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PhotoMedex, Inc. (NASDAQ:PHMD)

Q1 2014 Earnings Conference Call

May 12, 2014 11:00 am ET

Executives

Kim Golodetz - LHA, Inc.

Dolev Rafaeli - CEO

Dennis McGrath - President & CFO

Mike Celebrezze - CEO, LCA-Vision

Analysts

William Plovanic - Canaccord Genuity

Keay Nakae - Ascendiant Capital

Hamed Khorsand - BWS Financial

Jim Sidoti - Sidoti & Co.

Anthony Vendetti - Maxim Group

Operator

Good day and welcome to the PhotoMedex First Quarter Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Kim Golodetz. Please go ahead.

Kim Golodetz

Thank you, Operator. This is Kim Sutton 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 2014 first quarter. 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 broadcast, May 12, 2014. PhotoMedex undertakes no obligation to revise or update any statements to reflect events and circumstances after the date of this conference call.

With that, I'd like to turn the call over to Dr. Dolev Rafaeli.

Dolev Rafaeli

Thank you, Kim. Good morning. Welcome to our first quarter 2014 earnings call. My name is Dolev Rafaeli; I'm the CEO of PhotoMedex. Joining me today is Dennis McGrath, President and CFO and Mike Celebrezze, CEO of LCA-Vision.

I'd like to extend a warm welcome to Mike and the entire LCA team as they officially join PhotoMedex later this afternoon. We are excited about the prospect that holds in the combined businesses.

In addition to the LCA world-class staff, professional direct-to-consumer marketing, and strong customer satisfaction, this acquisition provides platform to launch direct XTRAC, Psoriasis and Vitiligo Centers of Excellence and Neova clinical dispensing outlets, which will extend, recurring reversed revenue from XTRAC and bring sales from Neova to the underutilized Lasik Plus infrastructure. Additionally, it adds the opportunity to increase Lasik, ophthalmic volume via PhotoMedex's marketing expertise.

In addition to successfully diversifying the geographic footprint of our existing XTRAC and Neova business lines, the LCA acquisition adds significant growth opportunities and greater diversity to our revenue base, which permits us to achieve one of the key corporate goals of balancing the consumer and medical parts of our business.

In fact, on a pro forma basis combining the LCA revenue, the first quarter revenue of the combined pro forma revenues would be approximately $76 million and it would be a split of roughly 50-50 between the world wide no!no! hair brand and the other brands. On a standalone basis without LCA, it would be roughly 75-25.

Our press release was issued earlier today and Dennis will follow me and provide more details.

Our revenues for the first quarter were $50.1 million. Comparing this year to last year's first quarter, there are some key things to note. Our XTRAC business was up 72% and growth would have been even higher if not for the number of office business loss due to the severe weather during the first quarter. We are off to a very, very fast start in the second quarter with XTRAC expected revenue growth to put us in the $5.5 million to $6.5 million range, a sequential growth of approximately 25% to 45% or 37% to 62% growth over the second quarter of 2013.

International consumer revenue, excluding Japan, increased by 50%. Also in the consumer revenue area, direct response revenue are approximately even with the same previous in both 2013 and 2012. The difference in the distribution revenue is the Japanese market.

In the retail home shopping channel, HSN beyond revenues increased by 65% offset by a decrease in HSN revenue of about of $3 million, which in part is a reflection of the timing of HSN special show date this year versus last year.

There are two today special or TS dates in the first quarter last year versus one this year. You will recall that in the fourth quarter the November date of 2011 and 2012 got pushed back to December to introduce the no!no! firm.

Consequently 2014 dates were also moved back and therefore do not align with the 2013 airings. For instance the second TS of 2013 aired on March 26 versus the second TS in 2014 airing about six week later on May 9, which was this past Friday. By the way the Friday TS yielded approximately$3.8 million in gross retail sale.

The Neova consumer sales increased 67%. Kyrobak sales were $645,000 and for the last six weeks as averaged over $100,000 per week.

As mentioned in last earnings call, we have begun to test media in Brazil, revenue were approximately $300,000 and return is less than 2%. While maintaining the nearly 85% gross margin in the consumer business we were able to increase the physician recurring gross margin from 51% to 61%.

Last quarter, we discussed two clinical studies that were published affecting our Neova and XTRAC business. In this quarter we note two additional favorable clinical studies that were recently completed or published. As a remainder, a study was published in the Journal of Dermatological Treatment which offers evidence that XTRAC when used in combination with tropical therapy is as effective as biologics, but without the systemic view suppression or other potentially harmful side effect for the treatment of moderate or two severe psoriasis, the in-clinic implications are that the ability to effectively and economically treat these patients using XTRAC.

The two new studies are both outlined in our press release and show the first one that a survey of health care system costs of thousands of psoriasis patients shows that treating patients with biologics therapies cost the systems three times as much as used for the therapy treatments such as the XTRAC. And the second study shows that in an IRB-approved clinical study our Kyrobak consumer device for lower back pain demonstrated the specifically significant reduction in pain.

We have a number of initiatives ongoing in addition to all of these other things that are mentioned above we have just set up corporate subsidiaries in India for medical brand and in Columbia to be used as large platforms for these countries. We initiated operations in Hong Kong and no!no! is now displayed with additional prestigious retailers.

With that, I'm going to turn it over to Dennis to provide you with more specific color on the quarter and the year. Dennis please.

Dennis McGrath

Thank you, Dolev. Good morning everyone. I'm going to provide you just some basic metrics that seem to be asked on each call. Happy to provide as much color as you would like in the Q&A portion of our call.

As Dolev mentioned, first quarter revenues were $50.1 million broken down into $41 million in the consumer segment, $7 million in the physician recurring, and $2 million in the professional segment. There is a schedule in the press release detailing these specific splits.

Some additional color on parts of revenue not covered by Dolev. With regard to the consumer business, our direct responses in line with last year that North America MER was 2.9 in the first quarter versus 3.3 in the first quarter last year.

The distributor channel included $150,000 of revenues from Japan in this year's first quarter versus 3.9 in the first quarter last year.

In the retail channel offsetting the significant growth in Bed, Bath & Beyond the timing impact of realigning the 2014 dates for the today’s specials and the home shopping channel. We expect annual revenues for this category to be in line with last year. However, we realized $2.5 million for the February TS while in the first quarter of 2013 we recognized $5.9 million for the sum total of two TS live show areas. Dolev mentioned there was a TS special this past weekend.

Our European consumer revenues increased 50% from $4.7 million to $6.9 million in the comparable first quarter periods. With regard to media spend, advertising spend in direct response North America market was in line with the prior year first quarter of about $13 million. The major increases in consolidated sales and marketing cost of approximately $2.3 million comparing the first quarter this year to the first quarter last year arise from about $2 million in new marketing initiatives as follows. The increase direct-to-patient advertising initiatives for the XTRAC program of about $700,000.

Our Kyrobak advertising was $475,000, in Brazil $450,000, in Germany an increase of $250,000, and in Neova $150,000.

With regard to the physician recurring business, the XTRAC despite being muted by a significant number of patient business loss to weather XTRAC revenues increased 72% to $4.4 million. We increased our installed base with another 26 net locations for a total of 527 U.S. locations. Direct-to-patient XTRAC media spend was $819,000 for the quarter driving a cost per lead of $87 compared to approximately $133 in the first quarter last year for a decrease of approximately 35%.

Neova. The Neova skin care products sold on the consumer platform increased 67% over last year and together with the XTRAC progress contributed toward the physician recurring gross profit of $4.4 million, an increase of 45% compared with the prior year and the physician recurring gross margin increased significantly as Dolev mentioned to 61% from 51% in the prior year first quarter.

Couple of noteworthy items isolating certain expenses amounting to $3.8 million in additional charges for the first quarter P&L. In the sales and marketing we already identified the $2 million in advertising in the early stage projects and geographies. And for the G&A expenses we incurred $775,000 in litigation cost to pursue a company infringing upon our no!no! patents, and we also incurred $979,000 in LCA-Vision deal cost. Without these charges, adjusted EBITDA was approximately $0.34 per diluted share for the quarter.

With regard to the balance sheet. Cash of $48.1 million represents cash per diluted share of $2.57. The cash also includes advances on the line of credit of $5 million, down from $10 million at the end of December 2013. The accounts receivable decreased by approximately $5 million, representing the payment of balances due from Bed, Bath & Beyond and HSN at the end of the year.

Liabilities decreased by approximately $18.5 million, $5 million was from the repayment of line of credit, $6.5 million in AP and accrued payrolls, changes which are mostly timing related payments, and $6.3 million in sales return liabilities, which reflect the change in the size of seasonal sales in December compared to the first quarter of 2014. Although, sale returns from the fourth quarter was slightly less than we estimated, we have continued to consistently apply our historic methodology to be applicable current quarter sales.

Of interesting note, is that our company has now been included as of yesterday in another index fund on the Tel Aviv Stock Exchange, we're now part of the Tel Aviv Tech-Elite Index fund. Our quarter annual report on Form 10-Q will be filed with the SEC this afternoon and our next earnings call as scheduled for Thursday, August 7.

So operator with that, if you could open up the lines for questions, Dolev, myself, and Mike Celebrezze will be happy to entertain questions.

Question-and-Answer Session

Operator

Certainly. (Operator Instructions).

We'll take our first question from William Plovanic with Canaccord Genuity.

William Plovanic - Canaccord Genuity

Just a couple of questions. Just curious as the no!no! brand continues to move forward. Just where are you with Germany at this point?

Dennis McGrath

I think you can see it from the growth in international sales that our Western European sales are moving in the right direction. We are spending more in advertisement and it is moving the right way. I hope this answers the question.

William Plovanic - Canaccord Genuity

Okay. And as you're closing on the LCA-Vision, merger closes today, I assume. And just in terms of integration, how long will this take to integrate? Is there any cost synergies that we should expect other than transaction? And when do you start placing units into those facilities and marketing and searching the revenue contribution?

Dennis McGrath

Mike, do you want to take that initially and then I'll add to it.

Mike Celebrezze

Sure. So we've been having -- we had several integration planning sessions and we're making progress in working out details of getting things implemented in the clinics, as well as corporate integration of our businesses, delivers the best practices. We don't have firm timelines, although we could see our first test clinic as early as the end of the third quarter. The lot of steps involved, including site selection, doctor recruitment, getting on the insurance plans, other logistical matters.

But I will say that process has been moving on very smoothly. We've got key meetings every week. We're getting focal operation from all parties, including the LCA team and the PhotoMedex team. So we're working hard to make some progress.

Dennis McGrath

Bill, I'll just add a little bit further. There is nothing in the three months since we announced the deal in February that has changed our perspective for what we indicated on that call, the low hanging fruit between advertising and in public company expense. We focused a great deal, as Mike has indicated, on who do we get XTRAC integrated, how we get our teams integrated for that few -- to act as a one world employee base. And we spent a considerable amount of time on that.

So we've made progress. There are several additional opportunities we've identified in the process so far that present opportunities for us to increase the synergies here. But so far the indications we had is, nothing on the negative side is changed and there are outside opportunities for it. This will be an ongoing process. There are some initial things we'll get in the first 90 days, pretty quickly. And as the XTRAC starts to evolve and the clinics get comfortable with the process then we'll start to turn that facet on full board.

We'll clearly have more color for you in our August call as we start to implement. So far it's been mostly theoretical. Today starts the actual implementation and we'll get to see how smoothly that runs with the adoption curve over the next 90 days to 180 days.

William Plovanic - Canaccord Genuity

And then, as for the -- you mentioned the DTC marketing to help drive the LCA-Vision business, when does that begin?

Dolev Rafaeli

Just -- this is Dolev and I'll hand it over Mike. The LCA-Vision business is driven today by DTC. The steps we are taking on now is taking the advantage of learning’s from both ends. How do they do business, how do we do business? Their overall annual advertising is about $23 million, our overall annual advertisement is about $72 million, so in combination it's about $95 million. We know we can do things better and cheaper by cross-pollinating the two systems. This has -- the meeting of the teams has started. We are taking it to that direction but just remember, we are officially getting married this afternoon, didn't happen yet.

And so as I said, the meetings have already started but their direct-to-consumer advertisement is a lifelong experience, they've been doing this for a very longtime. They are very good at that. They drive a lot of patients to their inbound. We drive a lot of consumers to our inbound. And the opportunity arise is not only from reducing the cost of doing that but also from cross-pollinating these two patient streams or customer streams. Mike, do you want to take it from here?

Mike Celebrezze

Sure. So I would say just to add a little color to that. We're the leader -- LCA-Vision has always been a leader in the laser vision-correction space in terms of direct-to-consumer advertising. This drives a lot of our patients. We have other patient acquisition channels as well. We have affiliations with most of the large heath plans, where they refer members to us but on a discounted procedure basis. In other words they get 15% off get generally for procedures.

And we’ve started building a partner network of teaming up with independent optometrist to share their patients and help to care their patients, so that's a nice feeder of us. But really direct-to-consumer has been our backbone and that's one of the benefits of the integration with PhotoMedex. Their skills and our skills are complementary so we'll be able to leverage that -- those skills.

William Plovanic - Canaccord Genuity

And then just the last question. Simply, my to understand Dennis that in Q1 there is one event, in Q2 there is two event as it relates to HSN? So that while the year for 2014 would be flat relative to '13, Q2 will see a bigger bolus?

Dennis McGrath

Q2 also has one event. It will be caught up the end of the year.

William Plovanic - Canaccord Genuity

Q2 has one event. Great. Okay. Thank you.

Operator

We'll take our next question from Keay Nakae with Ascendiant Capital.

Keay Nakae - Ascendiant Capital

Yes, thank you. Wonder if you can give us a little more color about Brazil. You give us a revenue number. How is that number tracking versus your expectation and what else can you do to begin to accelerate sales there?

Dolev Rafaeli

Good morning, Keay. This is Dolev. As in our press release and previous earning calls, we lost in Brazil late in 2013. We started immediately after that to advertise, to create our space in retail. Within the first quarter, we created a significant entry into retail by getting into a number of retailers. We are focused on the São Paulo state, which is the largest state in Brazil. But we're focusing our media assets there.

The press release lists the names of these retailers. Now, we're in the second phase with them when we expand the number of source, which obviously is going to end the amount of sell out. The Brazil retail behavior is unique in the way that they don't take in a lot of inventory because of the -- because of inflation and because of the high taxes that they taken in. We increased a number of stores -- sorry, the number of doors per store. In addition to that, we are in expansion mode in the number of retailers that take us so that's on the retail front.

On the direct-to-consumer front, we started by having advertisement drives in driving to our website and into call center and that started taking off. We are improving on that. We've only being doing that for five months. As a reminder, it took us a couple of years to build that capability in Western Europe. It took us a little bit more than that in Northern America and we're showing good progress there. The -- I think the update in the press release is very extensive in the sense of where we are and where we're heading to.

Keay Nakae - Ascendiant Capital

Okay. Switching countries to Japan, any updates there related to the distribution channel and resolving a path going forward?

Dolev Rafaeli

We are still in discussion with several entities and we are trying to see which one of them is more fit for us in taking over distribution in Japan or setting up our own activities in Japan or a mixture thereof.

Keay Nakae - Ascendiant Capital

Just in general then when we think about that no!no! line, the last significant advance was the no!no! Pro. What else do you have in the pipeline to continue the extension of the brand?

Dolev Rafaeli

As I mentioned in the last earning call we do tend to come out with new products frequently. And if you think about the line of the products today we had the 8800 controlling our retail space up until the end of 2012 and the beginning of 2013 we started launching no!no! Pro. We started doing this slowly through direct response and towards the end of the year we were almost completely switched over in our direct response to no!no! Pro and we spotted turning over high end retail which is Neiman Marcus and Nordstrom and then at the very end of the year in December we turned over HSN. What that created is an ability to take our mass retail outlet in North America, which is Bed Bath & Beyond into a more advanced platform the 8800 and a higher price point at $270 compared to $250.

So at the end of 2013 the beginning of 14 we have the no!no! Pro work 290 and 310 there is two models in the market we have the 8800 at $270 and we still have the no!no! Plus at $250. This opened up a space in the market for us to introduce a lower-end version if you want to think of it. So I would look out for that and to go after different market.

Now if you look at what happened in our advertising mix, our advertising mix has changed as well up until the end of 2012 we were advertising mostly to older women and it was mostly focused on facial hair. In 2013 this advertisement has changed in the mix in where we advertise it is more to general population it is to different ages and it is to different body parts and this opens up to more activity in retail. It also opens up with the opportunity to introduce something that is at a different price point and then as soon as something like that is introduced we will be talking about those in our discussions with investors.

But if you look at our progress, the progress was we had a very strong platform with the 8800, we had to stretch it up with price so that we will be able to enter with two or three different platforms in our advertisements. Right now, we are with two platforms the 8800 and Pro with the no!no! Plus being are benefiting from the advertisement that not being advertised per se.

In a way of answering previous question in markets outside of the U.S. this is more limited we go because we do only brand advertisement, we advertise the brand and we expand on the products in the point of sale, in the U.S. we can -- in the U.S. and the UK and Germany we can expand more than that in TV advertisement. But I would look out for product launches that would fill up these gaps as these gaps open up.

Keay Nakae - Ascendiant Capital

Okay. That's helpful information. And then Kyrobak seems to be gaining some momentum. How should we think about what the advertising spend might look like that for the next couple of quarters?

Dolev Rafaeli

Without specifically answering the question I explained in the previous earning call that we started advertising we did a soft launch of Kyrobak in December, it was done only with insert print advertisement since then we started advertising in TV with long form advertisement what most people call in commercials 28 minutes and 30 seconds overnight and we’ve also started late in the first quarter with short form advertisement which are two minutes and we’re looking at these results. Our print advertisement is very strong, very successful, we are expanding on it. Our TV advertisement is still in learning mode to see which channels work, which messaging works and how to expand on that and once that is learned we will be able to expand much faster.

Keay Nakae - Ascendiant Capital

Okay, and then just finally on the LCA centers, with the change in ownership is there any risk that just the LCA business sees any negative impact, or should it be fairly seamless as far as that business goes while the transition is occurring?

Dennis McGrath

We don’t think the acquisition will bring any negative impact on the business the acquisition per se. Dolev and I and as well as Mike has made it high priority to meet with the staff this is driven by the effect on this advertising and the customer service delivery at the clinic level we met have with physicians, we have met with staff. I think across the board Mike's entire team is enthusiastic about what the prospects of this means. We are committed to the laser correction business. We are committed to the cataract business and we will be adding the XTRAC business as well as other services to the clinics. And I can think of only positive reasons about this -- about the impact of the acquisition going forward.

Mike Celebrezze

Okay. I will make just a quick comment. The entire senior leadership team is staying, which is a good thing and as we have the expertise but we have worked really hard to make sure that we communicate all across the organization and from top to bottom and people are excited about this. I mean we knew that we needed to expand our service offerings beyond just a single laser vision correction offering and this creates a great opportunity for us to leverage our skill and leverage our space. So we do not see it any way being a negative we are going to embrace this and leverage our strengths, continue to improve our Lasik business, continue to expand in the correct space and expand into this psoriasis and vitiligo treatment. So we are jazzed by it.

Operator

We will move on to our next question with Hamed Khorsand with BWS Financial.

Hamed Khorsand - BWS Financial

First off, I wanted to just ask what is your expected expenses that you're going to incur with the LCA integration in Q2.

Dennis McGrath

There are some deal costs that will spill into the second quarter. At this point it’s mostly legal costs associated with it and investment banking fees and that estimate is around $2.2 million, $2.3 million remaining.

Hamed Khorsand - BWS Financial

Okay. And then what is the biggest significance in the direct-to-consumer revenue line declining from last year? It was down $1 million.

Dennis McGrath

Yes, $31 million to $30 million. That's your comment?

Hamed Khorsand - BWS Financial

Yes.

Dennis McGrath

We see that generally in line. The MER was a little bit difference in the two points in time and we don’t see any substantial change between those two periods. MER is a response to the media there are several more points in terms of the success of the media campaign that we haven’t gone beyond in any of our calls including as we would look at it we see that the advertising change we’ve increased price substantially, the number of calls we get from the advertising are higher than they were before. So we’ve experienced a greater response, we’ve increased the price so customers are willing to pay more if we’ve experienced higher AOVs. The conversion of those initial calls coming in it’s a little bit lower. There is whole bunch of balancing act. So on average we see it is in line with the prior year.

So I’m not sure that it is worthwhile to dissect $1 million change between the two periods. But if you wanted to distill it down to one item, which I think would be misleading and would be the MER particularly as you look at Pro being the dominant component at a higher price point versus 8800 a year ago change in the audience that we’re advertising to increased response a fewer converted calls for that. There is a variety of factors that we’re really getting down into the weeds on this generally view at the inline.

Hamed Khorsand - BWS Financial

Okay. And as far as the sequential decline was that mostly just associated with just the holidays?

Dennis McGrath

Yes, you remember December we were in a fortunate position to be able to increase our advertising spend some weeks over $2 million. As much as I talked to you specifically and others that I don’t necessarily view this as a holiday gift giving item for obvious reasons in the two past years that the month of December could have a nice bump and one of the things we took advantage of this year after seeing the bump in the prior year which pushed the envelope and see whether or not we could acquire more advertising -- weekly advertising we did and we had a higher response rate than normal.

So that's why you didn’t see a whole lot of comparisons in my prepared remarks about this quarter versus the prior quarter on a sequential basis because they are two different animals.

Hamed Khorsand - BWS Financial

Okay. And then lastly, earlier you provided some XTRAC revenue guidance. Is that mostly based upon patients not being able to go in during the winter cold? Or is that based upon the amount of new patients that you are saying that want to use the XTRAC?

Dennis McGrath

I think that in the first quarter the limited growth and sizeable year-over-year, but limited sequentially, was the number of patient’s visits we lost to the weather. And I think in unlike other areas the derm space is such that you miss a patient visit getting in a limited office hour environment is very difficult. So a missed treatment is likely a missed forever treatment and I just continue the regimen at later time.

So if you look at it sequentially some of that the growth is related to the first quarter being a little bit muted, but the excitement we’re enjoying is the response to the media and the ability to schedule patient visits in the second quarter. The increase in the installed base is 26 locations, but most of it the increase in what we’re kind of giving you some color that’s the second quarter same-store sale increase or utilization in our vernacular.

Operator

We will move on to our next question Jim Sidoti with Sidoti & Co.

Jim Sidoti - Sidoti & Co.

So if you hadn't lost the Japanese distributor and you did have the same amount of promotions with the Home Shopping Network, are you saying your sales would have been roughly in line with where you were a year ago?

Dennis McGrath

$1 million from Japan, the delta last year, this year was I think 3.4 from shopping network, you’re talking about $7.5 million in revenue delta between those two.

Jim Sidoti - Sidoti & Co.

Okay, and on the -- okay, and it was about an $8 million delta on retail sales compared to a year ago?

Dennis McGrath

$8 million? I think about $3 million, right.

Jim Sidoti - Sidoti & Co.

I mean all together, I’m sorry consumer sales all together you did $49 million compared to about $41 million?

Dennis McGrath

Correct.

Jim Sidoti - Sidoti & Co.

All right. So the bulk of that were those two items. Now we look at these two items, do you think Japan will have distribution in place at some point in the next 12 months?

Dennis McGrath

I think Japan will have distribution at some point. We haven’t given any color as to timing. As Dolev explained we are evaluating multiple opportunities on multiple fronts there and a decision hasn’t been made and once that decision is made then we can give you more color as to timing.

Jim Sidoti - Sidoti & Co.

Okay and I think you mentioned a bill before that there will be one Home Shopping Network promotion this quarter compared to two a year ago, is that right?

Dennis McGrath

There was two in the first quarter last year, February 2, and March 26, and there was one in the first quarter, there will be one in the second quarter and should even out and our comment was --

Jim Sidoti - Sidoti & Co.

How many were in the second quarter of 2013?

Dennis McGrath

One.

Jim Sidoti - Sidoti & Co.

Okay, so it will even out during this quarter?

Dennis McGrath

It will even out throughout the year based upon our project plan with HSN we’re expecting revenues to be in line with last year. There is no guarantee on this. These are all kind of contingent dates. As well as we continue to perform we’re pleased with the results on Friday.

Jim Sidoti - Sidoti & Co.

Okay. All right, and then as far as the acquisition goes, can you update us on the amount of debt you expect to take out and what the interest rate will be?

Dennis McGrath

$75 million is the acquisition loan, term loan, four-year term the -- it also comes with a $10 million line of credit and the interest rate is LIBOR plus 300 basis points generally. There are varying rates from 275 to 300 depending upon the leverage ratio at any measurement period of time now I’m getting really down the lease. But it -- around the acquisition date it's little over 3%. So whether it’s 3.5 or 2.75, it’s still pretty low rate. We are pretty pleased with that. There are some bells and whistles to accelerate the deleveraging of this based upon performance and cash availability so that the term might be shorter than four years, but it's all driven by the performance of the combined companies.

Jim Sidoti - Sidoti & Co.

All right. And as far as the procedures that are done in the LCA centers, the extract procedures, how will the reimbursement be handled because as far as I can tell the LCA folks don't have much experience on the reimbursement front, so will that still be handled through the PhotoMedex people, or?

Dennis McGrath

Mike, why don't you talk about the cataract business reimbursement, what you do at electronic medical records and the experience so far? There is more there than meets the eye, Jim?

Jim Sidoti - Sidoti & Co.

Okay.

Mike Celebrezze

We currently have seven clinics that are offering reimbursed procedures, cataract refractive lens procedures and ICLs some which were reimbursed by Medicare or insurance. So we have learned a little bit about billing and we actually have a third-party billing company that we use. The XTRAC procedures, there aren't many codes, so it's relative easy. And we'll be able to add into our billing system.

We're actually -- we also have an EHR system, Electronic Health Record system but it's really ophthalmology based so we need to have to modify it or get something else but we’re talking about that in integration too and we’re going to do our first test center on paper chart work through all the processes and then migrate to electronic after we have got it all sorted out but we can handle the billing and we’ve got a compliance capability, we are in the reimbursed space you need to be extra careful with the regulations. So we have been exposed to that area too, we have a compliance officer that we use and so we are prepared to deal with all that.

Jim Sidoti - Sidoti & Co.

Do you anticipate doing any XTRAC cases in LPA centers this quarter or do you think you will till the third quarter before that starts?

Dennis McGrath

I think that would be an aggressive expectation.

Mike Celebrezze

Yes, we need to get on insurance and it takes three to six months to get an insurance. So it won't be this quarter.

Jim Sidoti - Sidoti & Co.

Okay. Do you think third quarter is realistic, or do you think it's more likely 2015?

Mike Celebrezze

I stated earlier that it could be as early as the end of the third quarter. So that’s I’m going to pin down as early as which means it could be slightly later around that.

Operator

And we will take our next question from Anthony Vendetti from Maxim Group.

Anthony Vendetti - Maxim Group

Just on the MERs, what was the MERs for this quarter versus first-quarter 2013?

Dennis McGrath

2.9 to 3.3.

Anthony Vendetti - Maxim Group

2.9 this quarter versus 3.3.

Dennis McGrath

Yes.

Anthony Vendetti - Maxim Group

Okay. Then just on pricing, on the no!no!, I know the no!no! Pro is more, it's also slightly higher margin. Overall pricing for the no!no!, has that been stable?

Dennis McGrath

Anthony, I’m not sure I understand your question completely. Let me give you a few facts that may address what I think you’re trying to get at. The actual AOV which is the average order value, which is a combination of both the base unit and any add on things that the customer calling to our call center buys or buys from our website. The AOVs have been increasing. So overall you see the unit cost going up.

Now that's a generalization right, because in the entire consumer chain you’ve got a variety of products at different price points. So you see a very stable price at the plus, you see a very stable price at the 8800. You see the Pro which that pricing we tinkered it a little bit but generally it's been fairly consistent since the implementation of it but it is higher than the 8800 and what you see is a mix change overtime. So hopefully that gives you what you were aiming to get at.

Anthony Vendetti - Maxim Group

Yes, that's helpful.

Dolev Rafaeli

Anthony this is Dolev and just to add on to the no!no! Classic introduced in the U.S. in 2007 sold for $250. The no!no! 8800 was introduced in at the end of 2009 and it sold for $270, the no!no! Plus was introduced in the end of 2011 sold for $250. The no!no! Pro was introduced two levels two different products, but they were introduced at $290 and $310. None of these prices has ever changed down, not by us, not by retailers.

The AOV which is the average order value that we collect from a consumer when they buy it from us it trends up because we end up using the consumer as a resource and offering them more things but the actual product price did not change. When I was talking earlier about the opportunity of introducing more products into the market it says more different products at different entry point prices.

Dennis McGrath

So that gives us a wider bandwidth of ASPs to enable the proper positioning of these couple new products.

Anthony Vendetti - Maxim Group

Okay. Can you talk a little bit, Dolev, about -- I saw a little bit of commentary in the press release on Brazil, but just anything quantitatively that you could talk about in terms of units or just general trends in terms of sales?

Dolev Rafaeli

I don’t think I can add too much to what was in the press release I was just there 10 days ago. We are doing there what we have done in other markets. We are present in the most prestigious retailers best shop is the high end of best buy of Brazil it's at the -- you can buy TV screens for $50,000, you could buy the most advanced home electronics we are there side-by-side with the only other brand in hair removal and that they present which is Philips only two brands us and Philips actually the two sides of the same display.

We are with other retailers at the same level. We are starting to triple down to the other retail chains. That I explained previously on this call the next step is to not only be with the retailer but be in ever increasing number of points of sale. So we originally when we launched in late September, beginning of October 2013 we decided to focus only on Sao Paulo which is the largest state in Brazil it represents 30% to 40% of the Brazilian retail economy but we focused on that. We are starting to move out of that circle by getting into retail space in Rio de Janeiro and potentially in other places this is all going to happen in the coming quarters. The Brazilian calendar is different than ours, the important date on the calendar now is Mother's Day and afterwards there is a different sequence of retail events.

We are very prominently presented with these retailers which allows us to benefit from the brand awareness being built on TV versus the presentation in the store, competition as we expected in Brazil is far away from us in price. You can find Philips Lumea priced about three times as much as we are and you can find Remington priced roughly 2.5 times or 2.2 times as much as we are. There are some other companies but they are just far from us in terms of pricing which creates a great opportunity for us. We are priced in Brazil higher than we are in the U.S. We are selling the MSRP for products in Brazil is about 1000 Real which is U.S. $500. Since we are importing into Brazil using the Mercosur agreement we have very low duties coming in and we can allow a much lower price than that we can bring it almost down to the U.S. pricing but we did not decide to do that yet, we are starting it where we wanted to be and we haven’t gotten yet to doing price checking.

At first since we did not have our own platforms in Brazil we are using outsource platforms for inbound call center and online we are changing that as we go forward, so in the next few quarters we will update you as we build our own platforms in Brazil. That's going to only take increase the margin we take it's not going to change the way we do the business. So the press release refers you to the Brazilian lending pages and web properties that we have.

We are using well known personalities in Brazil. We are using Maria-Eve she was the girlfriend of a very famous tennis player, and she is also very famous in other advertisements. In addition to her male counterpart in the advertisement who stayed almost until the last week in the Big Brother Brazil Show, so she is very well known across Brazil. So there is a lot of face recognition going along with the products.

One of the reasons for me being there 10 days ago was to launch another retail kiosk for us. So we have our own retail presence in the big shopping centers in Sao Paulo, where we increased the exposure to the brand. Our last four five months we’re taken to learn what TV channels influence which kind of buyer. We do that using the same tools we use in other countries. We measure the response to see what creates response, not only in the retail but actually in online and through the phone lines. And that allows us to get a much more media efficient buy into Brazil. So our media buying rates have declined significantly from launch until now.

But again, Anthony, as a reminder, we've only been added for five months now. This is actually the beginning of the fifth month of us being in Brazil. The extension into retail puts us head-to-head with the other brands out there.

In Fast Shop as I explained before which is the primary home electronics retailer in Brazil, if you go on their website now you will see that we are the number two brand in personal care. But that doesn't answer the question of quantity. We need to extend the points of contact with consumers that it is the number of stores and we need to increase our direct response presence. I have a better call center and have a better online conversion.

Anthony Vendetti - Maxim Group

Okay, great. Just lastly, Dennis, on the numbers. I think I must be missing some expense, but if you go from the $0.23 non-GAAP or operating number that you reported and then you take out stock-based comp and then you take out the litigation and acquisition related expenses, that totals for me $0.17. Take that away from the $0.23, I get to $0.06 positive GAAP. What is the delta? What am I missing between $0.06 and negative $0.02?

Dennis McGrath

So there in the press release Anthony, you've got the non-GAAP reconciliation takes down the EBITDA adjusted for the stock-based comp. My comments -- so there are couple things included in the press release. You see a quote for $0.23, which is the $800,000 roughly rounded number for acquisition expenses or I'm sorry for litigation expenses $1 million in non-GAAP.

My comments in prepared remarks went one step further and added back the change in the media expense for the startup areas. So you have here in the press release $0.13. You see a explanatory paragraph right after that that reconciles you up to $0.23. And then in the -- in my prepared remarks, I quoted $0.34 based upon if you took out these new initiatives just that we were going to do it and hopefully that helps you reconcile down to your notes.

Anthony Vendetti - Maxim Group

Okay. Still not 100% clear. But we'll do it offline. All right. Thanks.

Operator

(Operator Instructions). Oh, sorry

Dennis McGrath

Operator, that appears to be our last question. So with that, thank you for joining our call today. We look forward to reporting back to you in August for our second quarter results, which we expect to report on August 7. With that have a great day, bye now.

Operator

That concludes today's conference. We thank you for your participation.

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