UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
OR
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission File Number 0-51481
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer
Identification No.)
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(Address of principal executive offices, including zip code)
(215 ) 619-3200
(Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
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Title of each class
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Trading
Symbol(s) |
Name of each exchange on which registered
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Indicate by check mark whether the registrant: (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company,
or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☐
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Accelerated filer ☐
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Smaller reporting company
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Emerging growth company
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No ☒
The number of shares outstanding of the issuer’s common stock as of August 7, 2021 was 34,017,612 shares.
STRATA SKIN SCIENCES, INC.
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Part I. Financial Information:
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PAGE
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a.
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1
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b.
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2
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c.
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3
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d.
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4
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f.
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5
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g.
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6
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21
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29
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29
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Part II. Other Information:
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29
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29
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29
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30
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31
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E-31.1
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PART I – Financial Information
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
(In thousands, except share and per share amounts)
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June 30, 2021
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December 31, 2020
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ASSETS
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(unaudited)
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Current assets:
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Cash and cash equivalents
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$
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$
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Restricted cash
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Accounts receivable, net of allowance for doubtful accounts of $
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Inventories
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Prepaid expenses and other current assets
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Total current assets
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Property and equipment, net
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Operating lease right-of-use assets, net
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Intangible assets, net
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Goodwill
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Other assets
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Total assets
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$
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$
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current liabilities:
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Note payable
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$
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$
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Current portion of long-term debt
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Accounts payable
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Other accrued liabilities
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Current portion of operating lease liabilities
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Deferred revenues
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Total current liabilities
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Long-term liabilities:
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Long-term debt, net
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Deferred tax liability
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Long-term operating lease liabilities, net
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Other liabilities
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Total liabilities
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Commitments and contingencies (see Note 15)
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Stockholders’ equity:
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||||||||
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Series C Convertible Preferred Stock, $
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Common Stock, $
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Additional paid-in capital
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Accumulated deficit
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(
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)
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(
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)
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Total stockholders’ equity
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Total liabilities and stockholders’ equity
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$
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$
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The accompanying notes are an integral part of these condensed consolidated financial statements.
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
(In thousands, except share and per share amounts)
(unaudited)
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For the Three Months Ended
June 30,
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2021
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2020
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Revenues, net
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$
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$
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Cost of revenues
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Gross profit
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Operating expenses:
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Engineering and product development
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Selling and marketing
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General and administrative
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Loss from operations
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(
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(
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Other income (expense), net:
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Gain on extinguishment of debt
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Interest expense net
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(
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(
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(
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Income (loss) before income taxes
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(
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)
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Income tax expense
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(
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(
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Net income (loss)
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$
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$
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(
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Earnings (loss) attributable to common shares
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$
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$
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(
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Earnings (loss) attributable to Preferred Series C shares
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Earnings (loss) per common share:
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Basic
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$
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$
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(
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)
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Diluted
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$
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$
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(
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Shares used in computing earnings (loss) per common share:
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Basic
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Diluted
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The accompanying notes are an integral part of these condensed consolidated financial statements.
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
(In thousands, except share and per share amounts)
(unaudited)
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For the Six Months Ended
June 30,
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2021
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2020
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Revenues, net
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$
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$
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Cost of revenues
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Gross profit
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Operating expenses:
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Engineering and product development
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Selling and marketing
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General and administrative
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Loss from operations
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(
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(
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Other income (expense), net:
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Gain on extinguishment of debt
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Interest expense, net
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(
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(
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(
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Loss before income taxes
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(
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(
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Income tax expense
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(
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(
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Net loss
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$
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(
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$
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(
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Loss attributable to common shares
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$
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(
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$
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(
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Loss attributable to Preferred Series C shares
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$
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(
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)
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Loss per common share:
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Basic
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$
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(
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)
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$
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(
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)
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Diluted
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$
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(
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$
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(
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Shares used in computing loss per common share:
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Basic
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Diluted
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Loss per Preferred Series C share - basic and diluted
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$
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(
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)
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Shares used in computing loss per basic and diluted Preferred Series C Shares
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The accompanying notes are an integral part of these condensed consolidated financial statements.
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
FOR THE SIX MONTHS ENDED JUNE 30, 2021 AND 2020
(In thousands, except share amounts)
(unaudited)
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Convertible
Preferred Stock – Series C
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Common Stock
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Additional Paid-In
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Accumulated
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|||||||||||||||||||||||||
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Shares
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Amount
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Shares
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Amount
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Capital
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Deficit
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Total
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||||||||||||||||||||||
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BALANCE, January 1, 2020
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$
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$
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$
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$
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(
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)
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$
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Stock-based compensation
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-
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-
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Conversion of convertible preferred stock into common stock
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(
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(
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Net loss
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-
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-
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(
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(
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|||||||||||||||||||
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BALANCE, March 31, 2020
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$
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$
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$
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$
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(
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$
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Stock-based compensation
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-
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Issuance of restricted stock
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Net loss
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-
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-
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(
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(
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|||||||||||||||||||
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BALANCE, June 30, 2020
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$
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$
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$
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$
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(
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)
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$
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|||||||||||||||
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Convertible
Preferred Stock – Series C
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Common Stock
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Additional Paid-In
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Accumulated
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|||||||||||||||||||||||||
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Shares
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Amount
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Shares
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Amount
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Capital
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Deficit
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Total
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||||||||||||||||||||||
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BALANCE, January 1, 2021
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$
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$
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$
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$
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(
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)
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$
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|||||||||||||||
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Stock-based compensation
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-
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-
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|||||||||||||||||||||
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Issuance of restricted stock
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|||||||||||||||||||||
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Net loss
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-
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-
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(
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)
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(
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)
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|||||||||||||||||||
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BALANCE, March 31, 2021
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|
$
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$
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$
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$
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(
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)
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$
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|||||||||||||||
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Stock-based compensation
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-
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-
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||||||||||||||||||||||
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Issuance of restricted stock
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||||||||||||||||||||||
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Net income
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-
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-
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|||||||||||||||||||||
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BALANCE, June 30, 2021
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$
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|
|
$
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$
|
|
$
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(
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)
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$
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|
|||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
(In thousands, unaudited)
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For the Six Months Ended
June 30,
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||||||||
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2021
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2020
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|||||||
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Cash Flows From Operating Activities:
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||||||||
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Net loss
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$
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(
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)
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$
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(
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)
|
||
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Adjustments to reconcile net loss to net cash provided by operating activities:
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||||||||
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Depreciation and amortization
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Amortization of right-of-use asset
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Provision for doubtful accounts
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(
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)
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Stock-based compensation
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Loss on lasers placed in-service
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Gain on extinguishment of debt
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( |
) | ||||||
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Deferred taxes
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||||||
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Changes in operating assets and liabilities:
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||||||||
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Accounts receivable
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||||||
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Inventories
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(
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)
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|||||
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Prepaid expenses and other assets
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(
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)
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Accounts payable
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(
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)
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Other accrued liabilities
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(
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)
|
|||||
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Other liabilities
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(
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)
|
|||||
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Operating lease liabilities
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(
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)
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(
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)
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Deferred revenues
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(
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)
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|||||
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Net cash provided by operating activities
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||||||
| Cash Flows From Investing Activities: | ||||||||
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Lasers placed-in-service
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( |
( |
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Purchases of property and equipment
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( |
|||||||
| Net cash used in investing activities | ( |
( |
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Cash Flows From Financing Activities
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Proceeds from note payables and long-term debt
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Net cash provided by financing activities
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Net (decrease) increase in cash and cash equivalents and restricted cash
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(
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)
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|||||
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Cash, cash equivalents and restricted cash, beginning of period
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||||||
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Cash, cash equivalents and restricted cash, end of period
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$
|
|
$
|
|
||||
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Cash and cash equivalents
|
$
|
|
$
|
|
||||
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Restricted cash
|
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|
||||||
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$
|
|
$
|
|
|||||
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Supplemental information of cash and non-cash transactions:
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||||||||
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Cash paid for interest
|
$
|
|
$
|
|
||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
(In thousands, except share, per share amounts and number of lasers)
(unaudited)
Note 1
The Company:
Background
STRATA Skin Sciences (the “Company”) is a
medical technology company in dermatology dedicated to developing, commercializing and marketing innovative products for the treatment of dermatologic conditions. Its products include the XTRAC® excimer laser and VTRAC® lamp systems utilized in
the treatment of psoriasis, vitiligo and various other skin conditions.
The XTRAC is an ultraviolet light excimer
laser system utilized to treat psoriasis, vitiligo and other skin diseases. The XTRAC excimer laser system received clearance from the United States Food and Drug Administration (the “FDA”) in 2000. As of June 30, 2021, there were 848 XTRAC systems placed in dermatologists’ offices
in the United States and 41 systems internationally under the Company’s recurring revenue business model. The XTRAC systems deployed
under the recurring revenue model generate revenue on a per procedure basis or include a fixed payment over an agreed upon period with a capped number of treatments, which if exceeded would incur additional fees. The per-procedure charge is
inclusive of the use of the system and the services provided by the Company to the customer, which includes system maintenance and other services. The VTRAC Excimer Lamp system, offered in addition to the XTRAC system internationally, provides
targeted therapeutic efficacy demonstrated by excimer technology with a lamp system.
In September 2020, the Company signed a
direct distribution agreement with our Japanese distributor for a combination of direct capital sales and recurring revenue for the country of Japan.
In February 2021, the Company signed an
agreement with our Chinese distributor for a combination of direct capital sales and recurring revenues for the country of China.The Company has now introduced its Home by XTRAC™ business, leveraging in-house resources including DTC advertising,
in-house call center and its insurance reimbursement team to provide an at-home, insurance-reimbursed treatment option for patients with certain skin diseases that do not qualify for in-office treatments. The Company is evaluating this business
in an ongoing beta test.
In late 2019, there was an outbreak of a new strain of coronavirus (“COVID-19”) which became a global pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, constrained work force participation and created significant volatility and disruption of financial markets. In addition, the pandemic lead to the suspension of elective procedures in the U.S. and to the temporary closure of many physician practices which are our primary customers. We do not know the extent of the impact on our customers including their potential for permanent closure. While many offices have reopened, the ongoing impact of the COVID-19 pandemic and its variants on the Company’s operational and financial performance, including its ability to execute its business strategies and initiatives in the expected time frames, will depend on future developments, including the duration and ongoing spread of the COVID-19 outbreak and its variants, continued or renewed restrictions on business operations and transport, any governmental and societal responses thereto including legislative or regulatory changes as well as the distribution and effectiveness of COVID-19 vaccines and the continued impact on worldwide economic and geopolitical conditions, all of which are uncertain and cannot be predicted.
Domestically, as the procedures for which the Company’s devices are used
are elective in nature; and as social distancing, travel restrictions, quarantines and other restrictions became prevalent in the United States, this had a negative impact on the Company’s recurring revenue model and its financial position and
cash flow. The virus has disrupted the supply chain from China and other countries and the Company depends upon its supply chain to provide a steady source of components to manufacture and repair our devices. To mitigate the impact of COVID-19
the Company took a variety of measures to ensure the availability and functioning of its critical infrastructure by implementing business continuity plans. To promote the safety and security of its employees, while complying with various
government mandates including work-from-home arrangements and social-distancing initiatives to reduce the transmission of COVID-19, the Company provided face masks for employees at facilities significantly impacted and required masks and
on-site body temperature monitoring before entering facilities. In addition, the Company created and executed programs utilizing its direct to consumer advertising and call center to contact patients and partner clinics to restart the Company’s
partners’ businesses. To conserve its cash in order to mitigate the ongoing impact of the COVID-19 pandemic, in the second quarter of 2020, the Company furloughed employees who returned to work after the Company received proceeds from the PPP
Loan. The Company also reduced discretionary spending in 2020 and continues to delay payments to vendors. Delayed payments to vendors were approximately $472 as of June 30, 2021. See Note 2, Liquidity for
discussion on Company liquidity.
6
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, per share amounts and number of lasers)
(unaudited)
Basis of Presentation:
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned, inactive subsidiary in India. All significant intercompany balances and transactions have been eliminated in consolidation.
Unaudited Interim Condensed Consolidated Financial Statements
The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of
the United States Securities and Exchange Commission (“SEC”) for interim financial reporting. These condensed consolidated statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring
adjustments and accruals) necessary to fairly present the results of the interim periods. The condensed consolidated balance sheet at December 31, 2020, has been derived from the audited consolidated financial statements at that date. Operating
results and cash flows for the three and six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2021 or any other future period. Certain information and footnote
disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been omitted in accordance with the rules and regulations for
interim reporting of the SEC. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended
December 31, 2020 (the “2020 Form 10-K”), and other forms filed with the SEC from time to time. Dollar amounts included herein are in thousands, except share, per share data and number of lasers.
Reclassifications
Certain reclassifications from the prior year presentation have been made to
conform to the current year presentation. These reclassifications did not have a material impact on the Company’s equity, results of operations, or cash flows.
Significant Accounting Policies
The significant accounting policies used in preparation of these condensed
consolidated financial statements are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, and there have been no changes to the Company’s significant accounting policies during the six months ended June 30, 2021.
Use of Estimates
The preparation of the condensed consolidated financial statements in
conformity with U.S. GAAP requires management to make estimates and assumptions that affect amounts reported of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting
periods. Actual results could differ from those estimates and be based on events different from those assumptions. As of June 30, 2021, the more significant estimates include (1) revenue recognition, in regards to deferred revenues and the
contract term and valuation allowances of accounts receivable, (2) the inputs used in the impairment analyses of goodwill, (3) the estimated useful lives of intangible assets and property and equipment, (4) the inputs used in determining the fair
value of equity-based awards, (5) the valuation allowance related to deferred tax assets, (6) the inventory reserves, (7) state sales and use tax accruals and (8) warranty claims.
Additionally, the full impact of the ongoing COVID-19 outbreak is unknown and
cannot be reasonably estimated. However, management has made appropriate accounting estimates on certain accounting matters, which include the allowance for doubtful accounts, inventory valuation, carrying value of the goodwill and other
long-lived assets, based on the facts and circumstances available as of the reporting date. The Company’s future assessment of the magnitude and duration of the ongoing COVID-19 outbreak, as well as other factors, could result in material impacts
to the Company’s financial statements in future reporting periods.
7
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, per share amounts and number of lasers)
(unaudited)
Fair Value Measurements
The Company measures and discloses fair value in accordance with Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification 820, Fair Value Measurements and Disclosures (“ASC Topic 820”). ASC Topic 820 defines fair value, establishes a framework and gives
guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a
basis for considering such assumptions there exists a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
|
|
•
|
Level 1 – unadjusted quoted prices are available
in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date.
|
|
|
•
|
Level 2 – pricing inputs are other than quoted
prices in active markets that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.
|
|
|
•
|
Level 3 – pricing inputs are unobservable for the
non-financial asset or liability and only used when there is little, if any, market activity for the non-financial asset or liability at the measurement date. The inputs into the determination of fair value require significant management
judgment or estimation. Fair value is determined using comparable market transactions and other valuation methodologies, adjusted as appropriate for liquidity, credit, market and/or other risk factors.
|
This hierarchy requires the Company to use observable market data, when
available, and to minimize the use of unobservable inputs when determining fair value.
The fair value of cash and cash equivalents and restricted cash are based on
their respective demand value, which are equal to the carrying value. The carrying value of all short-term monetary assets and liabilities is estimated to be approximate to their fair value due to the short-term nature of these instruments. As of
June 30, 2021 and December 31, 2020, the carrying value of the note payable and the Company’s long term debt are estimated to approximate fair value.
Earnings Per Share
The Company calculates earnings (loss) per common share and
Preferred Series C share in accordance with ASC 260, Earnings per Share. Under ASC 260, basic earnings (loss) per common share and Preferred Series C share is calculated by
dividing the earnings (loss) attributable
to common shares and Preferred Series C shares by the weighted-average number of
common shares and Preferred Series C shares outstanding during the reporting period and excludes dilution for potentially dilutive securities. Diluted earnings (loss) per common share and Preferred Series C share gives effect to dilutive
options, warrants and other potential common shares outstanding during the period.
8
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, per share amounts and number of lasers)
(unaudited)
The following table presents the calculation of basic and diluted earnings
(loss) per share by each class of security for the three and six months ended June 30, 2021, and 2020:
|
Three Months Ended
June 30, 2021
|
Six Months Ended
June 30, 2021
|
|||||||||||||||
|
Common
Stock
|
Series C
Convertible
Preferred Stock
|
Common
Stock
|
Series C
Convertible
Preferred Stock
|
|||||||||||||
|
Earnings (loss) attributable to each class
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||||
| Weighted average number of shares outstanding during the period basic |
||||||||||||||||
| Weighted average number of shares outstanding during the period diluted |
||||||||||||||||
|
Basic and Diluted earnings (loss) per share
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||||
|
Three Months Ended
June 30, 2020
|
Six Months Ended
June 30, 2020
|
|||||||||||||||
|
Common
Stock
|
Series C
Convertible
Preferred Stock
|
Common
Stock
|
Series C
Convertible
Preferred Stock
|
|||||||||||||
|
Loss attributable to each class
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
|||||
|
Weighted average number of shares outstanding during the period
|
||||||||||||||||
|
Basic and Diluted loss per share
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
|||||
The Company considers
its Series C Convertible Preferred Stock to be participating securities in the presentation of earnings per share. For the six months ended June 30, 2021 and three and six months June 30, 2020, diluted loss per common share and Series C
Convertible Preferred Stock share is equal to the basic loss per common share and Series C Convertible Preferred Stock share, respectively, since all potentially dilutive securities were anti-dilutive.
The following table sets forth the weighted average of
potential common stock equivalents outstanding during the three and six months ended June 30, 2021, and 2020 that have been excluded from the earnings (loss) per share calculation as their inclusion would have been anti-dilutive:
|
Three Months Ended
June 30,
|
Six Months Ended June 30, |
|||||||||||||||
|
|
2021
|
2020
|
2021 | 2020 | ||||||||||||
|
Common stock purchase warrants
|
|
|
||||||||||||||
|
Restricted stock units
|
|
|
||||||||||||||
|
Common stock options
|
|
|
||||||||||||||
|
Total
|
|
|
||||||||||||||
Accounting Pronouncements Recently Adopted
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes
(Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 eliminated certain exceptions and changed guidance on other matters. The exceptions relate to the allocation of income taxes in separate company financial statements,
tax accounting for equity method investments and accounting for income taxes when the interim period year-to-date loss exceeds the anticipated full year loss. Changes relate to the accounting for franchise taxes that are income-based and
non-income-based, determining if a step up in tax basis is part of a business combination or if it is a separate transaction, when enacted tax law changes should be included in the annual effective tax rate computation, and the allocation of
taxes in separate company financial statements to a legal entity that is not subject to income tax. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early
adoption permitted. The adoption of ASU No. 2019-12 on January 1, 2021, did not have a material effect on the Company’s condensed consolidated financial statements.
9
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, per share amounts and number of lasers)
(unaudited)
Recent Accounting Pronouncements Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) Facilitation of the
Effects of Reference Rate Reform on Financial Statements. This pronouncement provides temporary optional expedients and exceptions for applying U.S. GAAP principles to contract modifications and hedging relationships to ease the financial
reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. The guidance is effective upon issuance in March 2020, and will apply through December 31, 2022. We continue to
evaluate the temporary expedients and options available under this guidance, and the effects of these pronouncements and as the Company does not have any hedging activities does not believe this will have a material effect on the Company’s
condensed consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt with Conversion and Other Options (Subtopic
470-20) and Derivative and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40); Accounting for Convertible Instruments and Contracts in an Entity’s own Equity. The pronouncement simplifies the accounting for certain financial instruments
with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. Specifically, the ASU “simplifies accounting for convertible instruments by removing major separation models required under
current U.S. GAAP.” In addition, the ASU “removes certain settlement conditions that are required for equity contracts to qualify for it” and “simplifies the diluted earnings per share (EPS) calculations in certain areas.” The guidance is
effective beginning after December 15, 2021 and early adoption is permitted. The Company does not currently engage in contracts covered by this guidance and does not believe it will have a material effect on the Company’s condensed consolidated
financial statements, but could in the future.
Note 2
Liquidity
The Company has been negatively impacted by the ongoing COVID-19 pandemic, has
historically experienced recurring losses and has been dependent on raising capital from the sale of securities in order to continue to operate and meet the Company’s obligations in the ordinary course of business. Since the equity financing in
May 2018 and pre-COVID, the Company has improved revenues and gross profit, generated positive cash flow from operations, refinanced its debt at a lower interest rate. During the COVID-19 pandemic, the Company received cash proceeds from the
PPP loan, which was forgiven, and the EIDL loan (each as defined in Note 9 below). Management believes that the Company’s cash and cash equivalents, combined with the anticipated revenues from the sale or use of the Company’s products and the
proceeds from the PPP loan and the EIDL loan, will be sufficient to satisfy our working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with our existing operations through the next 12
months following the date of the issuance of these unaudited condensed consolidated financial statements. However, the negative impact of the ongoing COVID-19 outbreak on the financial markets could interfere with our ability to access
financing and on favorable terms.
Note 3
Revenue Recognition
In the Dermatology Recurring Procedures
Segment the Company has two types of arrangements for its phototherapy treatment equipment as follows: (i) the Company places its lasers in a physician’s office at no charge to the physician, and generally charges the physician a fee for an
agreed upon number of treatments; or (ii) the Company places its lasers in a physician’s office and charges the physician a fixed fee for a specified period of time not to exceed an agreed upon number of treatments; if that number is exceeded
additional fees will have to be paid.
10
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, per share amounts and number of lasers)
(unaudited)
For the purposes of U.S. GAAP only,
these two types of arrangements are treated under the guidance of ASC 842, Leases. While these arrangements are not contractually operating leases, since the Company sells the physician access codes in order to operate the treatment equipment,
these arrangements are similar to operating leases for accounting purposes since the Company provides the customers limited rights to use the treatment equipment and the treatment equipment resides in the physician’s office and the Company may
exercise the right to remove the equipment upon notice, under certain circumstances, while the physician controls the utility and output of such equipment during the term of the arrangement as it pertains to the use of access codes to treat the
patients. For the lasers placed-in service under these arrangements, the terms of the domestic arrangements are generally 36 months
with automatic one-year renewals and include a termination clause that can be affected at any time by either party with 30 to 60 day notice. Amounts paid are generally non-refundable. For the first type of arrangement, sales of access codes are considered variable treatment
code payments and are recognized as revenue over the estimated usage period of the agreed upon number of treatments. For the second type of arrangement, customers purchase access codes and revenue is recognized ratably on a straight-line basis
as the lasers are being used over the term period specified in the agreement. Variable treatment code payments that will be paid only if the customer exceeds the agreed upon number of treatments are recognized only when such treatments are
being exceeded and used. Internationally, through its Korean, Japanese and, in 2021, Chinese distributors, the Company generally sells access codes for a fixed amount on a monthly basis to end-user customers and the terms are generally 48 months, with termination in the event of the customers’ failure to remit payments timely, and include a potential buy-out at the end of the term
of the contract. Currently, this is the only foreign recurring revenue. Pre-paid amounts are recorded in deferred revenue and recognized as revenue over the lease term in the patterns described above. Under both methods, pricing is fixed with
the customer.
With respect to lease and non-lease
components, the Company adopted the practical expedient to account for the arrangement as a single lease component.
In the Dermatology Procedures Equipment segment, the Company sells its
products internationally through distributors and domestically directly to physicians. For the product sales, the Company recognizes revenues when control of the promised products is transferred to either the Company’s distributors or
end-user customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those products (the transaction price). Control transfers to the customer at a point in time. To indicate the transfer of
control, the Company must have a present right to payment and legal title must have passed to the customer. The Company ships most of its products FOB shipping point, and as such, the Company primarily transfers control and records revenue
upon shipment. From time to time the Company will grant certain customers, for example governmental customers, FOB destination terms, and the transfer of control for revenue recognition occurs upon receipt. The Company has elected to
recognize the cost of freight and shipping activities as fulfillment costs. Amounts billed to customers for shipping and handling are included as part of the transaction price and recognized as revenue when control of the underlying goods are
transferred to the customer. The related shipping and freight charges incurred by the Company are included in cost of revenues.
Remaining performance obligations
related to ASC 606 represent the aggregate transaction price allocated to performance obligations with an original contract term greater than one year, which are fully or partially unsatisfied at the end of the period. Remaining performance
obligations include the potential obligation to perform under extended warranties but excludes any equipment accounted for as leases. As of June 30, 2021, the aggregate amount of the transaction price allocated to remaining performance
obligations was $69 , and the Company expects to recognize $51 of the remaining performance obligations within one year and the
balance over to three years .
Contract assets primarily relate to the Company’s rights to consideration for work completed in relation to its services performed but not billed at the reporting date. The contract assets are transferred to receivables when the rights become
unconditional. Currently, the Company does not have any contract assets which have not transferred to a receivable. Contract liabilities primarily relate to extended warranties where the Company has received payments, but has not yet satisfied
the related performance obligations.
The allocations of the transaction
price are based on the price of stand-alone warranty contracts sold in the ordinary course of business. The advance consideration received from customers for the warranty services is a contract liability that is recognized ratably over the
warranty period. As of June 30, 2021, the $51 of short-term contract liabilities is presented as deferred revenues and the $18 of long-term contract liabilities is presented within Other Liabilities on the condensed consolidated balance sheet. For the three and six months
ended June 30, 2021, and 2020, the Company recognized $20 and $54 , and $53 and $110 respectively, as revenue from amounts classified as contract liabilities (i.e. deferred revenues) as of December 31, 2020, and 2019.
With respect to contract acquisition
costs, the Company applied the practical expedient and expenses these costs immediately.
The Company records co-pay
reimbursements made to patients receiving laser treatments as a reduction of revenue. For the three and six months ended June 30, 2021, and 2020, the Company recorded such reimbursements in the amounts of $186 and $343 , and $86 and $254 respectively.
11
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, per share amounts and number of lasers)
(unaudited)
The following tables present the Company’s revenue disaggregated by
geographical region for the three and six months ended June 30, 2021 and, 2020, respectively. Domestic refers to revenue from customers based in the United States, and substantially all foreign revenue is derived from sales to our distributors,
primarily in Asia.
|
Three Months Ended
June 30, 2021
|
||||||||||||
|
Dermatology Recurring Procedures
|
Dermatology Procedures Equipment
|
TOTAL
|
||||||||||
|
Domestic
|
$
|
|
$
|
|
$
|
|
||||||
|
Foreign
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Six Months Ended
June 30, 2021
|
||||||||||||
|
Dermatology Recurring Procedures
|
Dermatology Procedures Equipment
|
TOTAL
|
||||||||||
|
Domestic
|
$
|
|
$
|
|
$
|
|
||||||
|
Foreign
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Three Months Ended
June 30, 2020
|
||||||||||||
|
Dermatology Recurring Procedures
|
Dermatology Procedures Equipment
|
TOTAL
|
||||||||||
|
Domestic
|
$
|
|
$
|
|
$
|
|
||||||
|
Foreign
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Six Months Ended
June 30, 2020
|
||||||||||||
|
Dermatology Recurring Procedures
|
Dermatology Procedures Equipment
|
TOTAL
|
||||||||||
|
Domestic
|
$
|
|
$
|
|
$
|
|
||||||
|
Foreign
|
|
|
|
|||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
12
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, per share amounts and number of lasers)
(unaudited)
The following table summarizes the Company’s expected future undiscounted
fixed treatment code payments from international recurring revenue customers as of June 30,
|
Remaining
|
$
|
|
||
|
|
|
|||
|
|
|
|||
|
|
|
|||
|
|
|
|||
|
|
|
|||
|
Total
|
$
|
|
Note 4
Inventories:
Inventories consist of:
|
June 30, 2021
|
December 31, 2020
|
|||||||
|
Raw materials and work-in-process
|
$
|
|
$
|
|
||||
|
Finished goods
|
|
|
||||||
|
Total inventories
|
$
|
|
$
|
|
||||
Work-in-process is
immaterial, given the Company’s typically short manufacturing cycle, and therefore is disclosed in conjunction with raw materials.
Note 5
Property and Equipment,
net:
Property and equipment consist of:
|
June 30, 2021
|
December 31, 2020
|
|||||||
|
Lasers placed-in-service
|
$
|
|
$
|
|
||||
|
Equipment, computer hardware and software
|
|
|
||||||
|
Furniture and fixtures
|
|
|
||||||
|
Leasehold improvements
|
|
|
||||||
|
|
|
|||||||
|
Accumulated depreciation and amortization
|
(
|
)
|
(
|
)
|
||||
|
Property and equipment, net
|
$
|
|
$
|
|
||||
Depreciation and
related amortization expense was $520 and $1,001 ,
and $495 and $1,081 for
the three and six months ended June 30, 2021, and 2020, respectively.
Note 6
Intangible Assets, net:
Set forth below is a detailed listing of definite-lived intangible assets as of
June 30, 2021:
|
Balance
|
Accumulated
Amortization
|
Intangible
assets, net
|
||||||||||
|
Core technology
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
|
Product technology
|
|
(
|
)
|
|
||||||||
|
Customer relationships
|
|
(
|
)
|
|
||||||||
|
Tradenames
|
|
(
|
)
|
|
||||||||
|
$
|
|
$
|
(
|
)
|
$
|
|
||||||
13
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, per share amounts and number of lasers)
(unaudited)
Related amortization
expense was $353 and $705 ,
and $453 and $905 for
the three and six months ended June 30, 2021, and 2020, respectively.
Definite-lived
intangible assets are tested for impairment when events or changes in circumstances indicate that the carrying value of the asset group may not be recoverable. The Company recognizes an impairment loss when and to the extent that the recoverable
amount of an asset group is less than its carrying value. There were no impairment charges for the six months ended June 30, 2021.
Estimated amortization expense for the above amortizable
intangible assets for future periods is as follows:
|
Remaining 2021
|
$
|
|
||
|
2022
|
|
|||
|
2023
|
|
|||
|
2024
|
|
|||
|
2025
|
|
|||
|
Total
|
$
|
|
Note 7
Other Accrued Liabilities:
Other accrued liabilities consist of:
|
June 30, 2021
|
December 31, 2020
|
|||||||
|
Accrued warranty, current
|
$
|
|
$
|
|
||||
|
Accrued compensation, including commissions and vacation
|
|
|
||||||
|
Accrued state sales, use and other taxes
|
|
|
||||||
|
Accrued professional fees and other accrued liabilities
|
|
|
||||||
|
Total other accrued liabilities
|
$
|
|
$
|
|
||||
Accrued State Sales and Use Tax
In the ordinary course of business, the Company is, from time to
time, subject to audits performed by state taxing authorities. These actions and proceedings are generally based on the position that the arrangements entered into by the Company are subject to sales and use tax rather than exempt from tax under
applicable law. The Company uses estimates when accruing its sales and use tax liability. All of the Company’s tax positions are subject to audit. One state has assessed the Company, in two assessments, an aggregate amount of $1,484 for the period from
March 2014 through February 2020, including penalties and interest. The Company has declined an informal offer to settle at a substantially lower amount, and the Company appealed in that jurisdiction’s administrative process of appeal.
In January 2021, the Company received notification that the
administrative judge from the respective state had issued an opinion finding in favor of the Company that the sale of XTRAC treatment codes were not taxable as sales tax with respect to the first assessment. The jurisdiction has filed an appeal of
the administrative law judge’s finding, and the appeal is in process.
A second jurisdiction has made an assessment of $720 from June 2015 through March 2018 plus interest of $171
through April 2020. The Company is also in that jurisdiction’s administrative process of appeal and the timing of the process has been impacted by the COVID-19 pandemic. If there is a determination that the true object of the Company’s recurring
revenue model is not exempt from sales taxes and is not a prescription medicine or the Company does not have other defenses where the Company does not prevail, the Company may be subject to sales taxes in those particular states for previous years
and in the future, plus potential interest and penalties.
14
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, per share amounts and number of lasers)
(unaudited)
The Company believes its state sales and use tax accruals have
properly recognized such that if the Company’s arrangements with customers are deemed more likely than not that the Company would not be exempt from sales tax in a particular state are the basis for measurement of the state sales and use tax is
calculated in accordance with ASC 405, Liabilities as a transaction tax. If and when the Company is successful in defending itself or in settling the sales tax obligation for a lesser amount, the reversal of this liability is to be recorded in the
period the settlement is reached. However, the precise scope, timing and time period at issue, as well as the final outcome of any audit and actual settlement remains uncertain.
The Company records state sales tax collected and remitted for its
customers on equipment sales on a net basis, excluded from revenue. The Company’s sales tax expense that is not presently being collected and remitted for the recurring revenue business is recorded in general and administrative expenses on the
condensed consolidated statements of operations.
Accrued Warranty Costs
The Company offers a standard
warranty on product sales generally for a to -year period, however, the Company has offered longer warranty periods, ranging from to four years , in order to meet competition or meet customer demands. The Company provides for the estimated cost of the future warranty claims on the date
the product is sold. Total accrued warranty is included in other accrued liabilities and other liabilities on the condensed consolidated balance sheet. The activity in the warranty accrual during the three and six months ended June 30, 2021 and, 2020, is summarized as follows:
|
Three Months Ended,
June 30,
|
Six Months Ended,
June 30,
|
|||||||||||||||
|
2021
|
2020
|
2021
|
2020
|
|||||||||||||
|
Accrual at beginning of period
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Additions charged to warranty expense
|
|
|
|
|
||||||||||||
|
Expiring warranties/claimed satisfied
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
|
Total
|
|
|
|
|
||||||||||||
|
Less: current portion
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
|
Total long-term accrued warranty costs
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
Note 8
Note Payable
On December 30, 2020, the Company renewed its $7,275 loan with a commercial bank
pursuant to a one-year Fixed Rate – Term Promissory Note (the “Note”). The Company’s obligations under the Note are secured by an
Assignment and Pledge of Time Deposit (the “Agreement”), under which the Company has pledged to the commercial bank the proceeds of a time deposit account in the amount of the loan and recorded the time deposit and accrued interest as
restricted cash on the balance sheet. The principal is due on December 30, 2021 with no penalties for prepayments. The interest rate
is fixed at 1.40 %. The secured time deposit has a fixed interest rate of 0.40 %.
Note 9
Long-term Debt:
Paycheck Protection
Program Loan
On April 22, 2020, the Company closed a
loan of $2,028 (the “PPP loan”) from a commercial bank, pursuant to the Paycheck Protection Program (“PPP”) administered by the Small
Business Administration (the “SBA”) pursuant to the CARES Act. The PPP loan would have matured on May 1, 2022 and bore an interest
rate of 1 % per annum. Payments of principal and interest of any unforgiven balance was scheduled to commence December 1, 2020, but was
deferred until the SBA approved of the forgiveness amount. In the second quarter of 2021,
the Company received notification that the PPP loan had been forgiven. The Company recorded a gain on extinguishment of debt in the amount of the loan of $2,028 .
15
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, per share amounts and number of lasers)
(unaudited)
Economic Injury
Disaster Loan
On May 22, 2020, the Company executed the
standard loan documents required for securing a loan (the “EIDL Loan”) from the SBA under its Economic Injury Disaster Loan (“EIDL”) assistance program in light of the impact of the COVID-19 pandemic on the Company’s business. The principal
amount of the EIDL Loan is up to $500 , with proceeds to be used for working capital purposes and is collateralized by all the Company’s
assets. On June 12, 2020, the Company received these funds from the SBA. Interest accrues at the rate of 3.75 % per annum. Installment
payments, including principal and interest, were originally due monthly beginning March 26, 2021 (twelve months from the date of the promissory note) in the amount of $2 . In March 2021, the SBA deferred payments on the EIDL loans by an additional 12 months. The balance of principal and interest is payable over the next thirty years from the date of the promissory note. There are no penalties for prepayment. Based upon guidance issued by the SBA on June 19, 2020, the EIDL Loan was not
required to be refinanced by the PPP loan. The balance of the loan at June 30, 2021 was $500 .
Note 10
Warrants:
At December 31, 2020, the Company had 19,812 outstanding common stock warrants at an exercise price of $5.30 . These warrants expired on January 29, 2021 . There are no outstanding common stock warrants at June 30, 2021.
Note 11
Stock-based
Compensation:
As of June 30, 2021, the Company had options to purchase 6,925,478 shares of common
stock outstanding with a weighted-average exercise price of $1.83 . As of June 30, 2021, options to purchase 4,510,555 2,700,000 and therefore there are 2,741,774 shares remaining available for issuance in the form of future equity awards. There were 71,934 restricted stock units vested and unissued as of March 31, 2021, which were all issued in April and May 2021.
Stock-based compensation expense, which
is included in general and administrative expense, for the three and six months ended June 30, 2021 and 2020, was $581 and $1,243 , and $410 and $840 respectively. As of June 30, 2021, there was $2,641
in unrecognized compensation expense, which will be recognized over a weighted average period of 1.28 years.
On February 28, 2021, in connection with
the separation of the Company’s Chief Executive Officer, the Company accelerated the vesting of all unvested options to purchase shares of common stock and extended the period to exercise to August 22, 2021. This acceleration and the extension of
the period to vest met the modification criteria for accounting purposes. For these modifications, the Company calculated and recorded the additional compensation expense of $173 .
On March 1, 2021, the Company granted an
option to purchase 1,632,590 shares of common stock to its incoming Chief Executive Officer with a strike price of $1.73 vesting over a three year period,
with 544,198 options vesting on the first anniversary of the date of the grant and 136,049 vesting every three months thereafter subject to acceleration of vesting under certain circumstances and expire ten years form the date of the grant. The aggregate fair value of the options granted was $2,103 .
In July 2021, the Company issued 128,373 restricted stock units to the board of directors with a fair
value of $182 , which vested immediately and was related to compensation from June 2020 through July 2021. In addition, the Company
issued 149,281 restricted stock units with a fair value of $212 , which vest quarterly from June 1, 2021 through June 2022 and issued 20,000
restricted stock units, with a fair value of $28 , to a new board member which vest quarterly from April 2021 to April 2022.
Note 12
Income Taxes:
The Company accounts for income taxes
using the asset and liability method for deferred income taxes. The provision for income taxes includes federal, state and local income taxes currently payable and deferred taxes resulting from temporary differences between the financial
statement and tax bases of assets and liabilities. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.
Income tax expense of $4 and of $8 , and $47 and $135 for the three and six
months ended June 30, 2021 and, 2020, respectively, was comprised primarily of changes in deferred tax liability related to goodwill. Goodwill is an amortizing asset according to tax regulations.
16
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, per share amounts and number of lasers)
(unaudited)
The United States enacted the Coronavirus
Aid, Relief, and Economic Security Act (CARES Act). The CARES Act is an approximately $2 trillion emergency economic stimulus package in response to the COVID-19 outbreak, which among other things contains numerous income tax provisions. Some of
these tax provisions are expected to be effective retroactively for years ending before the date of enactment. The Company analyzed the impact of the CARES Act and does not foresee a significant impact on its condensed consolidated financial
position, results of operations, effective tax rate and cash flows.
The Company has experienced certain
ownership changes, which under the provisions of Section 382 of the Internal Revenue Code of 1986, as amended, result in annual limitations on the Company’s ability to utilize its net operating losses in the future. The February 2014, July 2014,
June 2015 and May 2018 equity raises by the Company will limit the annual use of these net operating loss carryforwards. Although the Company has not performed a Section 382 study, any limitation of its pre-change net operating loss carryforwards
that would result in a reduction of its deferred tax asset would also have an equal and offsetting adjustment to the valuation allowance.
Note 13
Business Segments:
The Company has organized its business
into two operating segments to present its organization based upon the Company’s management structure, products and services offered,
markets served and types of customers, as follows: The Dermatology Recurring Procedures segment derives its revenues from the usage of its equipment by dermatologists to perform XTRAC procedures. The Dermatology Procedures Equipment segment
generates revenues from the sale of equipment, such as lasers and lamp products. Management reviews financial information presented on an operating segment basis for the purposes of making certain operating decisions and assessing financial
performance.
Unallocated operating expenses include
costs that are not specific to a particular segment but are general to the group; included are expenses incurred for administrative and accounting staff, general liability and other insurance, professional fees and other similar corporate
expenses. Interest expense and other income (expense), net, are also not allocated to the operating segments.
The following tables reflect results of operations from our business segments for the periods
indicated below:
Three
Months Ended June 30, 2021
|
Dermatology
Recurring
Procedures
|
Dermatology
Procedures
Equipment
|
TOTAL
|
||||||||||
|
Revenues
|
$
|
|
$
|
|
$
|
|
||||||
|
Costs of revenues
|
|
|
|
|||||||||
|
Gross profit
|
|
|
|
|||||||||
|
Gross profit %
|
|
%
|
|
%
|
|
%
|
||||||
|
Allocated operating expenses:
|
||||||||||||
|
Engineering and product development
|
|
|
|
|||||||||
|
Selling and marketing
|
|
|
|
|||||||||
|
Unallocated operating expenses
|
|
|
|
|||||||||
|
|
|
|
||||||||||
|
Income (loss) from operations
|
|
|
(
|
)
|
||||||||
| Gain on extinguishment of debt |
||||||||||||
|
Interest expense, net
|
|
|
(
|
)
|
||||||||
|
|
$
|
|
$
|
|
$
|
|
||||||
17
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, per share amounts and number of lasers)
(unaudited)
Six Months Ended June 30, 2021
|
Dermatology
Recurring
Procedures |
Dermatology
Procedures
Equipment
|
TOTAL
|
||||||||||
|
Revenues
|
$
|
|
$
|
|
$
|
|
||||||
|
Costs of revenues
|
|
|
|
|||||||||
|
Gross profit
|
|
|
|
|||||||||
|
Gross profit %
|
% |
% |
% |
|||||||||
|
Allocated operating expenses:
|
||||||||||||
|
Engineering and product development
|
|
|
|
|||||||||
|
Selling and marketing
|
|
|
|
|||||||||
|
Unallocated operating expenses
|
|
|
|
|||||||||
|
|
|
|
||||||||||
|
Income (loss) from operations
|
|
|
(
|
)
|
||||||||
|
Gain on extinguishment of debt
|
||||||||||||
|
Interest expense, net
|
|
|
(
|
)
|
||||||||
|
Income (loss) before income taxes
|
$
|
|
$
|
|
$
|
(
|
)
|
|||||
Three Months Ended June 30, 2020
|
Dermatology
Recurring
Procedures
|
Dermatology
Procedures
Equipment
|
TOTAL
|
||||||||||
|
Revenues
|
$
|
|
$
|
|
$
|
|
||||||
|
Costs of revenues
|
|
|
|
|||||||||
|
Gross profit
|
|
|
|
|||||||||
|
Gross profit %
|
|
%
|
|
%
|
|
%
|
||||||
|
Allocated operating expenses:
|
||||||||||||
|
Engineering and product development
|
|
|
|
|||||||||
|
Selling and marketing
|
|
|
|
|||||||||
|
Unallocated operating expenses
|
|
|
|
|||||||||
|
|
|
|
||||||||||
|
Income (loss) from operations
|
(
|
)
|
|
(
|
)
|
|||||||
|
Interest expense, net
|
|
|
(
|
)
|
||||||||
|
Income (loss) before income taxes
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
|
||||
18
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, per share amounts and number of lasers)
(unaudited)
Six
Months Ended June 30, 2020
|
Dermatology
Recurring
Procedures
|
Dermatology
Procedures
Equipment
|
TOTAL
|
||||||||||
|
Revenues
|
$
|
|
$
|
|
$
|
|
||||||
|
Costs of revenues
|
|
|
|
|||||||||
|
Gross profit
|
|
|
|
|||||||||
|
Gross profit %
|
|
%
|
|
%
|
|
%
|
||||||
|
Allocated operating expenses:
|
||||||||||||
|
Engineering and product development
|
|
|
|
|||||||||
|
Selling and marketing
|
|
|
|
|||||||||
|
Unallocated operating expenses
|
|
|
|
|||||||||
|
|
|
|
||||||||||
|
Income (loss) from operations
|
|
|
(
|
)
|
||||||||
|
Interest expense, net
|
|
|
(
|
)
|
||||||||
|
Income (loss) before income taxes
|
$
|
|
$
|
|
$
|
(
|
)
|
|||||
Note 14
Significant Customer
Concentration:
For the three and six months ended June
30, 2021, revenues from sales to one of the Company’s distributors were $797 and $1,480 , and 10.8 % and 11.2 %, respectively, of total revenue for such period.
For the three and six months ended June 30, 2020, revenues
from the sales to the Company’s international master distributor were $807 and $1,303 , or 20 % and 12 %, respectively, of total revenues for such period.
No other customer represented more than
10% of total company revenues for the three and six months ended June 30, 2021 and 2020. No customer represented 10% of total accounts receivable as of June 30, 2021.
Note 15
Commitments:
Leases
The Company recognizes right-of-use
assets (“ROU assets”) and operating lease liabilities when it obtains the right to control an asset under a leasing arrangement with an initial term greater than twelve months. The Company adopted the short-term accounting election for leases
with a duration of less than one year. The Company leases its facilities and certain IT and office equipment under non-cancellable operating leases. All of the Company’s leasing arrangements are classified as operating leases with remaining lease
terms ranging from 1 to 4
years, and one facility lease has a renewal option for two years . Renewal options have been excluded from the determination of the
lease term as they are not reasonably certain of exercise. On May 1, 2019, the Company entered into an addendum with FR National Life, LLC for the Carlsbad, California facility for five years which began on October 1, 2019. Included in cash flows provided by operations for the six months ended June 30, 2021, and 2020, there was amortization of right-of-use assets of
$174 and $159 ,
respectively.
Operating lease costs were $107 and $223 , and $112 and $224 for the three and six months ended June 30, 2021, and 2020, respectively. Cash paid for amounts included in the measurement of operating lease liabilities was $115 231 9.76 % and the
weighted average remaining lease term was 2.6 years. The following table summarizes the Company’s operating lease maturities as of June 30, 2021:
19
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, per share amounts and number of lasers)
(unaudited)
|
For the year ending December 31,
|
Amount
|
|||
|
Remaining 2021
|
$
|
|
||
|
2022
|
|
|||
|
2023
|
|
|||
|
2024
|
|
|||
|
Total remaining lease payments
|
|
|||
|
Less: imputed interest
|
(
|
)
|
||
|
Total lease liabilities
|
$
|
|
||
Contingencies:
In the ordinary course of business, the Company is routinely
defendants in or parties to pending and threatened legal actions and proceedings, including actions brought on behalf of various classes of claimants. These actions and proceedings are generally based on alleged violations of employment, contract
and other laws. In some of these actions and proceedings, claims for substantial monetary damages are asserted against the Company. In the ordinary course of business, the Company is also subject to regulatory and governmental examinations,
information gathering requests, inquiries, investigations, and threatened legal actions and proceedings. In connection with formal and informal inquiries by federal, state, local and foreign agencies, the Company receives numerous requests,
subpoenas and orders for documents, testimony and information in connection with various aspects of its activities.
Note 16
Subsequent Events:
In July 2021, the
Company issued 128,373 restricted stock units to the board of
directors, which vested immediately and was related to compensation from June 2020 through June 1, 2021. In addition, the
Company issued 149,281 restricted stock units which vest from June 1, 2021 through June 2022 and issued 20,000 restricted stock units to a new board member which vest from April 2021 to April 2022.
On August 16, 2021, the Company acquired the U.S. dermatology Pharos business from Ra Medical Systems, Inc. for a cash payment of $3,700 for certain assets and the assumption of estimated existing customer warranty and service agreement liabilities and other assumed liabilities.
The Company also signed a services agreement to cover services to be provided by Ra Medical Systems.
The following discussion of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and notes to
condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q (this “Report”). This discussion contains forward-looking statements that involve risks and uncertainties. These forward-looking statements
include, but are not limited to, statements about the plans, objectives, expectations and intentions of STRATA Skin Sciences, Inc., a Delaware corporation (referred to in this Report as “we,” “us,” “our,” “STRATA,” “STRATA Skin Sciences” or
“registrant”) and other statements contained in this Report that are not historical facts. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that characterize our business including the scope and duration of the COVID-19 outbreak and its impact on global economic systems. In
particular, we encourage you to review the risks and uncertainties described in Part II-Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020. These risks and uncertainties could cause actual results to
differ materially from those projected in forward-looking statements contained in this report or implied by past results and trends. Forward-looking statements are statements that attempt to forecast or anticipate future developments in our
business, financial condition or results of operations and statements — see “Cautionary Note Regarding Forward-Looking Statements” that appears at the end of this discussion. These statements, like all statements in this Report, speak only as
of their date (unless another date is indicated), and we undertake no obligation to update or revise these statements in light of future developments.
The following financial data, in this narrative, are expressed in thousands, except for the earnings per share and prices per treatment.
Introduction, Outlook and Overview of Business Operations
STRATA Skin Sciences is a medical technology company in dermatology dedicated to developing, commercializing and marketing innovative products for the treatment of dermatologic conditions. Its products include the
XTRAC® excimer laser and VTRAC® lamp systems utilized in the treatment of psoriasis, vitiligo and various other skin conditions.
The XTRAC ultraviolet light excimer laser system utilized to treat psoriasis, vitiligo and other skin diseases. The XTRAC excimer laser system received clearance from the United States Food and Drug Administration
in 2000 and has since become a widely recognized treatment among dermatologists. The system delivers targeted 308nm ultraviolet light to affected areas of skin, leading to psoriasis clearing and vitiligo repigmentation, following a series of
treatments. As of June 30, 2021, there were 848 XTRAC systems placed in dermatologists’ offices in the United States under our dermatology recurring procedure model, an increase from 832 at the end of December 31, 2020. Under the dermatology
recurring procedure model, the XTRAC system is placed in a physician’s office and fees are charged on a per procedure basis or a fee is charged on a periodic basis not to exceed an agreed upon number of procedures. The XTRAC system’s use for
psoriasis is covered by nearly all major insurance companies, including Medicare. The VTRAC Excimer Lamp system, offered internationally in addition to the XTRAC, provides targeted therapeutic efficacy demonstrated by excimer technology with the
simplicity of design and reliability of a lamp system. We believe there are approximately 7.5 million people in the United States and up to 125 million people worldwide suffering from psoriasis, and 1% to 2% of the world’s population suffers from
vitiligo.
In September 2020, we signed a direct distribution agreement with our Japanese distributor for a combination of direct capital sales and recurring revenue for the country of Japan.
In February 2021, we signed an agreement with our Chinese distributor for a combination of direct capital sales and recurring revenues for the country of China.
In late 2019, there was an outbreak of a new strain of coronavirus (“COVID-19”) which became a global pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, constrained work force participation and created significant volatility and disruption of financial markets. In
addition, the pandemic lead to the suspension of elective procedures in the U.S. and to the temporary closure of many physician practices which are our primary customers. We do not know the extent of the impact on our customers including their
potential for permanent closure. While many offices have reopened, the impact of the ongoing COVID-19 pandemic and its variants on our operational and financial performance, including its ability to execute its business strategies and
initiatives in the expected time frames, will depend on future developments, including the duration and ongoing spread of the COVID-19 outbreak and its variants, continued or renewed restrictions on business operations and transport, any
governmental and societal responses thereto, including legislative or regulatory as well as the distribution of vaccines and effectiveness of COVID-19 vaccines and the continued impact on worldwide economic and geopolitical conditions, all of
which are uncertain and cannot be predicted.
Domestically, as the procedures in which our devices are used are elective in nature; and as social distancing, travel restrictions, quarantines and other restrictions became prevalent in the
United States, this had a negative impact on our recurring revenue model and its financial position and cash flow. The virus has disrupted the supply chain from China and other countries and we depend upon its supply chain to provide a steady
source of components to manufacture and repair our devices.
To mitigate the impact of COVID-19, we have taken a variety of measures to ensure the availability and functioning of our critical infrastructure by implementing business continuity plans to
promote the safety and security of our employees, while complying with various government mandates, including work-from-home arrangements and social-distancing initiatives to reduce the transmission of COVID-19, we are providing face masks for
employees at facilities significantly impacted and requiring on-site body temperature monitoring before entering facilities. In addition, we created and executed programs utilizing our direct to consumer advertising and call center to contact
patients and partner clinics to restart our partners’ businesses. To conserve our cash in order to mitigate the ongoing impact of the COVID-19 pandemic, in the second quarter of 2020, we furloughed employees who returned to work after we received
proceeds from the PPP Loan. In 2020, we also reduced discretionary spending and we continue to delay payments to vendors. Delayed payments to vendors were approximately $472 as of June 30, 2021.
In the event our own employees are impacted through direct or ancillary contact with a person who has the virus, we may need to devise other methods of transacting business in our offices by
working from home and or potentially ceasing operations for a period of time.
The ongoing COVID-19 pandemic has had a negative impact on our results of operations and financial performance for the first half of fiscal 2021, and we expect it will continue to have a
negative impact on revenues, earnings and cash flows in fiscal 2021. Accordingly, current results and financial condition discussed herein may not be indicative of future operating results and trends.
Key Technology
| • |
XTRAC® Excimer Laser. XTRAC received FDA clearance in 2000 and has since become a widely recognized treatment among dermatologists for psoriasis and other skin diseases. The XTRAC System
delivers ultra-narrowband ultraviolet B (“UVB”) light to affected areas of skin. Following a series of treatments typically performed twice weekly, psoriasis remission can be achieved, and vitiligo
patches can be re-pigmented. XTRAC is endorsed by the National Psoriasis Foundation, and its use for psoriasis is covered by nearly all major insurance companies, including Medicare. We estimate that more than half of all major insurance
companies now offer reimbursement for vitiligo as well, a figure that is increasing.
|
| • |
In the third quarter of 2018, we announced the FDA granted clearance for our Multi Micro Dose (MMD) tip for our XTRAC excimer laser. The MMD Tip accessory is indicated for use in conjunction with the XTRAC laser system to filter the
Narrow Band UVB (“NB-UVB”) light at delivery in order to calculate and individualize the maximum non-blistering dose for a particular patient.
|
| • |
In the third quarter of 2018, we announced the launch of our S3®, the next generation XTRAC. The S3 is smaller, faster and has a smart user interface.
|
| • |
In January 2020, we announced the FDA granted clearance of our XTRAC Momentum Excimer Laser Platform.
|
| • |
VTRAC® Lamp. VTRAC received FDA clearance in 2005 and provides targeted therapeutic efficacy demonstrated by excimer technology with the simplicity of design
and reliability of a lamp system.
|
Recent Developments
Acquisition of the U.S. dermatology
Pharos business of Ra Medical Systems
On August 16, 2021, we acquired the Pharos dermatology business from Ra Medical Systems, Inc. for a cash payment of $3,700 for certain assets and the assumption of estimated existing customer warranty and service agreement liabilities and certain other assumed liabilities. We also signed a
services agreement to cover services to be provided by Ra Medical Systems.
Paycheck Protection Program
On April 22, 2020, we closed on a loan of $2.0 million (the “PPP loan”) from a commercial bank, pursuant to the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief and Economic Security Act (the
“Cares Act”). The PPP loan would have matured on May 1, 2022 and bore an interest rate of 1% per annum. Payments of principal and interest of any unforgiven balance was scheduled to commence December 1, 2020,
but was deferred until the SBA approves of the forgiveness amount.
In the second quarter of 2021, we received notification the PPP loan had been forgiven and recorded a gain on extinguishment of debt in the amount of the loan of $2,028.
Economic Injury Disaster Loan
On May 22, 2020, we executed the standard loan documents required for securing a loan (the “EIDL Loan”) from the SBA under its Economic Injury Disaster Loan (“EIDL”) assistance program in light
of the impact of the COVID-19 pandemic on our business. The principal amount of the EIDL Loan is up to $500, with proceeds to be used for working capital purposes and is collateralized by all of our assets. On June 12, 2020, we received these
funds from the SBA. Interest accrues at the rate of 3.75% per annum. Installment payments, including principal and interest, were originally due monthly beginning March 26, 2021 (twelve months from the date of the promissory note) in the amount
of $2. In March 2021, the SBA deferred payments on the EIDL loans by an additional 12 months. The balance of principal and interest is payable over the next thirty years from the date of the promissory note. There are no penalties for prepayment.
Based upon guidance issued by the SBA on June 19, 2020, the EIDL Loan was not required to be refinanced by the PPP loan. The balance of the loan at June 30, 2021 was $500.
Critical Accounting Policies and Estimates
There have been no changes to our critical accounting policies in the six months ended June 30, 2021. Critical accounting policies and the significant estimates made in accordance with such policies are regularly
discussed with our Audit Committee. Those policies are discussed under “Critical Accounting Policies” in our “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” included in Item 7, as well as in our consolidated financial statements and the footnotes thereto for the fiscal year ended December 31, 2020, of our Annual Report on Form 10-K as filed with the SEC on March
25, 2021.
Results of Operations
Revenues
The following table presents revenues from our segments for the periods indicated below:
|
For the Three Months Ended
June 30,
|
For the Six Months Ended
June 30,
|
|||||||||||||||
|
2021
|
2020
|
2021
|
2020
|
|||||||||||||
|
Dermatology Recurring Procedures
|
$
|
5,452
|
$
|
2,796
|
$
|
10,131
|
$
|
8,497
|
||||||||
|
Dermatology Procedures Equipment
|
1,930
|
1,234
|
3,078
|
2,263
|
||||||||||||
|
Total Revenues
|
$
|
7,382
|
$
|
4,030
|
$
|
13,209
|
$
|
10,760
|
||||||||
Dermatology Recurring Procedures
The ongoing COVID-19 pandemic has had a negative impact on our results for the adjusted second quarter of 2021 and 2020, and we expect it will have a negative impact on its revenue for as long as the pandemic
continues. Recognized recurring treatment revenue for the three months ended June 30, 2021, was $5,452, which we estimate is approximately 78,000 treatments, with prices between $65 to $95 per treatment compared to recognized recurring treatment
revenue for the three months ended June 30, 2020 of $2,796, which we estimate is approximately 40,000 treatments, with prices between $65 to $95 per treatment.
Recognized treatment revenue for the six months ending June 30, 2021, was $10,131, which we estimate is approximately 145,000 treatments with prices between $65 and $95 per treatment compared to recognized
treatment revenue for the six months ended June 30, 2020, of $8,497, which is approximately 122,000 treatments with prices between $65 and $95 per treatment.
Increases in procedures are dependent upon building market acceptance through marketing programs with our physician partners and their patients to show that the XTRAC procedures will be of clinical benefit and will
be generally reimbursed by insurers. We believe that several factors have an impact on the prescribed use of XTRAC treatments for psoriasis and vitiligo patients. Specifically, we believe that there is a lack
of awareness of the positive effects of XTRAC treatments among both sufferers and providers; and the treatment regimen, which can sometimes require up to 12 or more treatments, has limited XTRAC use to certain patient populations. Therefore, our
strategy is to continue to execute a direct-to-patient program for XTRAC advertising in the United States, targeting psoriasis and vitiligo patients through a variety of media including television and radio; and through our use of social media
such as Facebook and Twitter. We monitor the results of our advertising expenditures in this area to reach the more than 10 million patients in the United States we believe are afflicted with these diseases. During 2020, we reduced our direct to
consumer advertising spend, but in 2021, subject to governmental responses to variants of COVID-19, we expect to increase spending in the direct-to-patient programs to drive patients to our partner clinics to increase recurring revenue and
increase spend in marketing activities as well. The increase in spending on these programs usually precedes the recurring revenue in our past experience as there is a lag between our advertising and patients then receiving treatment, which we
estimate to be three to nine months.
Revenues from Dermatology Recurring Procedures are recognized as revenue over the estimated usage period of the agreed upon number of treatments, as
the treatments are being used. As of June 30, 2021, and 2020, we deferred net revenues of $1,897 and $546, respectively, which will be recognized as revenue over the remaining usage period for domestic placements. Lower deferred revenue from the fourth quarter 2020 negatively impacted the first half of 2021 as compared to the first half of 2020 when higher deferred revenue favorable impacted that
period.
We have recently signed direct distribution contracts with our international distributors for a combination of direct capital sales and recurring revenue. If the recurring model is accepted in these countries and
the business model can be executed by these distributors, these agreements are expected to increase recurring revenue over time, but will have an initial impact of reducing sales of dermatology procedures equipment.
Dermatology Procedures Equipment
The ongoing COVID-19 pandemic has had a negative impact on our results for the first and second quarters of 2021 and 2020, and we expect it will have a negative impact on its revenue for as long as the pandemic
continues. For the three months ended June 30, 2021, dermatology equipment revenues were $1,930. Internationally, we sold 14 systems (all XTRAC). Domestically, there were five systems sold during the three months ended June 30, 2021.
For the three months ended June 30, 2020, dermatology equipment revenues were $1,234. Internationally, we sold 5 systems (2 XTRAC and 3 VTRAC). Domestically, there were no XTRAC systems sold during the three months
ended June 30, 2020.
For the six months ended June 30, 2021, dermatology equipment revenues were $3,078. Internationally, we sold 16 systems (all XTRAC). Domestically, we sold five XTRAC systems during the six months ended June 30,
2021.
For the six months ended June 30, 2020, dermatology equipment revenues were $2,263. Internationally, we sold 10 systems (2 XTRAC and 8 VTRAC). Domestically, we sold 1 XTRAC system for the six months ended June 30,
2020.
Cost of Revenues
The following table illustrates cost of revenues from our two business segments for the periods listed below:
|
For the Three Months Ended
June 30,
|
For the Six Months Ended
June 30,
|
|||||||||||||||
|
2021
|
2020
|
2021
|
2020
|
|||||||||||||
|
Dermatology Recurring Procedures
|
$
|
1,635
|
$
|
1,364
|
$
|
3,136
|
$
|
3,166
|
||||||||
|
Dermatology Procedures Equipment
|
986
|
702
|
1,599
|
1,231
|
||||||||||||
|
Total Revenues
|
$
|
2,621
|
$
|
2,066
|
$
|
4,735
|
$
|
4,397
|
||||||||
Gross Profit Analysis
The following tables present changes in our gross margin for the periods presented below:
|
Company Profit Analysis
|
For the Three Months Ended
June 30,
|
For the Six Months Ended
June 30,
|
||||||||||||||
|
2021
|
2020
|
2021
|
2020
|
|||||||||||||
|
Revenues
|
$
|
7,382
|
$
|
4,030
|
$
|
13,209
|
$
|
10,760
|
||||||||
|
Percent increase
|
83.2
|
%
|
22.8
|
%
|
||||||||||||
|
Cost of revenues
|
2,621
|
2,066
|
4,735
|
4,397
|
||||||||||||
|
Percent increase
|
26.9
|
%
|
7.7
|
%
|
||||||||||||
|
Gross profit
|
$
|
4,761
|
$
|
1,964
|
$
|
8,474
|
$
|
6,363
|
||||||||
|
Gross profit percentage
|
64.5
|
%
|
48.7
|
%
|
64.2
|
%
|
59.1
|
%
|
||||||||
Gross profit increased to $4,761 for the three months ended June 30, 2021 from $1,964 during the same period in 2020. As a percent of revenue, the gross margin was 64.5% for the three months ended June 30, 2021, as
compared to 48.7% for the same period in 2020.
Gross profit increased to $8,474 for the six months ended June 30, 2021 from $6,363 during the same period in 2020. As a percent of revenue, the gross margin was 64.2% for the six months ended June 30, 2021, as
compared to 59.1% for the same period in 2020 and the increase was primarily the result of higher sales due to a reduction of cases in the COVID-19 pandemic.
The following tables present changes in our gross margin, by segment for the periods presented below:
|
Dermatology Recurring Procedures
|
For the Three Months
Ended
June 30,
|
For the Six Months Ended
June 30,
|
||||||||||||||
|
2021
|
2020
|
2021
|
2020
|
|||||||||||||
|
Revenues
|
$
|
5,452
|
$
|
2,796
|
$
|
10,131
|
$
|
8,497
|
||||||||
|
Percent increase
|
95.0
|
%
|
19.2
|
%
|
||||||||||||
|
Cost of revenues
|
1,635
|
1,364
|
3,136
|
3,166
|
||||||||||||
|
Percent increase (decrease)
|
19.9
|
%
|
(0.9
|
%)
|
||||||||||||
|
Gross profit
|
$
|
3,817
|
$
|
1,432
|
$
|
6,995
|
$
|
5,331
|
||||||||
|
Gross profit percentage
|
70.0
|
%
|
51.2
|
%
|
69.0
|
%
|
62.7
|
%
|
||||||||
The primary reasons for the increase in gross profit for the three and six months ended June 30, 2021 was the result of higher sales, partially offset by higher depreciation expenses in
the second quarter of 2021 and partially offset by an unfavorable impact of deferred revenue in 2021 as compared to 2020.
|
Dermatology Procedures Equipment
|
For the Three Months Ended
June 30,
|
For the Six Months Ended
June 30,
|
||||||||||||||
|
2021
|
2020
|
2021
|
2020
|
|||||||||||||
|
Revenues
|
$
|
1,930
|
$
|
1,234
|
$
|
3,078
|
$
|
2,263
|
||||||||
|
Percent increase
|
56.4
|
%
|
36.0
|
%
|
||||||||||||
|
Cost of revenues
|
986
|
702
|
1,599
|
1,231
|
||||||||||||
|
Percent increase
|
40.5
|
%
|
29.9
|
%
|
||||||||||||
|
Gross profit
|
944
|
$
|
532
|
$
|
1,479
|
$
|
1,032
|
|||||||||
|
Gross profit percentage
|
48.9
|
%
|
43.1
|
%
|
48.1
|
%
|
45.6
|
%
|
||||||||
The primary reason for the change in gross margin percent for the three and six months ended June 30, 2021 as compared to the same period in 2020 was the result of product mix and higher sales.
Engineering and Product Development
For the three months ended June 30, 2021, engineering and product development expenses were $403 as compared to $247 for the three months ended June 30, 2020. Engineering and product development costs for the six
months ending June 30, 2021 were $787, compared to $539 for the six months ended June 30, 2020. Engineering and product development costs were higher primarily as a result of consulting costs associated with certain development projects.
Selling and Marketing Expenses
As of June 30, 2021, our sales and marketing personnel consisted of 60 full-time positions, inclusive of a vice president of sales, direct sales organization as well as an in-house call center staffed with patient
advocates and a reimbursement group that provides necessary insurance information to our physician partners and their patients.
For the three months ended June 30, 2021, selling and marketing expenses were $3,160 as compared to $1,442 for the three months ended June 30, 2020. For the six months ended June 30, 2021 selling and marketing
costs were $6,092 as compared to $4,395 for the six months ended June 30, 2020. Sales and marketing expenses for the three and six months ended June 30, 2021 were higher, as compared to the same periods in 2020, as we made investments in sales
and marketing and direct to consumer advertising, while in 2020 we managed our costs due to the downturn in business as a result of the COVID-19 pandemic, with lower tradeshow costs, compensation costs and direct-to-consumer advertising costs.
General and Administrative Expenses
For the three months ended June 30, 2021, general and administrative expenses increased to $2,121 from $1,890 for the three months ended June 30, 2020. For the six months ended June 30, 2021 general and
administration costs were $4,910 compared to $3,992 for the six months ended June 30, 2020. General and administrative expenses were higher for the three and six months ended June 30, 2021, as compared to the same periods in 2020, as a result of
higher compensation, severance and stock option costs, primarily as a result of the CEO transition in the first quarter of 2021.
Other income (expense), net
Other income for the three and six months ended June 30, 2021 was $2,009 and $1,987 as compared to an expense of $18 and $17 for the three and six months ended June 30, 2020, respectively. In the second quarter of
2021, we received notification the PPP loan had been forgiven and recorded a gain on extinguishment of debt in the amount of the loan of $2,028.
Income Taxes
We recognized income tax expense of $4 for the three months ended June 30, 2021 as compared to $47 for the three months ended June 30, 2020, all of which were comprised primarily of changes in deferred tax
liability related to goodwill. Our pre-tax income for the three months ended June 30, 2021 was the result of a gain on extinguishment of debt as a result of the forgiveness of the PPP loan. There are no federal and state taxes on the PPP loan
forgiveness so therefore there was no impact on our income taxes. We recognized an income tax expense of $8 for the six months ended June 30, 2021 as compared to $135 for the six months ended June 30, 2020 all of which were comprised primarily
of changes in deferred tax liability related to goodwill.
Non-GAAP adjusted EBITDA
We have determined to supplement our condensed consolidated financial statements, prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), presented
elsewhere within this report, with certain non-GAAP measures of financial performance. These non-GAAP measures include non-GAAP adjusted EBITDA, “Earnings Before Interest, Taxes, Depreciation, and Amortization.”
This non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for Net Earnings (Loss) determined in accordance with U.S. GAAP, and should not be considered in isolation or as
a substitute for analysis of the Company’s results as reported under U.S. GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies. We consider these non-GAAP measures in addition to our
results prepared under current accounting standards, but they are not a substitute for, nor superior to, U.S. GAAP measures. These non-GAAP measures are provided to enhance readers’ overall understanding of our current financial performance and
to provide further information for comparative purposes. This supplemental presentation should not be construed as an inference that the Company’s future results will be unaffected by similar adjustments to Net Earnings (Loss) determined in
accordance with U.S. GAAP. Specifically, we believe the non-GAAP measures provide useful information to management and investors by isolating certain expenses, gains and losses that may not be indicative of our core operating results and business
outlook. In addition, we believe non-GAAP measures enhance the comparability of results against prior periods. Reconciliation to the most directly comparable U.S. GAAP measure of all non-GAAP measures included in this report is as follows:
|
For the Three Months Ended
June 30,
|
For the Six Months Ended
June 30
|
|||||||||||||||
|
2021
|
2020
|
2021
|
2020
|
|||||||||||||
|
Net income (loss)
|
$
|
1,082
|
$
|
(1,680
|
)
|
$
|
(1,336
|
)
|
$
|
(2,715
|
)
|
|||||
|
Adjustments:
|
||||||||||||||||
|
Depreciation/amortization*
|
961
|
1,028
|
1,880
|
2,145
|
||||||||||||
|
Income taxes
|
4
|
47
|
8
|
135
|
||||||||||||
|
Loss on lasers placed in service
|
63
|
19 |
63
|
19 | ||||||||||||
|
Gain on extinguishment of debt
|
(2,028
|
)
|
-
|
(2,028
|
)
|
-
|
||||||||||
|
Interest expense, net
|
19
|
18
|
41
|
17
|
||||||||||||
|
Non-GAAP EBITDA
|
101
|
(568
|
)
|
(1,372
|
)
|
(399
|
)
|
|||||||||
|
Stock compensation
|
581
|
410
|
1,243
|
840
|
||||||||||||
|
Non-GAAP adjusted EBITDA
|
$
|
682
|
$
|
(158
|
)
|
$
|
(129
|
)
|
$
|
441
|
||||||
*Includes depreciation of lasers placed-in-service of $506 and $975 and $463 and $1,029 for the three and six months ended June 30, 2021 and, 2020, respectively.
Liquidity and Capital Resources
As of June 30, 2021, we had $5,683 of working capital compared to $5,993 as of December 31, 2020. The change in working capital was primarily the result of higher accrued expenses, the extinguishment of debt for
the forgiveness of the PPP loan, lower accounts receivables and inventories. Cash, cash equivalents and restricted cash were $17,033 as of June 30, 2021, as compared to $18,112 as of December 31, 2020. As a result of cash conservation measures
implemented after the COVID-19 outbreak, we delayed payment of approximately $472 in payables from the first quarter into the second quarter.
On April 22, 2020, we closed on the PPP loan of $2.0 million from a commercial bank, pursuant to the Paycheck Protection Program of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The PPP
loan would have matured on May 1, 2022 and bore an interest rate of 1% per annum. Payments of principal and interest of any unforgiven balance was scheduled to commence December 1, 2020, but was deferred until
the SBA approves of the forgiveness amount.
In the second quarter of 2021, the Company received notification the PPP loan had been forgiven. The Company recorded a gain on extinguishment of debt in the amount of the loan of $2,028.
In June 2020, we obtained an EIDL loan with principal amount of $500. Interest accrues at the rate of 3.75% per annum. Installment payments, including principal and interest, were originally
due monthly beginning March 26, 2021 (twelve months from the date of the promissory note) in the amount of $2. In March of 2021, the SBA deferred payments on the EIDL loans by an additional 12 months. The balance of principal and interest is
payable over the next thirty years from the date of the promissory note. There are no penalties for prepayment. Based upon guidance issued by the SBA on June 19, 2020, the EIDL Loan was not required to be refinanced by the PPP loan. The balance
of the loan at June 30, 2021 was $500.
We have been negatively impacted by the ongoing COVID-19 pandemic, have historically experienced recurring losses and have been dependent on raising capital from the sale of securities in order to continue to
operate and meet our obligations in the ordinary course of business. Since the equity financing in May 2018 and pre-COVID, we have improved revenues and gross profit, generated positive cash flow from operations, refinanced our debt at a lower
interest rate. During the COVID-19 pandemic, we received cash proceeds from the PPP loan, which was forgiven, and the EIDL loan. Management believes that our cash and cash equivalents, combined with the anticipated revenues from the sale or use
of our products and the proceeds from the PPP loan and the EIDL loan, will be sufficient to satisfy our working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with our existing
operations through the next 12 months following the date of the issuance of these unaudited condensed consolidated financial statements. However, the negative impact of the ongoing COVID-19 outbreak and its variants on the financial markets could
interfere with our ability to access financing and on favorable terms.
Net cash and cash equivalents and restricted cash provided by operating activities was $387 for the six months ended June 30, 2021, compared to cash provided by operating activities of
$1,201 the six months ended June 30, 2020. The decrease in cash flows provided by operating activities for the six months ended June 30, 2021 was the result of a higher net loss, after adjusting for the gain on extinguishment of debt, decrease
in cash provided by accounts receivable partially offset by a decrease in inventory, accounts payable and an increases in accrued expenses.
Net cash and cash equivalents and restricted cash used in investing activities was $1,466 for the six months ended June 30, 2021, compared to cash used in investing activities of $730 for the six months ended June
30, 2020. The increase is the result of the cost of lasers placed in service in 2021 as compared to 2020, and other purchases of property and equipment.
There were no cash flows from financing activities for the six months ended June 30, 2021 and $2,528 in net cash from financing activities for the six months ended June 30, 2020 as a result of the proceeds from the
PPP loan and EIDL loan.
Commitments and Contingencies
There were no items, except as described above, that significantly impacted our commitments and contingencies as discussed in the notes to our 2020 annual financial statements included in our
Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
At June 30, 2021, we had no off-balance sheet arrangements.
| ITEM 3. |
Quantitative and Qualitative Disclosure about Market Risk
|
Not applicable.
| ITEM 4. |
Controls and Procedures
|
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and
procedures, (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), as of June 30, 2021. Based on that evaluation, management has concluded that, as of such date, our disclosure
controls and procedures were effective at the reasonable assurance level.
Limitations on the Effectiveness of Controls
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within an organization have been detected. Accordingly, our disclosure controls and procedures are designed to provide
reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the
period covered by this report, that our disclosure controls and procedures were effective to provide reasonable assurance that the objectives of our disclosure control system were met.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting in our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II - Other Information
From time to time in the ordinary course of our business, we may be a party to certain legal proceedings, incidental to the normal course of our business. These may include controversies relating to contract claims
and employment related matters, some of which claims may be material, in which case, we will make separate disclosure as required.
A description of the risks associated with our business, financial conditions and results of operations is set forth in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, and
filed with the SEC on March 25, 2021.
None
None.
None.
| ITEM 5. |
Other Information
|
None.
|
3.1
|
||
|
3.2
|
||
|
3.3
|
||
|
3.4
|
||
|
3.5
|
||
|
3.6
|
||
|
3.7
|
||
|
3.8
|
||
|
3.9
|
||
|
4.1
|
||
|
Rule 13a-14(a) Certificate of Chief Executive Officer
|
||
|
Rule 13a-14(a) Certificate of Chief Financial Officer
|
||
|
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
||
|
101.INS
|
XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline
XBRL document.)
|
|
|
101.SCH
|
Inline XBRL Taxonomy Extension Schema Document
|
|
|
101.CAL
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document
|
|
|
101.DEF
|
Inline XBRL Taxonomy Extension Definition Document
|
|
|
101.LAB
|
Inline XBRL Taxonomy Extension Label Linkbase Document
|
|
|
101.PRE
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document
|
|
|
104
|
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).
|
| * |
The certifications attached as Exhibit 32.1 accompany this Quarterly Report on Form 10-Q pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the
Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
|
Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
STRATA SKIN SCIENCES, INC.
|
|
Date August 16, 2021
|
By:
|
/s/ Robert J. Moccia
|
|
|
|
|
Name Robert J. Moccia
|
|
|
|
|
Title President & Chief Executive Officer
|
|
|
Date August 16, 2021
|
By:
|
/s/ Matthew C. Hill
|
|
|
|
|
Name Matthew C. Hill
|
|
|
|
|
Title Chief Financial Officer
|
|
31