RMIPhotoMedex: Decreasing Sales, Legal Issues, And Now A Stock Promotion (PHMD)
Background
PhotoMedex (NASDAQ: PHMD) is best known for its No! No! hair removal product that is marketed on TV paid announcements. The company recently obtained LCA-Vision in May of last year, but in August, it defaulted on the debt that it used to money the purchase. PhotoMedex likewise submitted an S-3 on January 9 to register an extra 967,000 shares of common stock which will weaken current investors. Additionally, the business goes through several class-action lawsuits that allege false advertising and management misconduct, amongst other things.On January
13, the company was the subject of a series of marketing e-mails from PennyStockCircle that resulted in the stock price quickly valuing in early trading hours before the rate tapered off and really ended below the opening rate on that date.Management and Insider Ownership CEO Dr. Dolev Rafaeli and Dennis M. McGrath, President and Chief Financial Officer are both paid pretty well thinking about the business monetary position -their annual salaries are$ 495,000 and $395,000, respectively. In addition, they are both eligible for bonus offers that could almost double their salaries.The topmagnates and experts own a total amount of about 32.2 % of the business typical stock-not an extreme amount, but enough that they could see a significant benefit if the business stock were to quickly appreciate in price.Business Technique From listening to the business Q3 2014 incomes call, it feels like the business is living in the past-it is greatly dependent on TV sales to create direct-to-consumer sales, and management noted that it is highly dependentdepending on the sale of only one item. Additionally, the business has reduced spending on its advertising projectsmarketing campaign, which is most definitely going to have a negative impacteffect on sales. The business is attempting to change its business model through its purchase of LCA-Vision, however even that business has actually traditionally been a money-loser. Financials According to the companys most recent Form 10-Q, the business has $15.9 million in money and$22.6 million in receivables, but it has existing liabilities of $119.57 million, which includesthat includes $80.1 million in short-term financial obligation, which indicates that management has to act quickly in order to refinance the debt to prevent a default. Additionally, the business sales have actually been faltering as it published$ 29.5 million in sales for the quarter compared to$41.7 million for the same duration last year. The worst part is that its operations utilized$27.4 million in money compared with supplying$11.2 million in the same duration last year. Bad indications all around, however the worst part is that management doesn’t appear to be in control of the companys finances.Its never ever an excellent indication when the Qamp; An area of the business incomes call opens with the concern, So the basic concern Im going to ask is in English, provided the company where it is today, the money burn that you have, how manythe number of quarters of
money do you have?While management was able to clarify that they expect to have cash through 2015, they were not able to respond to effectively when questioned about the companys capability to refinance
its debt, stating, Im not going to get real certain. There is a process going on. We worked with an investment lender. There is a substantial level of interest that preceded our announcement the other day and an additional interest and queries as an outcome of our statement the other day. We rely upon our worked with monetary consultant to arrange through that process. We expect, as we move through the next number of months, well have more color for you as soon as the Board decideschooses which course to take.Id want to think that the President and CFO would have a bit more detail on how the business prepares to endure through the year(and beyond)however it seemslooks like they had actually not even thoughtconsidered it and attempted to press it off as somebody elses job. Beyond the instant issues on the balance sheet, management did not attempt to attend to the companys legal concerns or the default on the financial obligation that occurred in the quarter.Loan defaults As previously mentioned, the business defaulted on the terms of its term loan and revolving credit facility that were used to fund the business purchase of LCA.From the 10-Q, On May 12, 2014, the Company got in into an$85 million senior secured credit facilities(the Facilities)with JP Morgan Chase(
Chase )which included a$10 million revolving credit facility and a$75 million four-year term loan. The facilities were used to refinance the existing term financial obligation with Chase, fund the acquisition
of LCA and for working capital and other basic
corporate purposes.There are monetary covenants including a maximum leverage covenant and a minimum fixed charge covenant, which the Company has to preserve. These covenants will be determined quarterly based on a rolling previous four quarters of monetary information. Since September 30, 2014, the Business remained to fail to meet both financial covenants and is in default of the credit facilities.On August 4, 2014, the Business got a notice of default and a reservation of rights from Chase and engaged a third-party independent consultant to help the Company in working out a longer term option to the defaults. The parties had actually entered into a preliminary Forbearance Contract (the Preliminary Forbearance Agreement )on August 25, 2014. On November 4, 2014, the Company entered into
an Amended and Reiterated Forbearance Contract (the Modified Forbearance Agreement)with the loan providers that are parties to the Credit Agreement and with Chase, as Administrative Representative for the Lenders.As an outcome of the default, the business noted that it has extremelyhardly any to invest on capital expenditures for numerous of its companies, specifying, The Company agreedaccepted restrict certain capital expenditures to$ 575, other than for those including the Companys XTRAC or VTRAC medical devices, and will not make investments or get any other interests in affiliated companies except as concurredconsented to by the Lenders.This sounds especially uncomfortable-what is the point of having multiple company lines if you are not going to purchase them? The company has not discussed the possibility of divesting the businessesbusiness that it can not purchase and requires to divulge what it plans to do going forward.Legal Procedures In the Legal Proceedings section of the companys most recentnewest 10-Q, there are a number of class-action claims associated with infractions of securities laws and claims of incorrect advertising in the companys products. The area checks out in part, On April 25, 2014, a putative class action claim was filed in the United States District Court for the District of Columbia against the Companys subsidiary, Radiancy, Inc. and Dolev Rafaeli, Radiancys President. The suit was filed by Jan Mouzon and twelve other consumers living in 10 various states who bought Radiancys no!no! Hair products.
It alleges numerous offenses of state business and customer protection codes consisting of incorrect and deceptive advertising, unreasonable trade practices, and breach of express and implied guarantees. The grievance looks for certification of the putative class,
or, conversely, accreditation as subclasses of plaintiffs residing in those certain states. The complaint likewise looks for an undefined amount of financial damages, pre-and post-judgment interest and attorneys charges, expert witness charges and other costs. Dr. Rafaeli was served with the Complaint on Might 5, 2014; to date, Radiancy, has not been served.And On June 30, 2014, the Companys subsidiary, Radiancy, Inc., was served with a putative course action lawsuit submitted in the Superior Court in the State of California, County of Kern. The suit was filed by April Cantley, who purchased Radiancys no!no! Hair products. It alleges different offenses of state company and consumer protection codes consisting of false and deceptive marketing, breach of express and indicated service warranties and breach of the California Legal Remedies Act. The grievance looks for certification of the putative course, which consists of consumers in the State of California who purchased the no!no! Hair devices. The problem likewise looks for an unspecified amount of monetary damages, pre-and post-judgment interest and lawyers charges, skilled witness fees and other expenses. Radiancy and its officers mean to vigorously safeguard themselves versus this claim. Discovery has actually now commenced in this action. At this time, the quantity of any loss, or variety of loss, can not be reasonably approximated as the case has just been started and no discovery has been performed to identify the credibility of any claim or claims made by plaintiffs.Given that the business is heavily dependent on the sale of its no!no! product, any unfavorable judgment would have a major impactinfluence on sales and the financials of the company.Conclusion While PhotoMedex does not feel like a penny stock scheme, it has major issues. The business financials are in pretty rough shape as sales have slid, loans have actually been defaulted on, and losses have mounted. PhotoMedexs flagship item is the topic of course action suits and is being marketed through a dying medium. While the company is trying to enter into another line of companyindustry, its execution so far has been horrid, as it has actually defaulted on the loans that it got to purchase LCA.The business is burning through cash and management doesn’t have any satisfying answers for investors in its incomes calls. In addition, it has substantial expert ownership as its eight directors and officers
own over 30 % of the impressive common stock. The newestThe most recent stock promo seemsappears like a desperate attempt at creating some excitement about the company, but there simply is not much to be excited
about.
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