenues were $49,638 compared to $33,632 in the three months ended September 30, 2011. For the nine months ended September 30, 2012, consumer products revenues were $142,303 compared to $99,718 in the nine months ended September 30, 2011. The increases of 47.6% and 42.7%, respectively, during the periods were mainly due to the following reasons:

• Direct to Consumer. Revenues for the three months ended September 30, 2012 were $30,001 compared to $18,614 for the same period in 2011. Revenues for the nine months ended September 30, 2012 were $95,211 compared to $57,945 for the same period in 2011. The increase of 61% and 64%, respectively, were 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 United Kingdom ("UK"), resulting in approximately $3,278 and $10,244 in revenues for the three and nine months ended September 30, 2012, respectively, compared to $1,381 and $2,024 in revenues for the three and nine months ended September 30, 2011, respectively.

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• Retailers and Home Shopping Channels. Revenues for the three months ended September 30, 2012 were $10,249 compared to $6,526 for the same period in 2011. Revenues for the nine months ended September 30, 2012 were $26,004 compared to $15,947 for the same period in 2011. The increases of 57% and 63%, respectively, were also mainly due to our successful marketing programs to the various home shopping channel customers, mainly in the United States ("US") and the UK.

• Distributors Channels. Revenues for the three months ended September 30, 2012 were $9,388 compared to $8,492 for the same period in 2011.The increase in revenues of 11% was due to increased marketing efforts by our partner in Japan as well as new product introduction. Revenues for the nine months ended September 30, 2012 were $21,088 compared to $25,826 for the same period in 2011. The decrease in revenues of 18% 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 Three Months Ended            For the Nine Months Ended
                                                     September 30,                        September 30,
                                               2012                2011               2012               2011
North America                              $      33,579       $      23,305     $      104,717       $   70,056
International                                     16,059              10,327             37,586           29,662

Total Consumer Revenues                    $      49,638       $      33,632     $      142,303       $   99,718

Physician Recurring Segment

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

                                             For the Three Months Ended          For the Nine Months Ended
                                                    September 30,                      September 30,
                                              2012                2011            2012                2011
XTRAC Treatments                           $     2,173         $         -     $     5,829         $        -
Neova skincare                                   1,907                   -           6,207                  -
Surgical products                                  489                   -           1,501                  -
Other                                              552                   -           1,930                  -

Total Physician Recurring Revenues         $     5,121         $         -     $    15,467         $        -

All revenues in this segment are generated through the Pre-merged PhotoMedex products. We completed the reverse acquisition on December 13, 2011. In accordance with generally accepted accounting principles, these revenues are included only from the completion date forward. There were no corresponding revenues for the periods ended September 30, 2011.

XTRAC Treatments

Recognized treatment revenue for the three months ended September 30, 2012 was $2,173. Recognized treatment revenue for the nine months ended September 30, 2012 was $5,829. Increases in procedures are dependent upon building market acceptance through marketing programs with our physician partners and their patients to show that the XTRAC procedures will be of clinical benefit and be generally reimbursed.

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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 three and nine months ended September 30, 2012, we deferred net revenues of $95 and $312, respectively, under this approach.

NEOVA skincare

For the three and nine months ended September 30, 2012, revenues were $1,907 and $6,207, respectively. These revenues are generated from the sale of various skin, hair care and wound products to physicians in both the domestic and international markets.

Surgical products

For the three and nine months ended September 30, 2012, revenues were $552 and $1,930, respectively. 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 Three Months Ended          For the Nine Months Ended
                                                    September 30,                      September 30,
                                              2012                2011            2012                2011
North America                              $     4,537         $         -     $    13,563         $        -
International                                      584                   -           1,904                  -

Total Physicians Recurring Revenues        $     5,121         $         -     $    15,467         $        -

Professional Segment

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

                                              For the Three Months Ended            For the Nine Months Ended
                                                     September 30,                        September 30,
                                               2012                2011              2012               2011
Dermatology equipment                      $         728       $           -     $      3,380       $          -
LHE equipment                                        743               1,113            3,152              3,615
Omnilux/Lumiere equipment                            366                   -            1,295                  -
Surgical lasers                                       85                   -              263                  -

Total Professional Revenues                $       1,922       $       1,113     $      8,090       $      3,615

The Dermatology equipment, Omnilux/Lumiere equipment and Surgical lasers revenues in this segment are all generated through the Pre-merged PhotoMedex products. As we completed the reverse acquisition, in accordance with generally accepted accounting principles on December 13, 2011, these revenues are included only from the completion date forward. There are no corresponding revenues for the periods ended September 30, 2011.

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Dermatology equipment

For the three months ended September 30, 2012, dermatology equipment revenues were $728. Included in this amount were domestic XTRAC laser sales of $105 on 3 lasers sold. For the nine months ended September 30, 2012, dermatology equipment revenues were $3,380. Included in this amount were domestic XTRAC laser sales of $899 on 20 lasers sold. 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. The international sales of our XTRAC and VTRAC systems were $623 for the three months ended September 30, 2012. We sold 26 systems for the three months ended September 30, 2012, 19 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. The international sales of our XTRAC and VTRAC systems were $2,481 for the nine months ended September 30, 2012. We sold 93 systems for the nine months ended September 30, 2012, 63 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

For the three and nine months ended September 30, 2012, LHE® brand products revenues were $743 and $3,152, respectively. These revenues are generated from the sale of mainly Mistral™, Kona™, FTD™, SpaTouch Elite™ and accessories. These devices are sold to physicians, spas and beauty salons.

Omnilux/Lumiere equipment

For the three and nine months ended September 30, 2012, Omnilux/Lumiere equipment revenues were $366 and $1,295, respectively. These revenues are generated from the sale of LED devices. The Omnilux units are sold for medical applications and the Lumičre 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 three and nine months ended September 30, 2012, surgical laser revenues were $85, representing three laser systems and $263, representing four laser systems, respectively.

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

                                              For the Three Months Ended            For the Nine Months Ended
                                                     September 30,                        September 30,
                                               2012                2011              2012               2011
North America                              $         463       $         655     $      2,600       $      1,752
International                                      1,459                 458            5,490              1,863

Total Professional Revenues                $       1,922       $       1,113     $      8,090       $      3,615

Cost of Revenues: all segments

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

                                              For the Three Months Ended             For the Nine Months Ended
                                                     September 30,                         September 30,
. . .
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