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PhotoMedex, Inc. (NASDAQ:PHMD)

Q3 2013 Results Earnings Call

November 6, 2013 11:00 AM ET

Executives

Kim Golodetz - LHA, IR

Dr. Dolev Rafaeli - Chief Executive Officer

Dennis McGrath - President and CFO

Analysts

Hamed Khorsand - BWS Financial

Bill Plovanic - Canaccord

Anthony Vendetti - Maxim Group

Jim Sidoti - Sidoti & Company

Kay MacKay - Sindiant

John Curti - Singular Research

Bob Clutterbuck - Clutterbuck Capital Management

Operator

Please standby, we are about to begin. Good day, everyone. Welcome to the PhotoMedex Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Senior Vice President of LHA, Ms. Kim Sutton Golodetz. Please go ahead.

Kim Golodetz

Thank you, Operator. This is Kim Golodetz with LHA. Thank you all for participating in today’s call. Joining me this morning from PhotoMedex are Dr. Dolev Rafaeli, Chief Executive Officer; and Dennis McGrath, President and Chief Financial Officer.

Earlier today PhotoMedex announced financial results for the third quarter of 2013. If you have not received this news release or if you would like to be added to the company’s distribution list, please call LHA in New York at 212-838-3777 and speak with Carolyn Curran.

Before we begin, I would like to caution that comments made during this conference call by management will contain forward-looking statements that involve risks and uncertainties regarding the operations and future results of PhotoMedex.

I encourage you to review the company’s filings with the Securities and Exchange Commission, including without limitation, the company’s Forms S3, S4, 10-Qs and 10-Ks, which can be accessed in the Investor section of the company’s website at photomedex.com.

These reports identify specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live webcast, November 6, 2013. PhotoMedex undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call.

With that, I will turn the call over to Dr. Dolev Rafaeli.

Dr. Dolev Rafaeli

Thank you, Kim. Welcome to our third quarter 2013 earnings call. My name is Dolev Rafaeli. I’m the CEO of PhotoMedex. Joining me today is Dennis McGrath, President and CFO.

Due to the nature of the quarterly results, our prepared remarks will be brief and presented by Dennis to allow adequate time afterwards to satisfactorily answer the detailed questions which we have got. Dennis, please?

Dennis McGrath

Thanks, Dolev. Difference in our quarterly results compared with our expectations both revenue and profits can largely be defined by what happened in Japan -- incurred in last years’ third quarter will take place this year in the fourth quarter.

Last year’s event, we sold a record number of no!no! products and we are looking forward to similarly strong reception December, when we offer the no!no! Pro which is a much higher average selling price versus the no!no! 8800 we sold last year.

Had the revenue contributions from these two events remained at the second quarter levels or even last year for that matter, third quarter revenues would have been approximately $13 million higher.

This is I can tell you about Japan from Dolev’s trip there during September and the ongoing discussions with our distributor. Our business there is largely retail store based and is directed by our distributor in Japan.

Japan is a multi-layered market, which means the normal supply chain distribution channel moves product from the manufacturer or us in this case through the distributor, Ya-Man in our case and then through an additional layer of distribution before arriving at retail processes. So the process is manufacturer, wholesaler, to distributors, to retail, to consumer.

Recent market survey data tells us that the no!no! continues to move off the retail shelves at the similar rate the last year and it was still market leader. Ya-Man recently eliminated the additional distributor layer between them and retailer for reasons which are not entirely clear to us.

This move affects not just our line of products but most of the lines Ya-Man represents. As part of this transition in this -- in their business model, the distributor intentionally lowered its inventory level to mitigate its investment risk during this transition. Consequently, we do not rely $10 million in all shipments we expected for the quarter.

Japan as a market tends to keep higher inventory levels in its pipeline. Hence we are not currently at risk for stock out on retailer shelves. So also explains why we are able to maintain our market share at the consumer level.

We are still legally on the contract with Ya-Man, so I cannot comment beyond what I've already said. We are taking all the necessary steps, evaluating all likely alternatives to timely resolve this situation in our favor at the level be with them again next week.

This example is one of the primary reasons we prefer to be in control of our own distribution where possible by selling direct in the countries we operate. It illustrates why we took the extra step to acquire own distribution resources in Brazil.

The rest of our P&L is in line with what you would expect. We are delighted about the upcoming HSN today special in December which will feature the no!no! Pro series for the first time. As promised, we launched in Brazil with initial shipment to three retailers at the end of September, last week media began running there in a very limited launch.

Germany is making progress. We continue to believe that Germany can deliver at least as good if not better results than our U.K. experience, you will remember that the U.K. went from $4 million -- from a $4 million mark in 2011 to $120 million plus mark in 2012 and continues to grow to date.

We continue to push the enveloped by our NEOVA consumer sales program, which resulted in a 31% sequential increase in revenues. Our XTRAC recurring revenue program continues to move forward at record rates.

Treatments nearly doubled since last year, the installed base continue to increase and the predictability of our media campaign continues to take shape converting an ever-growing number of generated leads into new patients as high as 87% in some markets.

We expect revenues for the fourth quarter to be more than $55 million without factoring in any contribution from Japan. Since the beginning of the year, we have generated EBITDA of $26.5 million and together with $13 million of cash, we have repurchased $19 million of our common stock, including more than $13 million this past quarter, reduced our liabilities by $7 million, increased our investment and income producing XTRAC’s in the U.S. market by nearly $5 million.

We are focused on doing better in all three of those areas in the upcoming quarter and next year by continuing our stock repurchases as we continue to believe our stock is a very cheap priced and further reducing our liabilities and continuing to invest in the XTRAC.

Some more detail on the consumer are, the consumer margin is up 200 basis points over last year for two reasons, a product mix favoring direct revenues, first, distributor revenues and an increasing contribution from the no!no! Pro series, which has a higher ASP.

The MER for the North American market was 3.01 for the quarter and it is noteworthy to highlight that the meaning of this number in absolute terms will likely be less comparative as we transition the product mix to more of the no!no! Pro series.

MERs are expected to be slightly lower at the outset of the no!no! Pro series campaign, but with a higher ASP that the Pro commence, the result is a greater contribution to the bottom line.

XTRAC, placement for the quarter were 34. U.S. recurring revenue installed base now equals 480 installed units. Recurring revenue increased 93% year-over-year and increased 18%, sequentially, after adjusting for the deferred revenues and are on track for more than 20% sequential increase for the fourth quarter.

We spent 515,000 in XTRAC media for the quarter, which is in line with last quarter. The current cost per lead is $104 which is lower than last quarter of $117. We told you -- we last told you in May, we move most of our XTRAC advertising to national cable TV. We continue to optimize the media campaign as more and more predictability is derived from these efforts.

Our best performing areas are New York City followed by the four major cities in Texas, followed by Los Angeles. During the quarter we added local advertising in New York City, where our conversion rate is the highest from lead to revenue generating patient. We are adding to these initiatives with local advertising in the four major cities in Texas.

NEOVA, NEOVA consumer campaign continues to deliver result with a 31% sequential increase in revenues. The key stat here remains that more than 30% of the buyers of no!no! at our call centers are purchasing NEOVA products, which is a very efficient use of our marketing funds.

The success of our XTRAC and NEOVA campaigns are evidence in the 44% annual increase in physician recurring revenues, which drove the gross margin in that business segment from 45% last year to 55% this year.

Our operating expenses, you can tell from the press release and from our filings, total operating expenses of $37.7 million are almost an exact duplicate of last quarter’s $37.5 million.

The balance sheet, earlier I provided you the balance sheet comparisons since the beginning of the year. The following are the sequential changes.

The 846,924 shares purchased in the quarter an amount of $13.6 million more than offset the change in cash. Receivables decreased by $7 million for the reasons we cited last quarter. Hence the collection of the Japan let our credit and the HSN account receivable that were outstanding at June 30th.

Inventory increased by $5 million for two primary reasons, buildup of inventory in our California XTRAC plant due to increasing worldwide demand and increasing amount of no!no! Pro series for both the HSN Beauty event in December and worldwide transition to the Pro from the 8800. Liabilities in the quarter decreased by $721,000.

Our quarterly report and Form 10-Q will be filed with the SEC on Friday, November 8th and next earnings call is schedule for March 13th.

With that, Operator, please open the lines for questions from our audience.

Questions-and-Answer Session

Operator

Thank you very much. (Operator Instructions) We’ll take our first question from Hamed Khorsand with BWS Financial.

Dr. Dolev Rafaeli

Good morning, Hamed.

Hamed Khorsand - BWS Financial

Let’s start off with, we had a earnings call back in August, right. So we are in the middle of the quarter, you guys were guiding flat, which means around $58 million revenue and so, but, you guys didn’t know Japan wasn’t placing any orders?

Dr. Dolev Rafaeli

Japan places an order ones a quarter and up until really the end of the quarter we expect that order to come in. So, you are right, the August 7th call at that point in time, we expected that revenue. Quit frankly, thought, we might get that order all the way up through the end of the quarter, was really towards that the second half of September, where there were issues that certainly surfaced and we needed to start dealing with that.

Hamed Khorsand - BWS Financial

Okay. And then you’re saying $10 million delta but where is the other $3 million, if I’m trying to get $58 million. There is one other. And Dolev you may want to comment on HSN entail that change and why?

Dr. Dolev Rafaeli

Great. So originally, we had the HSN events scheduled in November as it was last year. And it was with the 8800. In order to allow HSN to do a launch with no!no! pro because of our lack of inventory, we had to push this out to December. HSN wanted to launch the pro.

HSN wanted to continue taking advantage of the success of the 8800 until that stage. So the pro launch event which is going to happen in today’s special event is going to happen in December. And until then, we’re selling 8800 with the HSN since the -- our HSN business is majorly driven in volume and revenue by these events.

The shift of that event from November to December shifts our selling into HSN which if the event was in November, it would have been in October. And if the event is in December, it’s going to happen in the fourth quarter.

Hamed Khorsand - BWS Financial

Okay. So what kind of ASP, are you expecting? Is this increasing that you are expecting sales to go back to $55 million without Japan?

Dennis McGrath

Well, you have the HSN event, you have the increase with the XTRAC, then continuing increase in NEOVA. You’ve got Brazil kicking in. Brazil was $93,000 in the third quarter, all of those factors contribute to the guidance we provided.

Hamed Khorsand - BWS Financial

All right. Two more questions, if I may, one is, I mean, it seems like you guys are running into trouble with Japan distribution revenue issue, why did you keep buying stock and when did you actually stop buying stock?

Dennis McGrath

Stock repurchase program goes into the blackout period which is two weeks before the end of the quarter. And so we bought under the normal circumstances that we've been executing the repurchase program through, I think September 16 was the date. And that was before last two weeks of the quarter where Japan became an issue.

Hamed Khorsand - BWS Financial

So you guys weren’t able to actually hold it at all until the Japan issue was resolved?

Dennis McGrath

I’m not sure.

Hamed Khorsand - BWS Financial

Because obviously, you would know that your stocks are going to get hit. So why buy back the stock at a higher price point?

Dennis McGrath

Even at the price point, that we’re buying at, we thought price was inexpensive at that point. And we did stop buying on September 16. I haven’t bought any stock since that point in time. So sequentially you completed the buyback during that timeframe on September 16 and then Japan became an issue where we weren’t going to get that order. So I had that the flexibility to your point buying it at a price point lower than 16 to 16, if I had that crystal ball to see that we clearly would have done that.

Hamed Khorsand - BWS Financial

And last question for you guys, I see Radiancy as a new product but you guys hadn’t really commented on anything on it? What is it and what is the real rollout or has it rolled out given that I can find it on the Internet?

Dr. Dolev Rafaeli

Hamed, this is Dolev. As you know, we’ve been tracking this for a long time. We do not comment on things until we have results because of the nature of the rollout of the new products. We tend to do this after we have initial results. For those that did not notice what you just mentioned, we provided a peek preview to some consumers of a new category.

I was mentioning this briefly in some of the earlier conference call saying that we are in development of new products. Specifically, you're talking about a product called Kyrobak, which is targeted at alleviating back pains. It's been in development for the last 3.5 years. We've taken it through extensive clinical studies and we have started releasing marketing materials to the markets to see initial response as with any other thing we do, it’s going to be a slow, very calculated release of advertisement to see the response, to see the messaging.

The first market is going to be the U.S. The website was just revealed two days ago to a very small number of people. Actually I’m surprised that you mentioned it and we start to see excited response but I can’t comment beyond that on the business. It follows the same guidelines that we have with everything else we do. The product is efficacious.

We have great clinical results. The product has patents. We've registered the patent. The product is registered with the FDA. If somebody wants to go on the FDA registry, you'll see this under -- Radiancy was actually registered over a year ago and so that’s the -- that’s on the regulatory -- on the clinical side.

On the cost of good side, it follows the same -- the same guidelines we always have. It has higher than 10x multiple between cost of goods and the ASP we expect. And there is a huge market. There is over 40 million American suffering from back pain, lower back pain at any given day and we’re in a very unpopulated market because the two at home extreme alternatives would be these the upside down stretch beds on the one side and massaging units on the other side.

On the other extreme, we believe it’s going to be a huge growth potential. The actual technology comes from Radiancy. It comes from our patent portfolio. You can monitor this as well. So when I was talking about the previous earning scores about things are coming out of our own portfolio, this is one of the things I was relating to. I hope I answered the question.

Hamed Khorsand - BWS Financial

Yes. Thank you.

Dr. Dolev Rafaeli

Beyond that, you can go on two websites, one of them is kyrobak.com, which describes product and then gives a glimpse into the advertisement. And the one is howtokyro.com, which is the customer service website which explains how to use it and then supports the consumers. We’ve built up sufficient inventory in the U.S. to be able to launch and media is going to rollout between now and the end of the year. It’s not going to be -- it's going to be in very controlled measures to see the response, to see the -- that the marketing message isn’t to see the response from consumers.

Hamed Khorsand - BWS Financial

Okay. Great. Thanks.

Dennis McGrath

Thanks.

Operator

We’ll take our next question from Bill Plovanic from Canaccord.

Dennis McGrath

Good morning, Bill.

Bill Plovanic - Canaccord

Good morning. Couple of questions, more clarity on the Japan. I think you talked about no revenues Q3, no revenues Q4. How much inventory sitting in the channel and when do you expect Japan to turn back on?

Dr. Dolev Rafaeli

I’ll try to answer the first half of your question. The inventory in Japan sits in three levels. It’s in the hands of Ya-Man and as of the beginning of September, they had about 160,000 units which is roughly three turns to their annual volume. And it’s the usual level of inventory they carry. There is an additional layer of inventory that sits with the hands of the master distributor in Japan into retail.

We don't -- we don't have insight into that. And they -- since Ya-Man made the change, have been probably cutting back on their inventory levels and then the third level of inventory is with the retailers. This is -- so the inventory level as of the beginning of September when I was there was, what we expected to see.

We -- what we expect to see moving forward is our ability to, a, work with Ya-Man in a different format where they worked directly with retail. We haven't seen that executed yet. It's not only us if everything they sell. And the -- our ability to either help them or create an alternate channel to -- drives the other consumer channels which is TV and direct to consumer and catalogs and so on in Japan.

As Dennis mentioned before in his comments, it’s early in the process of discussions with them. Same as us, they are public company, so there is something that they tell us and some things they don’t. There is enough inventory to carry them through the end of the year and the season for launching of new products which is something that happens in Japan, has happened in Japan every year since 2008, when we launched is in golden week, which means that in Q1 these things must go in, in order to have newness in the market.

This has happened every year in the last five years and we look forward for it to happen again this year. I’m going to be there again at the beginning of next week, actually this weekend and we work with them very closely to see how we overcome this change of strategy that they have.

Bill Plovanic - Canaccord

So what you're saying is, I mean, they have four months at Ya-Man at the end of September. You don’t know how much is sitting in the master distributor channel and the retail level is as expected. I don't know what that means is that a month, six months a year, I don’t understand?

Dr. Dolev Rafaeli

I don’t know. I don’t have an answer to your question as to how much sits in the retailers or the master distributor. What I do know is when I was there last six weeks ago, the numbers that we had from GSK which is the market monitoring company, the market research company that controls the scanning of products at the cash register shows that we are still the number one in the market leading over Panasonic and the other players in the market but the biggest player is Panasonic.

With close to 50% of the market share growth, both in number of units as well as in dollars and we know that the market has not slowed down because we get a picture of the whole market. How much exact inventory fits in, in the other layers of the market, we don’t know.

Dennis McGrath

It’s harder to know as we mentioned earlier where we don't have control the distribution to know specifically the answers to those questions, Bill.

Bill Plovanic - Canaccord

Right. And then what you are inferring is with the golden week that they are going to have to launch new products, so they are probably going after rebuilding Q1, if you continue to work with Ya-Man.

Dennis McGrath

There's pressure on them to resolve this situation in our favor, because otherwise given that timeline to new products being launched and other products they want from us to launch in that market, they are going to have to resolve this in our favor or otherwise we will be looking for alternatives.

Bill Plovanic - Canaccord

Okay. And then if I could move on to the MER. I don't understand why the MER would go down if you have a higher price point. I understand you're going to spend extra money, but if you have a higher price point, then your MER should go up.

Dr. Dolev Rafaeli

There is two things at work here in terms of the contribution. The newness of the campaign means we are spending more money in no!no! pro advertisement and the launch with any new product or series of product. The campaign usually is led by the results and therefore you're spending more media than your immediate results. So where we're typically going to get, they are three or more in response gross revenue. You might get something less than that at the outset until that program normalizes.

But if anything where you might get a lower MER, because of the newness of that campaign is offset by the fact that you're getting higher ASPs. So the net contribution is higher. So as it works through the P&L, the higher ASP will give you a higher gross margin but you might see some higher marketing costs related to that, net-net, the contribution to the bottom line.

So where you have been accustomed to seeing a three MER, see in the gross margins at 85% in the consumer area and a relationship between net recognized sales and the marketing costs in our P&L. What you are going to see is somewhat of the peak you see in this current quarter. You see the consumer margin going up to 87 unchanged and you see a little bit higher increase in the marketing expense and that’s largely related to the newness of this campaign in this last quarter. That makes sense?

Bill Plovanic - Canaccord

It does. I think what you are trying to get at, at least what I’m taking away is that the operating -- the gross margin return is equivalent. It’s just on the revenues not as high.

Dr. Dolev Rafaeli

Yeah. So if see the MER go from 3.01 to 2.95 in a given week, but I’m making that up on the ASP such that my gross margin, my recognize revenue minus my cost of goods sold makes up for that higher marketing costs to drive that pro-sale at the outset. I’m going to be less concerned about that. My point in the comment I made in my prepared remarks is if you do see a 3.01 go to 2.95, that’s not a bellwether of a deteriorating market. It just is an indication of the transition and, therefore, higher leveraged profitability when the MER does go back up over 3 for the pro series. And just conditioning the educational level, what the MER represents in terms of the overall program, knowing that we are getting substantially higher price on the pro series.

Bill Plovanic - Canaccord

Okay. Last question then I'll jump back, Dennis. On the XTRAC, you are getting some momentum, but when do we see a significant ramp in this business with all the spending you have been starting to put behind in the campaign? Do you have the campaigns fully tweaked and does this really start to massive ramp as we get into next year sometime? And that’s it. Thank you.

Dennis McGrath

There are two comments. We don't have a tweak to the point of a predictability that we have in the no!no! campaign. However, substantial progress has been made there and a whole lot more predictability to where we understand the relationship of media spend to lead to conversion into a revenue generating patient. There are some improvements we can make there, particularly on the conversion level as our sales people continue to educate the physicians that conversion.

From a macro perspective, last year revenue of $8 million we are going to exit this year. I will give you a wide range. $15 million to $20 million more than doubled last year and given the size of the opportunity I'm not going to say that we are going to double next year but the opportunity we are looking at our sales people, we are working towards a substantial increase next year. And you will start to see a good peak of that in fourth quarter. As we indicated in my prepared remarks, 20% increase over what we did -- more than 20% increase of what we did in the third quarter put you over $5 million in the fourth quarter.

Dr. Dolev Rafaeli

Which translates to over $20 million next year, which is 4 times or 3.5 times of what we did last year. Now, let me hit on to this. Bill, this is Dolev. As Dennis mentioned in the prepared remarks, we find the performance of different markets to be different. New York City is the best performing market. Thus, we took the number of franchisees or clinics in the New York City media market from about 10, 2 years ago to about 50 today. We see the Texas market as being second in line just in terms of conversion from a lead to a patient in practiced, to a patient being treated, to money generated. And thus, we focus on increasing the media and the number of franchisees in the Texas market. And then we see the L.A. and then Orange County markets as being number three and then it goes on, it covers the whole country. We were present in the whole country and the media campaign that we have now, even though you call it significant is about $500,000 per quarter where it was zero six quarters ago and it was about $500,000 last quarter.

In order to increase it significantly, we need to be able to have the same penetration rate as we have in New York. So if you think of New York City as the right penetration rate in New York City, we have five franchises per million. So it takes us to kind of a right now target of 1,500 or 1,700 across the country. We are right now at 480, so there is three times the growth in number of franchises just to reach the penetration rate we have in New York City which is very, very effective and efficient right now. It has a lot to do with the way we work with the physicians. It has a lot to do with the way they convert in the clinics. It doesn't have anything to do with the actual geographic demographics because New York City and Texas and L.A. are three different demographics and geographies.

It's not as easy to get to a clinic in San Antonio as it is in New York City, where we have a franchisee every 10 blocks. The number of treatments almost doubled 93% year-over-year, which shows us that there is an efficiency squeeze that we can get from this clinic. We see this happening every week. As Dennis said, we are on track for over 20% growth in the fourth quarter, which means we are going to be more efficient by at least 20% in the coming quarter. And as I explained in the previous earnings scores, it's a three factor formula. How many franchises we have? This keeps growing and it grows in a 30 to 50 new placements -- new net placements every quarter.

Each one of them when they start, when they hit the floor -- the ground running, they have to be as fast as the average in order not to take the average down. So every quarter the starting revenue that we need to get from a new placement has to be higher than the previous quarter. So the second part of the equation is the efficiency and we make sure that every new placement has a higher starting point than the previous quarter and the average goes up by at least 20% and then the pricing.

And just as a reminder, we raised the amount of money we share in that process. We raised that back in March of this year and that took effect. So we see 2013 being in the wide range that Dennis mentioned, roughly doubled what we did in 2012. And if we at least replicate the fourth quarter of this year, then 2014 is going to be doubling of 2013.

Bill Plovanic - Canaccord

Great. Thank you.

Dr. Dolev Rafaeli

Thanks, Bill.

Operator

We’ll take our next question from Anthony Vendetti with Maxim Group.

Dr. Dolev Rafaeli

Good morning, Anthony.

Anthony Vendetti - Maxim Group

Good morning, guys. Just on the Ya-Man strategy that changed, what specifically have they or did they decide to do on September 16th around that time that's turning this whole distributor relationship in flux?

Dennis McGrath

So, I’m going to be careful here in the description.

Anthony Vendetti - Maxim Group

Sure.

Dennis McGrath

From what we understand, for reasons we don't understand. They cut out a layer of distribution. So, I was very deliberate in outlining what that supply chain looks like from us to retailer to consumer. It involves Ya-Man and a middle layer. They consciously or intentionally develop the strategy, whether it was to improve their profitability or a negotiation that went sideways, we are not really sure. That middle layer got cutout with an intent to go direct to the retailer. And based upon that, they -- I guess there was some level of uncertainty, how successful they would be in that transition and it affected not only us but other manufacturers they represent.

And surprised us that the order that we were expecting, normal quarterly order, particularly how Japan works was going to be delayed based upon their intention to understand how effective those change in strategy was going to develop. So they kind of layered out and the implications to us, as we found out in the latter part of September was that an order that’s going to be delayed, obviously that has implications to us from a legal, contractual standpoint, we are trying to resolve this. So, I’m trying to work what we can range up on the contract.

Anthony Vendetti - Maxim Group

And then on Brazil, you launched into three retailers at the end of September. Can you give us an idea, how that is going and what’s your initial reaction to that launch?

Dennis McGrath

It’s too early to tell, to be fair about it. As you know during the quarter -- just falling back to our last quarterly conference call, we said we were preparing the launch. We expected the launch by either the end of the quarter or the beginning of the fourth quarter. Shipments went out in the last couple days of September. We’ve got three retailers that we’ve talked about. We had a launch party with them in Brazil, sometime in September was probably right after the Asia trip.

And we’ve contracted with some media and got it started, rolling to the end of last week, it’s too early to tell and how that’s going. There is nothing that we’ve learned either in our discussion with the retailers or the direct campaign or the media that we bought or the commercials or the advertising that we’ve shot and develop, the changes are optimism about that market for us.

Anthony Vendetti - Maxim Group

Okay. And then your fourth quarter guidance of $55 million revenues, does that include some expected revenues from Brazil or what Brazil at this point be outside?

Dennis McGrath

There is a nominal amount from Brazil, baked into that but to be fair about this, you just go in past history of how we very deliberately launched a program. The meaningful revenues are going to be 2014 in Brazil. This is a learning period for us and like every other market, we are cautiously optimistic. We delivered about how much media we’re going to spend. We’ll continue to tweak it.

If we hit a home run right out of the gate, it would surprise us. It would be a nice surprise, but given our experience in every other market, there will be some tweaking to the advertising, there will be some tweaking to the distribution and October, November and December will be part of that 2014, certainly shaping up based upon the knowledge to being very favorable market for us.

Anthony Vendetti - Maxim Group

Okay. And then just two last questions, on the cash flow statement where you have the $18.9 million option exercises, is that all the repurchasing that you guys mentioned. Does that all refer repurchasing of shares?

Dennis McGrath

Yes. That’s the repurchasing of the shares. Now there is one portion that shows up in another section but it’s a small portion from par value.

Anthony Vendetti - Maxim Group

Okay. And last question for maybe Dolev on this. You mentioned the HSN shifting that 24 hour especially you’re waiting until December for the launch of pro series that make sense versus third quarter of ’12. But Dolev, you mentioned that it was October, may be November or October of last year or if it wasn’t the third quarter of last year and you were mentioning you were planning on doing it in October, November this year, that’s still the fourth quarter.

So my question is, is that $3 million delta is from HSN. Was that expected to not be in the third quarter regardless because even if it's been push to December, it will still not going to make it in third quarter, if it was October or November any way.

Dennis McGrath

The event in 2012, I think as you reference point, the event that was right around the hurricane Sandy week, so at the end of October, beginning of November. The shipments would have gone in the third quarter in the tail end of September in advance of that. So, you shifted back a month and you back up 30 days. Shipments will go in, in October for -- in November for the -- early part of November for the December event. So there's a delivery timeline that you’re missing in the analogy.

Anthony Vendetti - Maxim Group

I see, okay. So if it was earlier, in order to prep for that event, you would have probably shipped those units in September and therefore it would have made the third quarter?

Dennis McGrath

Yes. The shipments don’t go in, the week before the event. They require to be in substantial before them and that’s the (inaudible) in one quarter versus next.

Anthony Vendetti - Maxim Group

Okay. All right. Thanks.

Dennis McGrath

Thanks Anthony.

Operator

We will take our next question from Jim Sidoti with Sidoti & Company.

Dennis McGrath

Good morning Jim.

Jim Sidoti - Sidoti & Company

Good morning. Can you hear me?

Dennis McGrath

Yes.

Dr. Dolev Rafaeli

Yes.

Jim Sidoti - Sidoti & Company

Great. First one, with the Ya-Man contract, can you tell me when that expires?

Dennis McGrath

We just renewed that contract in December 30 of this past year that requires fourth for two years and requires roughly 300,000 units per year. So it’s got another year to run, year plus to run on this.

Jim Sidoti - Sidoti & Company

Okay. But obviously they aren’t.

Dennis McGrath

There is provisions in that and it give us flexibility based upon performance. There is performance clauses in any one of our distribution agreements.

Jim Sidoti - Sidoti & Company

And should you opt to go a different way. Are there distributors that you’re in contact with or could you go to some of these dealers -- or I mean, have you investigated those options?

Dr. Dolev Rafaeli

Jim, this is Dolev. Obviously I’m not going to discuss over an earnings call, what our next step is, specifically when I’m going to be there at the end of this week. But yes we know the other distribution companies in Japan. We’ve known them for years and there are different options we look at whether to keep with Ya-Man and make sure they perform either by getting better assurances that they do perform or by us helping them that they better perform, alternatively switching to a different distribution partner or alternatively changing the way we operate in Japanese market.

The Japanese market is very important for us. As a beauty market, it’s the number two market in size in the world, kind of, side by side with Brazil in size of market. We’ve been leading this market in the hair removal segment for the last five years. And it's not something that we would like to abandon and leave behind us.

The fact of the matter is where we have our own operations, we control the situation better, where we don’t, we do not control the situation as good as we do when we have it. Japan poses us with a challenge. It’s not only a complicated market by itself, but it’s also a different language and different culture. But we believe we know the right players and we will make the right decision to continue enjoying the size of this market.

We believe that the position we have in the market in terms of market leader. And the revenue and the margin we generate for all the parties are participating in this business is important for all these parties are enough for them to make the effort whether they are right now engaged with us or potentially they would like to be engaged with us.

Jim Sidoti - Sidoti & Company

And I can assume they are not running at that 300,000 unit rate right now. So either they will have to change their order pattern or you’ll have to exercise some of these options?

Dr. Dolev Rafaeli

They are not -- could you please explain what you mean by they do not run by 300,000, the market still runs at the same clip rate, it was running last year. Our market share in the market is roughly the same as it was last year. When I say last year, I mean 2012. Ya-Man’s sales into the market go through a filter, so Ya-Man is a public company and as a public company they advertise their own results but their sales are into a master distributor and that master distributor sells into retail.

We measure two -- we have two measurement points, one is how much we sell into Ya-Man and the other is how much is sold to the end consumer. We don’t measure the two interacting businesses, Ya-Man to the master distributor and that master distributor into retail. We just measure the beginning of the pipeline and the end of the pipeline.

Dennis McGrath

So the demand is still there for the product and our distributor has not bought in a quantity that would satisfy the minimum requirements of some of the contract and that one of the points that has to be resolved in the upcoming meeting.

Jim Sidoti - Sidoti & Company

Okay.

Dr. Dolev Rafaeli

One more comment, one more comment regarding to that. In every market we operate, we make sure that the inventory on the shelf is on the one hand sufficient but there is not too much inventories, if you run into a situation with someone it can play against us. This is why when we work with HSN, we deliver what they need but we don't over-deliver, we don’t increase their inventory reliability levels. This is why we work with them and we make sure that they sell and take advantage of the 8800 until the end of November and only then we launch the Pro which is planned according to them to be a very significant launch.

And we could not pull the Pro launch with HSN earlier because we did not have inventory. We were building that inventory through the third quarter this year.

Jim Sidoti - Sidoti & Company

So the inventory that’s in Japan today is the 8800, is that correct?

Dennis McGrath

Its mostly 8800. There’s a very small level of Pro that we delivered towards the Golden week of this year. And there is insignificant levels of inventory of previous generations in Japan. The Ya-Man itself is working with multiple channels and each one of them gets -- each different channel gets a different kind of product. We have about 20 different products on sale in Japan at any given time but just in broad categorizing.

The new Pro was launched on the high-end prestige retail, it did not trickle down yet to mess retail in Japan and the 8800 is a mess retail and previous generations are in other channels such as catalog and TV home shopping, QVC in Japan.

Jim Sidoti - Sidoti & Company

All right. And then a final question, could you just remind me in Germany, your distribution strategy, are you direct there or is there a distributor as well?

Dr. Dolev Rafaeli

We are direct in Germany. This was not similar to Japan but this was our attempt for until the beginning of 2013 to work through distribution in Japan, where they would not take the risk and they had very mild success. We changed this over to a direct mode where we advertise, we sell directly to consumers, we sell directly to the retailers and we build the market ourselves. This has been going on since the beginning of this year.

Jim Sidoti - Sidoti & Company

Okay. So because you’re directing Germany and Brazil, you don’t anticipate these type of issues that crop up in 2014 there.

Dr. Dolev Rafaeli

Correct.

Jim Sidoti - Sidoti & Company

Okay. Thank you.

Dennis McGrath

Thanks Jim.

Operator

We’ll take our next question from Kay MacKay from the Sindiant.

Dennis McGrath

Hey, good morning.

Kay MacKay - Sindiant

Thank you. A couple of questions first, back to Ya-Man, what is their capability to sell directly to the retailers instead of going through the master distributor?

Dr. Dolev Rafaeli

Ya-Man has been in business for 36 years, it’s a public company. Their sales are -- their fiscal year sales which ended in May is 19.4 billion yen which translates to about $194 million a year and that is mostly through distribution, partially through direct-to-consumer, partially through channel that they sell directly.

They believe they can turn this around and work directly with the retailers. I’m not 100% convinced until I see them actually selling to the same retail groups that they have been selling before that we know that they have the relationships. We’ve been in meetings with them and the retailers. So we know that they have the relationships. We need to see this happening.

As I mentioned before, there is too much revenue and margin to aspire for in this market for anybody to give it up. Out of the $194 million -- roughly $194 million of sales that Ya-Man does, we represent roughly 30%, and on average we run the same for them. We run the same margin as everything else they do. And their philosophy of going direct is not fully understandable by us, because you wouldn't change something that has been working for many years. If there’s not a good enough reason but this was their decision and they have done this across the board.

Dennis McGrath

And we don’t believe it was driven by our product lines, but their overall representation of bunch of manufactures, so it was a shift in their strategy?

Kay MacKay - Sindiant

I mean I understand that I just -- I mean there is a reason that match distributor layer exists. Just moving on to Germany, can you give us a sense of what level of sales you’ve accomplished thus far this year?

Dennis McGrath

Yeah. So, first quarter of the sales were -- which we launched in March were a couple of 100,000 and last two quarters roughly a $1 million. So that's why I’ve made the comment on my prepared remarks that the U.K. first year was $4 million plus and then grew to $20 million. I think it’s a common knowledge for our bar expectation of the markets that we think that Germany will emulate if not better than what we've accomplished in the U.K.

But we are in that kind of deliberate phase of optimizing the media, making sure our returns are what we would expect, tweaking the messaging, buying the advertising that we can in the unique features of Germany. So, we are on the right trajectory but against our expectations and we’ll turn that force when we think it's appropriate similar to what our best experience in other countries are. So, Germany is kind of living up to our expectations and we have high expectations going forward for Germany.

Kay MacKay - Sindiant

Yeah. Thanks for that. In Brazil, you talked about the initial launch involving three retailers but are you also going to be selling, not just advertising direct-to-consumer but also selling direct-to-consumers in Brazil?

Dr. Dolev Rafaeli

Yeah. We -- in Brazil, we are using two-level approach. We advertise on TV. That advertisement contains a phone number and a website if you wish where people can order on the phone and through the web. And in addition, it advertises the retailers we choose three leading retailers in Brazil, actually in São Paulo. And we expect to have a few hundred stores selling the products that we launched in store and on their online sites this quarter.

The two-level approach is we are going to sell. We're selling directly and by that subsidizing the advertising. And the advertising is going to push retailers in addition to that we are going to have as we have in the other markets that we can’t control directly. We are going to have our own kiosks or pop-up shops. The people call them different names.

The first two are going to come up in malls where there is a major traffic and that's going to happen during this quarter, leading up to Christmas. Again, this is not aimed at increasing the topline but it's aimed at through subsidizing the expense and creating the exposure to the people, allowing them hands-on experience, allowing them to see what it does. It has worked for us very favorably in markets like Canada, where we do this.

It has worked for us very favorably in other markets in South America such as Argentina and the whole purpose is you see us on TV, you see us when you walked down the center aisle in the mall. You see us in the stores and you will end up opting to buy. The approach is to expand the number of retailers as we move along. We need to be able to support them, both with marketing and there’s a demand for them to be tagged on the marketing, which we are not doing because if we tag one we have to tag them all and there is a demand for them to support them with on the ground, demonstration people which we do. And this is why we move slowly at deployment. It’s very similar to what we’ve done in all the other markets we control directly.

Kay MacKay - Sindiant

Thanks. Few more questions. First, Bed, Bath & Beyond, how is that looking at this point?

Dennis McGrath

Two comments to be made there. The Bed, Bath & Beyond is performing as expected. We also have healthy customer growth in the $5 million range. I will let Dolev talk about transition of the product offering.

Dr. Dolev Rafaeli

Bed Bath & Beyond is going to transition into once -- once Pro is 100% in direct-to-consumer, Bed Bath & Beyond is going to transition from offering only one product which is the no!no! Plus to offering two products which is the no!no! Plus and the 8800.

So in essence, the consumer would have access to three different product families in the market. The pro is going to be advertised on our channels and that’s going to be the main TV advertisements. And the 8800 and Plus are going to be the ones sold through retail, mostly Bed Bath & Beyond but other retailers. There’s some other retailers coming on board and we will announce this when you actually -- when you can actually see the products on the shelf.

The purpose of this is to expand both as something that we want, as a something as they want. They want to expand our shelf presence in the store. Up until now, there's only two products in Bed Bath & Beyond offered by us, two colors of the no!no! Plus, that’s going to be expanded with a few more products coming up towards the end of December once we launch the 8800 with them. And it’s going to be expanded further in the beginning of 2014 with other products on the show.

Kay MacKay - Sindiant

Okay. And then a final question. New product lines under the no!no! name, I mean you talked about the bath team product. But as far as product extension of a no!no! name that are different than hair removal like the skin, can you talk about were those would add?

Dennis McGrath

Sure. So, I’ll take one example and expand on it, but I’ll give you a hint to where to look for other things. So if you were to go on our website today you will see that there is a product called no!no! Glow. It's an FDA cleared device for treatment of dermatological purposes. It is mostly targeting skin rejuvenation or wrinkles and the surface of the skin. It was launched about three months ago in the market. It is launched on the backend of no!no! So we take advantage of the no!no! Hair advertisement and is being up sold to consumers. We are testing different marketing messages with the product. But I’ll speak briefly about the product. The product no!no! Glow is a miniaturized version of the LHE technology, which has been sold by Radiancy for the last 13 years to physician clinics.

The technology itself is patented. It uses a wide spectrum light and heat combination to treat dermatological conditions and I'm being very specific to the FDA clearances for treatment of dermatological conditions. The marketing messages are very specific. We show what are the before and after benefits of using it. We combine both LHE, which is a combination of -- call it IPL and heat and a cooling mechanism. Both of these are or the combination is patented. It went through the vigorous examination of the FDA.

One, it went through patent submission. Two, it went through clinical studies. Three, it has the right cost of goods to ASP. Four, it actually has more than 10 to 1 ratio between cost of goods and selling price. And it was launched on the no!no! Hair platform just because we can -- because we have tens of thousands of people calling us every week and we can offer them something else in addition to Hair Removal. We can take advantage of that and test the message, test the consumer response.

We've been doing this for a long time with no!no! Skin, which is the acne treatment product we have in the U.S. and now all kind of branch off in the UK, where we have found the messages to be very effective. no!no! Skin is a product by itself. It’s being advertised separately in a meaningful way for the U.K. market.

It has retail presence, which is much more significant than it does in the U.S. And the sales are very substantial for the U.K. scale. In the U.S., it still rides on the curtails of no!no! Hair. In terms of advertisement, there is very limited advertisement being dedicated to this until we make the message work. And the reason for this is that we in these two uniquely separate markets, the U.S. and the U.K., because of the competition we have is different.

The U.S. market for acne treatment is dominated by some topical companies that have been advertising for years, selling their solution for 1995 and then having continuity going on for 29, 95 every other month. We come with the device that sells for $180 front end. Our cost of goods is about $15, and we can promise them that not only its FDA cleared for the treatment of acne, but we can also promise them that they will see results within 24 hours, which the topicals cannot. But we need to overcome the barrier of the consumer expectation to pay 1995 a month versus $180 one time.

So, no!no! Glow is an example of new product. As I mentioned before about the Kyrobak, that which is the back pain treatment device or product we are softly launching now is clinically proven. It is regulatorily cleared. It has the patent associates with it, it has the right cost of goods to ASP and the marketing is being tested.

The reason why Kyrobak is not launched under the no!no! brand is simple. If you type no!no! in Google today, the first five to seven pages are going to be filled up by us and its all hair removal and slightly acne treatment.

So we did not want to get swamped by our own advertisement. The -- according to the search engine online a company we all know the no!no! term has grown -- the search for no!no! term has grown by over a 1000% over the last year and half. It is actually now bigger than the actual search for hair removal in terms of number of searches and in a very decisive analysis decided not to launch the Kryobak under the no!no! Brand in order not to overshadow its success with the hair removal market.

Other than that it’s a consumer product, it’s done by Radiancy. It’s patented by Radiancy. It uses the Radiancy patent portfolio, the clinical evidence is there and we just don’t want to have people look for back pain and get lost in hair removal.

Kay MacKay - Sindiant

Okay. What are the price points for Kyrobak in the no!no! Glow?

Dennis McGrath

no!no! Glow sales for about $200 and Kyrobak sales for about $300.

Kay MacKay - Sindiant

Okay. Thank you very much.

Dr. Dolev Rafaeli

Thanks, Kay.

Operator

We will take our next question from John Curti from Singular Research.

Dr. Dolev Rafaeli

John, good morning.

John Curti - Singular Research

Good morning. A couple of questions. First off on the skin care business, have been running around $1.8 million to $2 million a quarter and you have been talking about how you have been able to getting pretty good results on up-selling on the back of the no!no! some of the NEOVA products? If that’s the case why aren’t we seeing a little bit better traction maybe on the skin care revenue line?

Dennis McGrath

So the line you are referring to is in the physician recurring component. The sales people component is a $1.8 million to $2 million. The third quarter typically is a little bit later quarter than in other quarters. The $1.3 million of skin care NEOVA is in addition to that and are chose up under the consumer brand.

Dr. Dolev Rafaeli

So in essence just to complete the picture, we took it from a $2 million business to a $3.5 million business over the last six quarters, per quarter. And but we show this into two separate lines, the consumers sales is one thing and the physician recurring sales is different category and the reason we do this is because in the consumer sales we are now into third quarter where we experience continuity, where a consumer we sold to in December of 2012 is going to re-approached two months later and there is a repurchase and that same consumer is going to be re-approached two months later and there is a repurchase and this is why you see the growth because it’s coming from continuity of building up on the consumer installed base that we sold to.

These consumers did not have the opportunity or maybe they did have but they didn’t purchase through the physician dispended market. They did get exposed to the products -- the consumer products through the consumer advertisement channel and both the front end sale and the continuity sale happens through the consumer channel.

John Curti - Singular Research

And is the skin care products sold across all three components of the consumer segment, direct distributor and retail and home shopping?

Dr. Dolev Rafaeli

Correct. The -- so let me extend on that. In the beginning of 2013, we started offering NEOVA on HSN as a standalone brand and that is being going along steadily and being building up. In addition to that the second quarter of 2013, we gradually converted all the in the box topicals that we sale with no!no! and the up sales, that we sale with no!no! to be NEOVA components. So every single consumer that buys no!no! is also getting NEOVA and in addition to that we upsell them into additional NEOVA products and in addition to that we target them, we reach out to them as a continuity.

In addition to that retailers not talking about HSN are taking NEOVA into the shelves, we will announce specific launches when they happen. But you will see more and more NEOVA on the shelves, specifically the products are having an amazing acceptance by retailers, we just need to see the response. And it’s going to go hand in hand in the amount of the advertisement we put on TV and radio and print and so on.

John Curti - Singular Research

Okay. And then second question has to do with the consumer direct revenues have been running around $29 million, $30 million, $31 million? I am wondering if you could give us a little color on kind of may be to put some takes in terms of geographies, how things are trending, kind of around the world because I think there is may be some perception that you have really maybe hit wall in North America and/or sales were either really flattening out or may be falling off there and I am just wondering if you can give us some color on kind of on geographic basis, kind of how things are trending within that category, because I know at some point here Brazil kicks in, Germany kicks in, we should see a step up from that $30 million to $31 million.

Dennis McGrath

Yeah. I think your analysis in terms of future expectation is right, that those geographies will contribute to an increase there. And I will refer back to our comments we have made on the last earnings call that in any new market we are seeking the optimal level of advertisement that will generate roughly 3 to 1 return from dollar strength to revenue recognized.

And then you see somewhat of a step function in those revenues as we turned faucet on in those new geographies and that’s what you have seen. You have described the directives at $29 million to $31 million level. Its dictated by the advertising spend that we are doing. We described in the last earnings call where those optimal levels are and the next million dollars, U.S. for instance we are spending roughly a million dollars a week we continue to spend that in the last quarter and returns are generally what we would expect.

Now week to week they fluctuate, you could have a MER any given week of 2.9 and we have shown last fourth quarter we have had MER that went as high as 4.75. But the advertising is pretty consistent and overall it kind of blends out.

So anywhere where we direct those markets continue to be very sustainable markets with the ratios we have described and you will see those uptake as the newer market starts to mature. You will see an uptake is some other new products start to take route and we push the media generally knows. So, we have talked about, the two main issues in this quarter HSN in Japan in terms of the revenue, everything else is fairly straightforward.

John Curti - Singular Research

Then in terms of selling and marketing, we go back to $55 million or so million revenue in the fourth quarter then the selling and marketing kind of expense go back to kind of where they had been running as a percentage of sales?

Dennis McGrath

The sales -- the operating expenses this quarter versus the last quarter are almost an exact duplicate. I think I made that in my opening remarks. If you look at the three components engineering, sales and marketing and G&A, there were some slight changes in those buckets.

But overall and we expect that continue into the fourth quarter. Part of the increase that you are expecting or that’s in part of our guidance is HSN. There is not whole lot of marketing cost that goes along with that as you might expect in the direct channel where you are spending a dollar immediately to get $3 of gross revenue.

John Curti - Singular Research

And then lastly the tax benefit, three times the amount of the loss, I’m assuming that’s because of the way the revenues and results are allocated geographically?

Dennis McGrath

Yeah. Largely that is part of it and also in the third quarter is when you file your tax returns and you true up prior estimates with the actual returns that are filed, so that some of it.

John Curti - Singular Research

All right. Thanks very much.

Dennis McGrath

Thanks John.

Operator

We will take our next question from Bob Clutterbuck from Clutterbuck Capital Management.

Dennis McGrath

Good morning, Bob.

Bob Clutterbuck - Clutterbuck Capital Management

Hi, gentlemen. How are you? Dolev, this first one is for you. Actually all my operating questions have been asked and answered and they are answered well. Dolev 10b-5 -- 10b-5 and I recognized your programs but also I know these programs could be modified? Could you talk about or are you still in the selling mode or you are pretty much wrapped it up your comment?

Dr. Dolev Rafaeli

I'll be happy to comment. I am not sure I am going to answer your question. My 10b-5 was discussed extensively in the last earnings call and I think the last time that plan sold was about 10 days after that last earnings call.

Beyond that it was filed that as 10b-5 on with the reason. I have nothing to do with the execution of the plan and I don't control it. I set up the formula long time ago and I let it role and it happens and reports when it does.

Having said that, my position is as a stockholder, as a shareholder in the company is not significantly different than it was when we started this, the merger two years ago. I hold about a million and a half shares which represents over $20 million of -- at stake at any given time, that’s probably more than any other CEO in this space. Definitely more than most shareholders in both years, so I am at risk more than anybody else here.

The plan itself was done as part of my state planning and so, obviously, I am not going to relate to the details of the plan. But as you might have noticed it was not executing since, I believe the last week of August or the first day of September and there is obviously a reason for that. And I think, I hope that answers the question.

Bob Clutterbuck - Clutterbuck Capital Management

It does. And we will keep watching and I appreciate those comments. Dennis, again, my operating questions have been answered and I’m sure you are not go in the detail on the stock repurchase, but you do have a $25 million authorization at this point, is that correct?

Dennis McGrath

Yeah. We still have quite a bit remaining under the 55 million total, 25 million from August 1, 2012 and another 30 million is authorized August 1, 2013. And as we start to enter into the open window, it will be business as usual. I have made in my prepared remarks our earlier comments still think the stock is cheap, particularly cheap at these levels and we will continue to be rest and executing that plan.

Bob Clutterbuck - Clutterbuck Capital Management

Perfect. Okay. And for both you guys, I might be willing to be a volunteer test patient on this Kyrobak?

Dr. Dolev Rafaeli

Thanks.

Dennis McGrath

Kyrobak at thump.

Bob Clutterbuck - Clutterbuck Capital Management

Thank you.

Dr. Dolev Rafaeli

Thanks. Thanks, Bob.

Bob Clutterbuck - Clutterbuck Capital Management

Thanks, Operator.

Operator

We will take our next question from [Ory Ron] from CR Investments.

Dr. Dolev Rafaeli

Ory, good evening, I guess!

Unidentified Analyst

Hey. Guys. Good day. Good morning to you. And couple of quick questions. First of all on the Japanese market. What is the ASPs of 300,000 units a year is worth approximately how much in dollars?

Dr. Dolev Rafaeli

More than $20 million.

Dennis McGrath

The average, no, that wasn’t -- you are asking about the ASP for us or the APS for them?

Unidentified Analyst

No, no, no. I am asking about our selling price to Ya-Man, so basically how is their contrast commitment where are you worth in terms of revenues?

Dennis McGrath

Their contract commitment for 2013 was over $20 million and the contract commitment for 2014 was over $22 million. And there is a -- there is an either or clause in there that says that is going to be over $20 million or and because we knew the products are going to change, so there was a product mix alternate in there, but the monetary commitment is over $20 million and over $22 million.

Unidentified Analyst

Got you. Great. And in terms of the XTRAC business, can you talk a little bit about the trends in your costs per lead and what percentage of patients who started treatment, actually finished the treatment, what percentage of patients come back for a second phase treatment after the first batch of 10 or 12 treatments and sort of the fundamental associated with that business?

Dr. Dolev Rafaeli

I will let Dennis talk about the trending of the cost per lead because he has the numbers under his hand. Let me talk about a little bit about the patients. We as with any other business that drives the actual consumers to the selling points and we consider XTRAC to be the very similar situation. We can measure two points of data. We can measure how many patients we have sent in and Dennis mentioned these numbers before, so I am not going to repeat them and what was the cost per lead and Dennis is going to comment on this as per your request and we can also measure the number of patient charts opened up by our accounts.

Now I would like to explain this, every single franchisee, every single XTRAC that we have, uses us as a go between the clinic and the insurance company. So every patient that they are planning to put on the XTRAC treatment whether they actually execute the treatment or they start to execute and stops in the middle, or they complete a full session and then the patient goes away and comes back six months later. Every single patient requires a patient chart to be opened up in the system and we measure that as well.

Now not all of these, granted not all of these patients are going to show up in treatment, not all of them are going to complete the whole cycle and to complete the understanding we are barred from looking into the system and seeing the actual patient being treated because of HiPAA compliance.

So we cannot see whether [Joe Q] patient showed up for treatment and how many treatments were conducted on [Joe Q] patient. But we can log in to the system and download the number of treatments done on a patient and we have the patient number.

So each system has a patient database, each XTRAC has a patient database and that patient database includes the two letters for the patient names so we cannot identify the actual patient plus the serial number. And we can see how many treatments were done by that patient and tracked at. We can also see the way the physician is performing with the system, how many treatments on average does the physician conduct on every single patient and is this trending up or is it trending down.

The actual number right now is 23. So each patient on average across the installed base is conducting 23 treatments. Now, that number is an obscure number and I will explain why because you can get the -- the doctor can be treating you for vitiligo which requires 30 to 50 treatments until vitiligo goes away and then the doctor would never see you again or it might require 6.5 treatments done according to the right clinical protocol for the treatment of psoriasis for 75% to go away but then you might want some more.

So 23 treatments might mean three cycles of 6.5 or it might mean a third of a cycle for a 60 treatment vitiligo patient. That number 23 per year is an average number that we see tracking right now and it is going up. Having said that, the number we really -- we really monitor is the number of charts and that number has doubled over the last year.

So the number of patients being sent into treatment whether they were referred by us or referred by the physician himself into treatment has doubled year-over-year. And we see the results in revenue not all of that has been translated. So not all of these patients that are being referred into us for insurance verification actually show up in treatment and multiply this by 23, multiply this by the average reimbursement, multiply this by the amount of money we make, not all of this materializes but the potential revenue has doubled year-over-year and that is happening in the markets we advertise.

But it also happens at the same rate in markets where we do not focus on but only see results through national advertising. So we see this happening, this halo effect happening across the country in all different territories.

Dennis McGrath

So, just to give you some details, I think in the last three quarters of cost per lead because the periods prior to that were less relevant as we continue to optimize the program. It was 103 as I mentioned earlier for this last quarter. The cost per lead was 117 in the prior quarter, second quarter. It was 132 in the first quarter. So you see a downward trend or favorable trends, 132 first quarter, 117 the second quarter and 103 in this last quarter.

Dr. Dolev Rafaeli

So our cost of getting the patients in is 30% less. And our conversion of that patient actually being converted through the insurance verification being sent into clinic is higher and the conversion of the clinic taking that patient and actually putting them in treatment is higher. And as Dennis mentioned in his prepared remarks in some markets, it is as high as 87%. Obviously, it is not across the whole markets and we are not going to relate to that until we see consistency across all markets but it is as high as 87%.

Unidentified Analyst

Okay. Great. Can you guys talk a little bit about the Board’s decision on the pre-announced earning this time on the face without looking to the detail it was pretty heavier mix? And I know that you have pre-announced before, because some people on the call don’t have much hair left with the way this stock has been made trading has been down.

Dennis McGrath

Yeah. So it was largely related to, when the information become available to us and our realization where we are going to wind up on the quarter. And as we’ve indicated earlier, that the largest piece of it has been Japan, was right up until the end of the quarter. So the quarter closed and then a pre-announce is just a matter of having to going through the closing process and making sure we get the right revenue number. So, given those circumstances, there wasn’t a period of time either in August or early September that would have made sense similar to the one time we did pre-announce, which was earlier in the quarter.

Unidentified Analyst

Got you. Great. And lastly, we’ve talked about a little bit in our last meeting, Dolev. Have you guys looking to implementing the 10b5 plan? I mean, if the company could buy back shares on a day like this rather than looking to -- sky is blue and the stock is trading at 16, I think it would serve everybody’s benefit.

Dennis McGrath

Yeah. So 10b5 requires a formula that may anticipate something like today where it dip down to 10 and is trading at 12 and started at 16 just three weeks ago. It gets very cumbersome in terms of putting a corporate 10b5 plan in place. So we have discussed the merits. We haven’t implemented yet. It’s still under consideration. Having done so, we will aggressively be back in the market. But you are right, having windows cutoff for September 16th gives people time after the window closes to do what they need to do to move the stock in the direction that they wanted to be moved.

Right now, we are operating in the windows. So our game plan so far, we continue to evaluate how that will better execute in the stock repurchase program. Bottom line is we authorize the $30 million. It is not window dressing or veneer. We intend to execute against that plan, which certainly gives you an indication of how we expect the year from the date we announced the additional $30 million to operate in terms of cash flow.

Dr. Dolev Rafaeli

And if I remember right, Ory, you were asking a similar question last quarter and last earnings call and you were kind of doubting that we would actually meet the $25 million and we were very sure that we would. We met and exceeded the $25 million. We started eating into the $30 million. As Dennis said, the Board authorized a total of $55 million of stock buyback. We do this as the windows allow.

We did not implement a 10b5 yet and we do this because we believe the stock is cheap. And we believe that this company is a cash generating company. If you look at the -- if you look at the cash flow report you will see we generated $26 million of EBITDA this year. We up until now for the first nine months, we have generated $20 million of EBITDA that allowed us to do $25 million of buyback. And we believe that at the right levels, we should be doing this buyback for the benefit of the shareholders.

Unidentified Analyst

Great. Thanks a lot, guys.

Dr. Dolev Rafaeli

Thanks Ory.

Operator

And with no further questions in the phone queue, I would like to turn the call back to Dennis McGrath for any additional or closing remarks.

Dennis McGrath

Thank you, Operator, and thank you all. Just wanted to mention that we will be presenting in New York next week at the Canaccord Genuity Medical Technology & Diagnostics Forum on Thursday November 14th at 11:30 Eastern Time. Hope to see some of you at that meeting. We look forward to reporting back to you on March for our fourth quarter results, which we expect to report on March 13th. Have a good day. Thanks.

Operator

This does conclude today’s conference. We thank you for your participation.

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