UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20162020
OR
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________ to _____________
Commission file number: 0-11635
STRATA SKIN SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 13-3986004 (I.R.S. Employer Identification No.) |
(Address of principal executive offices, including zip code)
(215) 619-3200
(Issuer'sIssuer’s telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class | Trading Symbol(s) | Name of | which registered | |
| Common Stock, $0.001 par value | The NASDAQ Stock Market | LLC |
Securities registered under Section 12(g) of the Exchange Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes [ ] No [X]
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.
Yes [X][_X _] No [__]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)fi les).
Yes [X] No [__]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definitions of "large“large accelerated filer," "accelerated filer"” “accelerated filer,” “smaller reporting company” and "smaller reporting company"“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer [__] | ||
Non-accelerated filer [X] | Smaller reporting company [X] | ||
| Emerging growth company [__] |
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 has filed a report on and attestation to its management’s assessment of the effectiveness of internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. [__ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
The number of shares outstanding of our common stock as of June 30, 2016,2020, was 10,612,81433,754,909 shares. The aggregate market value of the voting and non-voting common stockequity held by non-affiliates (8,349,419 shares), based onof the registrant was $23,624,112, computed by reference to the closing market price ($0.61)$1.15 of the common stock as of June 30, 2016 was $5,093,146.2020, and 20,542,706 shares held by non-affiliates.
As of March 9, 2017,17, 2021, the number of shares outstanding of our common stock was 10,909,490. The closing market price of our common stock as of March 9, 2017 was $.59.33,801,045.
Documents Incorporated by Reference
None
Table of Contents
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Part III | |||||
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Item 16. | 67 | ||||
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K, or this Report, are "forward-looking statements." 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"“we,” “us,” “our”, "registrant"“registrant” or "the Company"“the Company”) and other statements contained in this Report that are not historical facts. The Private Securities Litigation Reform Act of 1995 (the “Reform Act”) provides a safe harbor for forward-looking statements made by or on behalf of the Company. Forward-looking statements in this Report or hereafter included in other publicly available documents filed with the Securities and Exchange Commission, or the Commission, reports to our stockholders and other publicly available statements issued or released by us involve known and unknown risks, uncertainties and other factors which could cause our actual results, performance (financial or operating) or achievements to differ from the future results, performance (financial or operating) or achievements expressed or implied by such forward-looking statements. Such future results are based upon management's best estimates based upon current conditions and the most recent results of operations. When used in this Report, the words "will, " "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" or the negative of such terms and similar expressions identify statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and that are generally intended to identify forward-looking statements, because these forward-lookingcome within the safe harbor protection provided by those sections. Forward-looking statements involve risks, assumptions and uncertainties. There are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements, including our plans, objectives, expectations and intentions and other factors discussedrisks set forth throughout this Annual Report, including under "Risk Factors." We undertake no obligation to update such forward-looking statements.“Item 1, Business,” “Item 1A, Risk Factors,” and “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These forward-looking statements include, but are not limited to, statements about:
| • | forecasts of future business performance, consumer trends and macro-economic conditions; |
| • | descriptions of market, |
| • | descriptions of plans or objectives of management for future operations, products or services; |
| • | actions by the FDA or other regulatory agencies with respect to our products or product candidates; |
| • | changes to third-party reimbursement of laser treatments using our devices; |
| • | our estimates regarding the sufficiency of our cash resources, expenses, capital requirements and needs for additional financing and our ability to obtain additional |
| • | our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others; |
| • | |
| anticipated results of existing or future litigation; | |
| • | Our ability to grow an at-home phototherapy business |
| • | health emergencies, the spread of infectious disease or pandemics; and |
| • | descriptions or assumptions underlying or related to any of the above items. |
In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained in this Report might not occur. Investors are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Report.Report, even if subsequently made available by us on our website or otherwise. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. You should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. All subsequent forward-looking statements attributable to us or to any person acting on itsour behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.
PART I
Our Company
Overview
We are a medical technology company in Dermatology and Plastic Surgery dedicated to developing, commercializing and commercializingmarketing innovative products for the treatment of dermatological disorders. dermatologic conditions. Our primary products include the XTRAC® excimer laser and VTRAC® lamp systems utilized in the treatment of psoriasis, vitiligo and various other skin conditions.
Corporate Information
We were incorporated in the State of New York in 1989 under the name Electro-Optical Sciences, Inc. and subsequently reincorporated under the laws of the State of Delaware in 1997. In April 2010, we changed our name to MELA Sciences, Inc. On January 5, 2016, we changed our name to STRATA Skin Sciences, Inc.
In June 2015, we completed the acquisition the "Acquisition", of the XTRAC® Excimer Laser and the VTRAC® excimer lamp businesses from PhotoMedex, Inc. The XTRAC and VTRAC products are devices cleared by(the “Acquisition”). Prior to the U.S. Food and Drug Administration, or FDA, forAcquisition, the treatment of psoriasis, vitiligo and other skin disorders. The purchase priceCompany’s only product was $42.5 million plus the assumption of certain business-related liabilities. We believe that these businesses acquired create a platform on which to transform STRATA into a leading medical dermatology company.
Impact of COVID-19 Pandemic
In late 2019, there was an outbreak of a new strain of coronavirus (“COVID-19”) which became a global pandemic. The MelaFind ® system is used whenCOVID-19 pandemic has negatively impacted the dermatologist choosesglobal economy, disrupted global supply chains, constrained work force participation and created significant volatility and disruption of financial markets. In addition, the pandemic has led to obtain additional information before making a final decisionthe suspension of elective procedures in the U.S. and to biopsythe temporary closure of many physician practices, which are our primary customers. We do not know the full impact on our customers including their potential for permanent closure. While many offices have reopened, the on-going impact of the COVID-19 pandemic on the Company’s operational and financial performance, including its ability to execute its business strategies and initiatives in order to rule out melanoma. MelaFind has not achieved a significant enough levelthe expected time frames, will depend on future developments, including the duration and spread of acceptance by dermatologists to justifythe COVID-19 outbreak, continued restrictions on business operations and transport and the continued investmentimpact on worldwide economic and geopolitical conditions, all of our scarce resources. In March 2017, we sent a notice towhich are uncertain and cannot be predicted.
Domestically, as the 90 owners of MelaFindprocedures in 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, informing them that, effective September 30, 2017, we no longerthis had a negative impact on the resourcesCompany’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 continueprovide a steady source of components to supportmanufacture and repair our devices.
To mitigate the deviceimpact of COVID-19 the Company has taken a variety of measures to ensure the availability and that ourfunctioning of its critical infrastructure by implementing business continuity plans, and 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, such as providing face masks for employees at facilities significantly impacted and requiring 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 on-going impact of the COVID-19 pandemic, in the second quarter the Company furloughed employees, who returned to work after the Company received proceeds from the Paycheck Protection Program (“PPP Loan)”. The Company also reduced discretionary spending, reduced all inventory purchases and delayed payments to vendors. Delayed payments to vendors were approximately $678,000 as of spare parts was being offeredDecember 31, 2020. See Note 2, included in the consolidated financial statements, Liquidity for sale to themdiscussion on a first-come, first-serve basis.Company liquidity.
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XTRAC Systems and VTRAC Systems
The XTRAC excimer laser technology emits highly concentrated UV light to treattargeted primarily towards autoimmune dermatological skin disorders.disorders such as psoriasis, vitiligo, atopic dermatitis, and eczema, among others. It received FDAU.S. Food and Drug Administration (“FDA”) clearance in 2000 and has since become a widely recognized treatment for psoriasis, vitiligo and other skin diseases. Psoriasis and vitiligo alone, affect up to 10.513 million people in the U.S. and 190 million people worldwide. VTRAC is a UV light lamp system that works in much the same way as the XTRAC. It received FDA clearance in August 2005 and CEConformité Européenne (“CE”) mark approval in January 2006 and has been marketed exclusively in international markets.
Present in natural sunlight, UVBultraviolet B (“UVB”) is an accepted psoriasis treatment that penetrates the skin to slow the growth of damaged skin cells thereby placing the disease into remission for a period of time. Studies have shown that the remission time can last 3 to 6 months or longer. In our XTRAC system, our targeted therapy approach delivers optimum amounts of UVB light directly to skin lesions, sparing healthy tissue. Many peer reviewed studies have proven that the XTRAC excimer laser can clear psoriasis faster and produce longer remissions than other UVB modalities, resulting in fewer treatments to produce the desired result.
We currently market twofour XTRAC excimer models:models. In October 2018 we announced the launch of XTRAC S3®, which, as compared to previous XTRAC generations, is smaller, faster and has a new user interface. In January 2020, we announced the FDA granted clearance for our XTRAC Momentum Excimer Laser System platform. This clearance is the first full platform clearance since 2008. Momentum has an increased power range to improve patient safety and treatment efficiency; a new and exclusive proprietary short-hair tip, providing ease of use in difficult-to-treat scalp psoriasis; and an enhanced user interface and database. We continue to market the XTRAC Velocity, is our most advanced technology which allows clinicians to treat greater surface areas of psoriatic disease in a shorter period of time than other technologies. Thethird-generation laser and the XTRAC Ultra Plus, which is also a highly effective model marketed primarily in certain international markets. Both theThe Momentum, S3, Velocity and the Ultra plusPlus are capable of treating mild, moderate and severe psoriasis, vitiligo, atopic dermatitis and leukoderma.
The XTRAC excimer laser is marketed in the U.S. mainly under a recurring revenue model;model in which we place the system in the physician'sphysician’s office for no upfront charge and generate our revenue on a per-use basis. We estimate that there are roughlyover 1,000 XTRAC lasers in use in the U.S., of which 775832 systems were, as of December 31, 2016,2020, included in theour recurring revenue model. The target U.S. audience for XTRAC lasers comprises approximately 3,500 dermatologists who perform disease management. InUntil 2019, in markets outside the U.S., the XTRAC laser ishad been marketed primarily as a capital sale through a master international distributor to distributors in over twenty-five countries. The VTRAC is marketed exclusively in international markets through the same master international distributor.
Since 2019, we have been transitioning our international equipment sales through our master distributor to a direct distribution model for equipment sales and recurring revenue on a country by country basis. We have signed contracts in Korea (in 2019), Japan (in 2020), and China (in January 2021).
Studies have concluded that XTRAC treatment leads to significant improvement in psoriasis areaplaques and severity scores in as littlefew as 6 to 10 treatments. Treatment protocols recommend that patients receive two treatments per week with a minimum of 48 hours between treatments. Our data shows that treatment with XTRAC excimer lasers has an 89% efficacy rate and produces only minimal side effects. In support of its clinical effect, the XTRAC Excimerexcimer lasers have been cited in over 45 clinical studies and research programs, with findings published in peer-reviewed medical journals around the world. The products haveXTRAC excimer laser has also been endorsed by the National Psoriasis Foundation, and theirits use for psoriasis is covered by nearly all major insurance companies, including Medicare.
XTRAC treatment is a reimbursable procedure for psoriasis under three Current Procedural Terminology ("CPT") codes. There are three applicable CPT codes that differ based on the total skin surface area of treatment only.being treated. Insurance Reimbursement to physicians varies based upon insurance company and geography.location. The national CPT code reimbursement established by the Center for Medicaid Services (CMS)(“CMS”), which forms the basis for most insurance companies'companies’ reimbursement levels, ranges for the three codes between $150$160 per treatment to $240$250 per treatment. (See "Third“Third Party Reimbursement".Reimbursement” below.)
Psoriasis, the disease
The World Health Organization describes psoriasis as a chronic, noncommunicable, painful, disfiguring and disabling disease for which there is no cure, which generates a great negative impact on patients’ quality of life. It manifests itself in many forms and typically causes raised, red, scaly patches that appear on the skin and may cause itchiness, burning or stinging. Psoriasis is also associated with other serious health conditions such as diabetes, heart disease and depression.
Psoriasis Treatment Options
There are essentially three main types of psoriasis treatments, as listed below.below:
| Topical therapies: | These can include corticosteroids, vitamin D3 derivatives, coal tar, anthralin and retinoids, among others, that are sold as a cream, gel, liquid, spray, or ointment. The efficacy of topical agents varies from person to person, although these products are commonly associated with a loss of potency over time as people develop resistance. |
| Phototherapy: | This is the area in which we operate. Our XTRAC Excimer Systems are FDA-cleared, reimbursed by insurance, and exhibit none of the significant side-effects associated with some alternative therapies. |
| Systemic medications: | There are a number of prescription medications available for psoriasis, which are given either by mouth or as an injection. The popularity and use of these medications |
Using the XTRAC Excimer Lasers to Treat Vitiligo and Other Skin Diseases
UV light therapy is considered to be an effective and safe treatment for many skin disorders beyond psoriasis. To this effect, the XTRAC technology is FDA cleared for the treatment of not only psoriasis but also vitiligo (a skin pigment deficiency), atopic dermatitis (eczema) and leukoderma, which is a localized loss of skin pigmentation that occurs after an inflammatory skin condition such as a burn, intralesional steroid injection, or post dermabrasion.
XTRAC technology for vitiligo patients typically requires more therapy sessions than for psoriasis but is dependent on the severity of the disease. In the treatment of vitiligo, we believe the XTRAC functions to reactivate the skin's melanocytes (the cells that produce melanin), which causes pigment to return. To date, there is not sufficient data to confirm how long patients can expect their vitiligo to be in remission after XTRAC therapy. Based on anecdotal reports, we believe that re-pigmentation may last for several years.
Historically, vitiligo treatments had been considered cosmetic procedures by insurance companies, and as such were not reimbursed. However, over the past several years, there has been a significant increase in insurance coverage for these procedures and we estimate that currently approximately 50%76% of insurers consider XTRAC treatments to be medically necessary for the treatment of vitiligo and therefore provide coverage.
We believe that several factors have limited the growth of the use of XTRAC treatments from those who suffer from psoriasis and vitiligo. Specifically, we believe that awareness of the positive effects of XTRAC treatments has not been high enough among both sufferers and providers; and that the treatment regimen requiring sometimes up to 12 or more treatments has limited XTRAC use to certain patient populations. Therefore, to addressAddressing the lack of knowledge issue, we have a direct to patient advertising campaign aimed at motivating psoriasis and vitiligo patients to seek out XTRAC treatments from our physician customers.partners. Specific advertisements encourage prospective patients to contact our patient advocacy center throughvia telephone or web site, wherebywherein we provide information on the treatment and insurance coverage, and ultimately we ultimatelycan schedule an appointment for the prospective patient to be evaluated by a physician within our customer network, convenient to their location, to determine if they would benefit from XTRAC treatments. We are in the process of a research and development effort to develop products to assist in the reduction of the number of treatments in the XTRAC treatment protocol to make XTRAC treatments gain a wider appeal for those patients who cannot fit the current treatment regimen into their schedules.
Home by XTRAC
In November 2011,January 2021, we received a Pre-Market Approval, or PMA, fromannounced the FDAintroduction of 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 MelaFind, a non-invasive, point-of-care (i.e. in the doctor's office) instrument to aid in the detection of melanoma, having already received in September 2011 Conformité Européenne ("CE") Mark approval. On March 7, 2012, we installed the first commercial MelaFind System. We designed MelaFind to aid in the evaluation of clinically atypical pigmentedpatients with certain skin lesions, when a dermatologist chooses to obtain additional information before making a final decision to biopsy in order to rule out melanoma. MelaFind acquires and displays multi-spectral (from blue to near infrared) and dermoscopic Red Green Blue ("RGB") digital data from pigmented skin lesions. It uses automatic data analysis and statistical pattern recognition to help identify lesions to be considereddiseases that do not qualify for biopsy to rule out melanoma. We believe that with the assistance provided by MelaFind, dermatologists may diagnose more melanomas at the most curable stages. However, the MelaFind System has not gained sufficient acceptance by dermatologists to justify continued investment.in-office treatments.
STRATAPEN
In MarchJanuary 2017, we sententered into an OEM agreement with Esthetic Education, LLC to private label the STRATAPEN device. STRATAPEN® MicroSystems is a notice to the 90 owners of MelaFind devicesmicropigmentation device that provides advanced technology offering exceptional results. This contract expired in the United States informing them that effective September 30, 2017,January 2020, but we no longer had the resources to continue to support the device and that our inventory of spare parts was being offered for sale to themsell this product on a first-come, first-servepurchase order basis.
Competition
Our XTRAC product line competes with pharmaceutical compounds and methodologies used to treat an array of skin conditions. Such alternative treatments may be in the form of topical products, systemic medications, and phototherapies from both large pharmaceutical and smaller devices companies. Our major competitors for dermatological solutions include The Daavlin Company, National Biologic Corporation, RA Medical and pharmaceutical companies producing topical products and systemic and biologic medications. Currently, our XTRAC system is believed to be a competitive therapy to alternative treatments on the basis of its recognized clinical effect, minimal side effect profile, cost-effectiveness and reimbursement.
Manufacturing
We manufacture our XTRAC products at our 28,00017,000 sq. ft. facility in Carlsbad, California. Our California facility is certified as ISO 13485 certified.compliant. ISO 13485 is an International standardization written by the International Organization for Standardization, which publishes requirements for a comprehensive quality management system for the design and manufacture of medical devices. Certification to the standard is awarded by accredited third parties. We believe that our present manufacturing capacity at these facilities is sufficient to meet foreseeable demand for our products.
Research and Development Efforts
Our research and development team, including engineers, consists of approximately fivefour employees. We conduct research and development activities at our facility located in Carlsbad, California. Currently, our research and development efforts are focused on the application of our XTRAC system tofor the treatment of inflammatory skin disorders.
Intellectual Property
Our policy is to protect our intellectual property by obtaining U.S. and foreign patents to protect technology, inventions and improvements important to the development of our business. As of December 31, 2016, 282020, 26 issued U.S. patents are in force, and many of these patents have foreign counterparts issued and pending. Of those issued, 10 U.S. patents and one German patent relate to the XTRAC and VTRAC product lines and eighteen U.S. patents. Additionally, the Company maintains 16 patents and several foreign patentsfrom Mela Sciences, Inc. related to various aspects ofthe MelaFind technology. As these MelaFind related patents come up for the payment of periodic maintenance fees, we will assess the need to continue to maintain their existence. We have not granted any significant licenses with respect to our intellectual property.product.
We also rely on trade secrets and technical know-how in the manufacture and marketing of our products. We require our employees, consultants and contractors to execute confidentiality agreements with respect to our proprietary information.
In February 2021, the license for the exclusive rights for patents related to the delivery of treatment to vitiligo with the Icahan School of Medicine at Mount Sinai expired. We do not believe that this will have a material impact on our business.
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We believe that our patented methods and apparatus, together with proprietary trade-secret technology and registered trademarks, give us a competitive advantage; however, whether a patent is infringed or is valid, or whether or not a patent application should be granted, are all complex matters of science and law, and therefore, we cannot be certain that, if challenged, our patented methods and apparatus and/or trade-secret technology would be upheld. If one or more of our patented methods, patented apparatus or trade-secret technology rights, or our trademark rights, are invalidated, rejected or found unenforceable, that could reduce or eliminate any competitive advantage we might otherwise have had.
Government Regulation
Regulations Relating to Products and Manufacturing
Our products and research and development activities are regulated by numerous governmental authorities, principally the FDA and corresponding state and foreign regulatory agencies. Any medical device or cosmetic we manufacture and/or distribute will be subject to pervasive and continuing regulation by the FDA. The U.S. Food, Drug and Cosmetics Act, or FD&C Act, and other federal and state laws and regulations govern the pre-clinical and clinical testing, design, manufacture, use, labeling and promotion of medical devices, including our XTRAC, VTRAC, STRATAPEN and MelaFind systems.Home by XTRAC devices. Product development and approval for medical devices within this regulatory framework takes a number of years and involves the expenditure of substantial resources.
In the U.S., medical devices are classified into three different classes, Class I, II and III, on the basis of controls deemed necessary to provide a reasonable assurance of the safety and effectiveness of the device. Class I devices are subject to general controls, such as facility registration, medical device listing, labeling requirements, premarket notification (unless the medical device has been specifically exempted from this requirement), adherence to the FDA'sFDA’s Quality System Regulation, and requirements concerning the submission of device-related adverse event reports to the FDA. Class II devices are subject to general and special controls, such as performance standards, pre-marketpremarket notification (510(k) clearance), post-market surveillance, and FDA Quality System Regulations. Generally, Class III devices are those that must receive premarket approval by the FDA to provide a reasonable assurance of their safety and effectiveness, such as life-sustaining, life-supporting and implantable devices, or new devices that have been found not to be substantially equivalent to existing legally marketed devices.
With limited exceptions, before a new medical device can be distributed in the U.S., marketing authorization typically must be obtained from the FDA through a premarket notification under Section 510(k) of the FDAFD&C Act, or through a premarket approval application under Section 515 of the FDAFD&C Act. The FDA will typically grant a 510(k) clearance if it can be established that the device is substantially equivalent to a predicate device that is a legally marketed Class I or II device (or to pre-amendments Class III devices for which the FDA has yet to call for premarket approvals). We have received FDA 510(k) clearance to market our XTRAC and VTRAC systems for the treatment of psoriasis, vitiligo, atopic dermatitis and leukoderma. The FDA granted these clearances under Section 510(k) on the basis of substantial equivalence to other technologies that had received prior clearances.
For any devices that are cleared through the 510(k) process, modifications or enhancements that could significantly affect the safety or effectiveness of the device, or that constitute a major change in the intended use of the device, will require a new 510(k) submission. In August 2003 the FDA granted 510(k) clearance for a significantly modified version of our XTRAC laser, which we have marketed as the XTRAC XL Plus Excimer Laser System. In October 2004 the FDA granted clearance for the XTRAC Ultra (AL 8000) Excimer Laser System and, in March 2008 we received 510(k) clearance for the XTRAC Velocity (AL 10000) Excimer Laser System. These approvals were originally granted to PhotoMedex, Inc. and acquired by us in the June 2015 asset acquisition transactionAcquisition described above.
We are subject to routine inspection by the FDA and, as noted above, must comply with a number of regulatory requirements applicable to firms that manufacture medical devices and other FDA-regulated products for distribution within the U.S., including requirements related to device labeling (including prohibitions against promoting products for unapproved or off-label uses), facility registration, medical device listing, labeling requirements, adherence to the FDA'sFDA’s Quality System Regulation, good manufacturing processes and requirements for the submission of reports regarding certain device-related adverse events to the FDA.
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We are also subject to the radiological health provisions of the FDAFD&C Act and the general and laser-specific radiation safety regulations administered by the Center for Devices and Radiological Health, or CDRH, of the FDA. These regulations require laser manufacturers to file initial, new product, supplemental and annual reports, to maintain quality control, product testing and sales records, to incorporate certain design and operating features (depending on the class of product) in lasers sold to end users pursuant to a performance standard and to certify and appropriately label each laser sold as belonging to one of four classes, based on the level of radiation from the laser that is accessible to users. Moreover, we are obligated to repair, replace, or refund the cost of certain electronic products that are found to fail to comply with applicable federal standards or otherwise are found to be defective. The CDRH is empowered to seek fines and other remedies for violations of the regulatory requirements. To date, we have filed the documentation with the CDRH for our laser products requiring such filing and have not experienced any difficulties or incurred significant costs in complying with such regulations.
We are approved by the European Union to affix the CE Markmark to our XTRAC laser and VTRAC lamp and MelaFind systems. This certification is a mandatory conformity mark for products placed on the market in the European Economic Area, which is evidence that they meet all European Community, or EC, quality assurance standards and compliance with applicable European medical device directives for the production of medical devices. This will enable us to market our approved products in all of the member countries that accept the CE Mark.mark. We also will beare required to comply with additional individual national requirements that are in addition to those required by these nations. Our products have also met the requirements for marketing in various other countries.
We purchase our Home by XTRAC and STRATAPEN devices from third parties, who are subject to the same regulations. We rely on these third parties to ensure compliance with the regulations.
Failure to comply with applicable regulatory requirements can result in fines, injunctions, civil penalties, recalls or seizures of products, total or partial suspensions of production, refusals by the U.SU.S. and foreign governments to permit product sales and criminal prosecution.
We are, or may become, subject to various other federal, state, local and foreign laws, regulations and policies relating to, among other things, safe working conditions, good laboratory practices and the use and disposal of hazardous or potentially hazardous substances used in connection with research and development.
Fraud and Abuse Laws
Because of the significant federal funding involved in Medicare and Medicaid, Congress and the states have enacted, and actively enforce, a number of laws whose purpose is to eliminate fraud and abuse in federal health care programs. Our business is subject to compliance with these laws.
Anti-Kickback Laws
In the U.S., there are federal and state anti-kickback laws that generally prohibit the payment or receipt of kickbacks, bribes or other remuneration in exchange for the referral of patients or other health-related business. The U.S. federal healthcare programs'programs’ Anti-Kickback Statute makes it unlawful for individuals or entities knowingly and willfully to solicit, offer, receive or pay any kickback, bribe or other remuneration, directly or indirectly, in exchange for or to induce the purchase, lease or order, or arranging for or recommending purchasing, leasing, or ordering, any good, facility, service, or item for which payment may be made in whole or in part under a federal healthcare program such as Medicare or Medicaid. The Anti-Kickback Statute covers "any“any remuneration,"” which has been broadly interpreted to include anything of value, including for example gifts, certain discounts, the furnishing of free supplies, equipment or services, credit arrangements, payments of cash and waivers of payments. Several courts have interpreted the statute'sstatute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the arrangement can be found to violate the statute. Penalties for violations include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs. In addition, several courts have permitted kickback cases brought under the Federal False Claims Act to proceed, as discussed in more detail below.
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The reach of the Anti-Kickback Statute was broadened by the Patient Protection and Affordable Care Act of 2010 (the "ACA"“ACA”), which, among other things, amends the intent requirement of the federal Anti-Kickback Statute. Pursuant to the statutory amendment, a person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it in order to have committed a violation. In addition, the ACA provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the civil False Claims Act (discussed below) or the civil monetary penalties statute, which imposes penalties against any person who is determined to have presented or caused to be presented a claim to a federal health program that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent.
Because the Anti-Kickback Statute is broadly written and encompasses many harmless or efficient arrangements, Congress authorized the Office of Inspector General of the U.S. Department of Health and Human Services, or OIG, to issue a series of regulations, known as "safe“safe harbors."” For example, there are regulatory safe harbors for payments to bona fide employees, properly reported discounts and rebates, and for certain investment interests. Although an arrangement that fits into one or more of these exceptions or safe harbors is immune from prosecution, arrangements that do not fit squarely within an exception or safe harbor do not necessarily violate the statute. The failure of a transaction or arrangement to fit precisely within one or more of the exceptions or safe harbors does not necessarily mean that it is illegal or that prosecution will be pursued. However, conduct and business arrangements that arguably implicate the Anti-Kickback Statute but do not fully satisfy all the elements of an exception or safe harbor may be subject to increased scrutiny by government enforcement authorities such as the OIG.
Many states have laws that implicate anti-kickback restrictions similar to the Anti-Kickback Statute. Some of these state prohibitions apply, regardless of whether federal health care program business is involved, to arrangements such as for self-pay or private-pay patients.
Government officials have focused their enforcement efforts on marketing of healthcare services and products, among other activities, and recently have brought cases against companies, and certain sales, marketing and executive personnel, for allegedly offering unlawful inducements to potential or existing customers in an attempt to procure their business.
Federal Civil False Claims Act and State False Claims Laws
The federal civil False Claims Act imposes liability on any person or entity who, among other things, knowingly and willfully presents, or causes to be presented, a false or fraudulent claim for payment by a federal healthcare program, including Medicare and Medicaid. The "qui“qui tam,"” or "whistleblower"“whistleblower” provisions of the False Claims Act allow a private individual to bring actions on behalf of the federal government alleging that the defendant has submitted a false claim to the federal government, and to share in any monetary recovery. In recent years, the number of suits brought against healthcare providers by private individuals has increased dramatically. Medical device companies, like us, can be held liable under false claims laws, even if they do not submit claims to the government, when they are deemed to have caused submission of false claims by, among other things, providing incorrect coding or billing advice about their products to customers that file claims, or by engaging in kickback arrangements with customers that file claims.
The False Claims Act also has been used to assert liability on the basis of misrepresentations with respect to the services rendered and in connection with alleged off-label promotion of products. Our future activities relating to the manner in which we sell our products and document our prices, such as the reporting of discount and rebate information and other information affecting federal, state and third-party reimbursement of our products, and the sale and marketing of our products, may be subject to scrutiny under these laws.
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When an entity is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties of $5,500 to $11,000 for each separate false claim. There are many potential basesbasis for liability under the False Claims Act. A number of states have enacted false claim laws analogous to the federal civil False Claims Act and many of these state laws apply where a claim is submitted to any state or private third-party payor.payer. In this environment, our engagement of physician consultants in product development and product training and education could subject us to similar scrutiny. We are unable to predict whether we would be subject to actions under the False Claims Act or a similar state law, or the impact of such actions. However, the costs of defending such claims, as well as any sanctions imposed, could significantly affect our financial performance.
HIPAA Fraud and Other Regulations
The Health Insurance Portability and Accountability Act of 1996, or HIPAA, created a class of federal crimes known as the "federal“federal health care offenses,"” including healthcare fraud and false statements relating to healthcare matters. The HIPAA health care fraud statute prohibits, among other things, knowingly and willfully executing, or attempting to execute, a scheme or artifice to defraud any healthcare benefit program, or to obtain by means of false ofor fraudulent pretenses, any money under the control of any health care benefit program, including private payors.payers. A violation of this statute is a felony and may result in fines, imprisonment and/or exclusion from government-sponsored programs. The HIPAA false statements statute prohibits, among other things, knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement or representation in connection with the delivery of or payment for healthcare benefits, items or services. A violation of this statute is a felony and may result in fines and/or imprisonment. Entities that are found to have aided or abetted in a violation of the HIPAA federal health care offenses are deemed by statute to have committed the offense and are punishable as a principal.
We are also subject to the U.S. Foreign Corrupt Practices Act and similar anti-bribery laws applicable in non-U.S. jurisdictions that generally prohibit companies and their intermediaries from making improper payments to non-U.S. government officials for the purpose of obtaining or retaining business. Because of the predominance of government-sponsored healthcare systems around the world, most of our customer relationships outside of the U.S. will be with governmental entities and therefore subject to such anti-bribery laws.
HIPAA and Other Privacy Regulations
The regulations that implement HIPAA also establish uniform standards governing the conduct of certain electronic healthcare transactions and protecting the security and privacy of individually identifiable health information maintained or transmitted by healthcare providers, health plans and healthcare clearinghouses, which are referred to as "covered“covered entities."” Several regulations have been promulgated under HIPAA'sHIPAA’s regulations including: the Standards for Privacy of Individually Identifiable Health Information, or the Privacy Rule, which restricts the use and disclosure of certain individually identifiable health information; the Standards for Electronic Transactions, or the Transactions Rule, which establishes standards for common healthcare transactions, such as claims information, plan eligibility, payment information and the use of electronic signatures; and the Security Standards for the Protection of Electronic Protected Health Information, or the Security Rule, which requires covered entities to implement and maintain certain security measures to safeguard certain electronic health information. Although we do not believe we are a covered entity and therefore are not currently directly subject to these standards, we expect that our customers generally will be covered entities and may ask us to contractually comply with certain aspects of these standards by entering into requisite business associate agreements. While the government intended this legislation to reduce administrative expenses and burdens for the healthcare industry, our compliance with certain provisions of these standards entails significant costs for us.
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The Health Information Technology for Economic and Clinical Health Act, or the HITECH Act, which was enacted in February 2009 strengthens and expands the HIPAA Privacy and Security Rules and the restrictions on use and disclosure of patient identifiable health information. HITECH also fundamentally changed a business associate'sassociate’s obligations by imposing a number of Privacy Rule requirements and a majority of Security Rule provisions directly on business associates that were previously only directly applicable to covered entities. HITECH includes, but is not limited to, prohibitions on exchanging patient identifiable health information for remuneration, restrictions on marketing to individuals, and obligations to agree to provide individuals an accounting of virtually all disclosures of their health information. Moreover, HITECH requires covered entities to report any unauthorized use or disclosure of patient identifiable health information, known as a breach, to the affected individuals, the United States Department of Health and Human Services, or HHS, and, depending on the size of any such breach, the media for the affected market. Business associates are similarly required to notify covered entities of a breach. Most of the HITECH provisions became effective in February 2010. HHS hashad already issued regulations governing breach notification which were effective in September 2009.
HITECH has increased civil penalty amounts for violations of HIPAA by either covered entities or business associates up to an annual maximum of $1.5 million for uncorrected violations based on willful neglect. Imposition of these penalties is more likely now because HITECH significantly strengthens enforcement. It requires HHS to conduct periodic audits to confirm compliance and to investigate any violation that involves willful neglect which carries mandatory penalties. Additionally, state attorneys general are authorized to bring civil actions seeking either injunctions or damages in response to violations of HIPAA Privacy and Security Rules that threaten the privacy of state residents.
In addition to federal regulations issued under HIPAA, some states have enacted privacy and security statutes or regulations that, in some cases, are more stringent than those issued under HIPAA. In those cases, it may be necessary to modify our planned operations and procedures to comply with the more stringent state laws. If we fail to comply with applicable state laws and regulations, we could be subject to additional sanctions.
Federal and state consumer protection laws are being applied increasingly by the United States Federal Trade Commission, or FTC, and state attorneys general to regulate the collection, use, storage and disclosure of personal or patient information, through websites or otherwise, and to regulate the presentation of web site content. Courts may also adopt the standards for fair information practices promulgated by the FTC, which concern consumer notice, choice, security and access. Numerous other countries have or are developing laws governing the collection, use, disclosure and transmission of personal or patient information.
HIPAA as well as other federal and state laws apply to our receipt of patient identifiable health information in connection with research and clinical trials. We collaborate with other individuals and entities in conducting research and all involved parties must comply with applicable laws. Therefore, the compliance of the physicians, hospitals or other providers or entities with whom we collaborate also impacts our business.
Third-Party Reimbursement
Our ability to market our phototherapy products successfully depends in large part on the extent to which various third parties are willing to reimburse patients or providers for the cost of medical procedures utilizing our treatment products. These third parties include government authorities, private health insurers and other organizations, such as health maintenance organizations. Third-party payorspayers are systematically challenging the prices charged for medical products and services. They may deny reimbursement if they determine that a prescribed device is not used in accordance with cost-effective treatment methods as determined by the payor,payer, or is experimental, unnecessary or inappropriate. Accordingly, if less costly drugs or other treatments are available, third-party payorspayers may not authorize, or may limit, reimbursement for the use of our products, even if our products are safer or more effective than the alternatives. Additionally, they may require changes to our pricing structure and revenue model before authorizing reimbursement.
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Reimbursement systems in international markets vary significantly by country and by region within some countries, and reimbursement approvals must be obtained on a country-by-country basis. Many international markets have government-managed healthcare systems that control reimbursement for new devices and procedures. In most markets, there are private insurance systems, as well as government-managed systems. Our XTRAC products remain substantially without approval for reimbursement in many international markets under either government or private reimbursement systems.
Many private plans key their reimbursement rates to rates set by the Centers for Medicare and Medicaid Services (CMS)CMS under three distinct Current Procedural Terminology (CPT)CPT codes based on the total skin surface area being treated.
As of March 9, 2017,December 31, 2020, the national rates were as follows:
96920 - designated for: the total area less than 250 square centimeters. CMS assigned a 2020 national payment of $166.37 per treatment;
96921 - designated for: the total area 250 to 500 square centimeters. CMS assigned a 2020 national payment of $182.25 per treatment; and
96922 - designated for: the total area over 500 square centimeters. CMS assigned a 2020 national payment of $248.66 per treatment.
The national rates are adjusted by overhead factors applicable to each state.
Employees
As of March 9, 2017,December 31, 2020, we had 96109 full-time employees, which consisted of two executive officers, 5 senior managers, 48two vice presidents, 56 sales and marketing staff, 1220 people engaged in manufacturing of lasers, 1514 customer-field service personnel, 54 engaged in research and development and 911 finance and administration staff.
Customers
Domestically, our customers consist of dermatologists and dermatological group clinics who partner with us in our recurring revenue model. As of December 31, 2020, we have 832 partner clinics throughout the United States.
Internationally, we have been transitioning our international equipment sales through our master distributor to a direct distribution model for equipment sales and recurring revenue on a country by country basis. We have signed contracts in Korea (in 2019), Japan (in 2020) and China (in January 2021). The change from equipment sales to a recurring revenue business model, internationally, will decrease sales in the short term, but will increase overall sales in the long term.
Available Information about Geographic Areas
We file annual, quarterly and current reports, proxy statements and other information with the Commission. These filings are available to the consolidated financial statements included elsewherepublic on the Internet at the Commission's website at http://www.sec.gov.
Our Internet address is http://www.strataskinsciences.com (this website address is not intended to function as a hyperlink and the information contained on our website is not intended to be a part of this Report). We make available free of charge on https://strataskinsciencesinc.gcs-web.com/sec-filings our annual, quarterly and current reports, and amendments to those reports, as soon as reasonably practical after we electronically file such material with, or furnish it to, the Commission. We may from time to time provide important disclosures to investors by posting them in the Investor Relations section of our website, as allowed by the Commission's rules. The information on the website listed above is not and should not be considered part of this filing.Report and is intended to be an inactive textual reference only.
In addition to the other information contained in this Annual Report and the exhibits hereto, the following risk factors should be considered carefully in evaluating our business. Our business, financial condition, cash flows or results of operations could be materially adversely affected by any of these risks. Additional risks not presently known to us or that we currently deem immaterial may also adversely affect our business, financial condition, cash flows or results of operations. The following discussion of risk factors contains forward-looking statements as discussed on page 1. Our business routinely encounters and addresses risks, some of which may cause our future results to be different – sometimes materially different – than we presently anticipate.
Risk Factor Summary
Risks Relating to Our Business Operations
We have incurred losses for a number of years and anticipate that we will incur continued losses for the foreseeable future.
The current outbreak of the novel coronavirus, or COVID-19, or the future outbreak of any other highly infectious or contagious diseases, could materially and adversely affect our results of operations, financial condition and cash flows.
There is a high degree of uncertainty regarding the implementation and impact of the PPP. There can be no assurance as to whether we will receive full forgiveness of the loan.
We may acquire other assets or businesses, or form collaborations or make investments in other companies or technologies that could harm our operating results, dilute our stockholders’ ownership, increase our debt or cause us to incur significant expense.
We may not be able to successfully integrate newly acquired businesses, joint ventures and other partnerships into our operations or achieve expected profitability from our acquisitions.
Our laser treatments of psoriasis, vitiligo, atopic dermatitis and leukoderma and/or any of our future products or services may fail to gain market acceptance or be impacted by competitive products, services or therapies which could adversely affect our competitive position.
We have introduced a new business, branded “Home by XTRAC,” with which we have little experience and may not be successful in launching or may need more resources than anticipated.
The success of our products depends on third-party reimbursement of patients' costs, which could result in potentially reduced prices or reduced demand and adversely affect our revenues and business operations.
The continuing development of our products depends upon our developing and maintaining strong working relationships with physicians.
Any failure in our customer education efforts could have a material adverse effect on our revenue and cash flow.
If revenue from a significant customer declines, we may have difficulty replacing the lost revenue, which would negatively affect our results and operations.
If we fail to execute our recurring revenue strategy outside the United States, we may have difficulty replacing the lost revenue from equipment sales, which would negatively affect our results and operations.
If we fail to manage our sales and marketing force or to market and distribute our products effectively, we may experience diminished revenues and profits.
We are reliant on a limited number of suppliers for production of our products.
Our failure to respond to rapid changes in technology and other applications in the medical devices industry or the development of a cure for skin conditions treated by our products could make our treatment system obsolete.
Our customers, or physicians and technicians, as the case may be, may misuse certain of our products, and product liability lawsuits and other damages imposed on us may exceed our insurance coverage, or we may be subject to claims that are not covered by insurance.
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We must comply with complex statutes prohibiting fraud and abuse, and both we and physicians utilizing our products could be subject to significant penalties for noncompliance.
We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws and regulations and could face substantial penalties if we are unable to fully comply with such laws.
If the effectiveness and safety of our devices are not supported by long-term data, and the level of acceptance of our products by dermatologists does not increase or is not maintained, our revenues could decline.
Our failure to obtain or maintain necessary FDA clearances and approvals, or to maintain continued clearances, or equivalents thereof in the U.S. and relevant foreign markets, could hurt our ability to distribute and market our products.
If required, clinical trials necessary to support a 510(k) notice or PMA application, for new or modified products, will be expensive and will require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit.
Our medical device operations are subject to FDA regulatory requirements
Healthcare policy changes may have a material adverse effect on us.
Our market acceptance in international markets requires regulatory approvals from foreign governments and may depend on third party reimbursement of participants' cost
We face substantial competition, which may result in others discovering, developing or commercializing products more successfully than us.
Consolidation in the medical device industry could have an adverse effect on our revenue and results of operations.
We actively employ social media as part of our marketing strategy, which could give rise to regulatory violations, liability, breaches of data security or reputational damage.
We may become subject to claims of infringement or misappropriation of the intellectual property rights of others, which could prohibit us from shipping affected products, require us to obtain licenses from third parties or to develop non-infringing alternatives, and subject us to substantial monetary damages and injunctive relief. Our patents may also be subject to challenge on validity grounds, and our patent applications may be rejected.
If we or our third-party manufacturers or suppliers fail to comply with the FDA’s Quality System Regulation or any applicable state equivalent, our manufacturing operations could be interrupted and our potential product sales and operating results could suffer.
If we fail to comply with ongoing regulatory requirements, or if we experience unanticipated problems with products, these products could be subject to restrictions or withdrawal from the market.
Our medical products may in the future be subject to product recalls that could harm our reputation, business and financial results.
If any of our medical products cause or contribute to a death or a serious injury, or malfunction in certain ways, we will be subject to medical device reporting regulations, which can result in voluntary corrective actions or agency enforcement actions.
We may have a need for additional funds in the future and there is no guarantee that we will be able to generate those funds from our business.
If we do not have enough capital to fund operations, then we will have to cut costs or raise funds.
If our actual liability for state sales and use taxes is higher than our accrued liability, it could have a material impact on our financial condition.
We may be subject to disruptions or failures in our information technology systems and network infrastructures, including through cyber-attacks or other third-party breaches that could have a material adverse effect on our business.
Environmental and health safety laws may result in liabilities, expenses and restrictions on our operations.
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Risks Relating to Our Common Stock
In the event of certain contingencies, the investors in the May 2018 Equity Financing may receive additional shares issued pursuant to the Retained Risk Provisions as defined in the purchase agreements.
Our stock price may be volatile, meaning purchasers of our common stock could incur substantial losses.
Our charter documents and Delaware law may inhibit a takeover that stockholders consider favorable and could also limit the market price of our stock.
Risks Relating to Our Business Operations
We have incurred losses for a number of years and anticipate that we will incur continued losses for the foreseeable future.
Since 1999,2015, we have primarily financed our operations through the sale of our equity securities and have devoted substantially all of our resources to research, developmentin the commercialization and commercializationsales of MelaFind.the XTRAC products. Our net loss for the year ended December 31, 20162020, was approximately $3.3$4.4 million, and as of December 31, 2016,2020, we had an accumulated deficit of approximately $210.6$219.0 million. Our profitability was negatively impacted by interest expense related to the June 2015 financing. Our losses, among other things, have had and willmay continue to have an adverse effect on our stockholders' equity. Upon the closingadequacy of our acquisitioncapitalization and cash flow. We believe that our cash and cash equivalents as of December 31, 2020, combined with the anticipated revenues from the sale of our products, will be sufficient to satisfy our working capital needs, lasers placed-in-service, capital asset purchases, outstanding commitments and other liquidity requirements associated with our existing operations through the next 12 months following the filing of this Report.
The current outbreak of the XTRACnovel coronavirus, or COVID-19, or the future outbreak of any other highly infectious or contagious diseases, could materially and VTRACadversely affect our results of operations, financial condition and cash flows. Further, the spread of the COVID-19 outbreak has caused severe disruptions in the U.S. and global economy and financial markets and could potentially create widespread business continuity issues of an as yet unknown magnitude and duration.
In December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China. COVID-19 has since spread to over 100 countries, including every state in the United States. On March 11, 2020 the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020 the United States declared a national emergency with respect to COVID-19. In the last twelve months, the United States and the world have experienced various levels of government shutdowns, closures and quarantines.
The outbreak of COVID-19 has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving and many countries, including the United States, have reacted by instituting quarantines, mandating business and school closures and restricting travel. This outbreak has triggered a period of global economic slowdown or a global recession which could continue for some time which cannot be predicted. COVID-19 or another pandemic has or could have material and adverse effects on our ability to successfully operate our business due to, among other factors:
a general decline in business activity;
the destabilization of the markets and negative impacts on the healthcare system globally could negatively impact our ability to market and sell our products, including through the disruption of health care activities in June 2015 we begangeneral and elective health care procedures in particular, the inability of our sales team to recognize revenuescontact and/or visit doctors in person, patients’ interest in starting or continuing procedures involving our products and our ability to support patients that presently use our products;
difficulty accessing the capital and credit markets on favorable terms, or at all, and a severe disruption and instability in the global financial markets, or deteriorations in credit and financing conditions which could affect our access to capital necessary to fund business operations;
the potential negative impact on the health of thoseour employees, especially if a significant number of them are impacted;
the impact of the pandemic on the Company’s customers, which may result in an increase in past due accounts receivable, write-offs and customer bankruptcies;
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a shut-down of suppliers within the Company’s supply chain has severely disrupted our ability to sell, place and repair our products, which we expect will provide sufficienthas had a material impact on the Company’s financial position and cash flow, and the continuation will likely have a material impact on the Company’s financial position and cash flow in future periods; and
a deterioration in our ability to fundensure business continuity during a disruption.
There is a high degree of uncertainty regarding the implementation and impact of the PPP. There can be no assurance as to whether we will receive full forgiveness of the loan.
In April 2020, we closed on a loan of $2.0 million under the PPP of the CARES Act, or the PPP loan, all or a portion of which may be forgiven dependent on our current operationsuse of proceeds. The PPP loan matures on May 1, 2022 and bears interest at a rate of 1.0% per annum. We are required to pay the lender equal monthly payments of principal and interest as required to fully amortize by May 1, 2022 on any principal amount outstanding on the PPP loan that has not been forgiven in accordance with the terms and conditions of the PPP loan. All or a portion of the PPP loan may be forgiven by the SBA upon application by us beginning 60 days, but not later than 120 days, after loan approval and upon documentation of expenditures in accordance with the SBA's requirements. Under the CARES Act, loan forgiveness is available for the foreseeable future.sum of documented payroll costs, covered rent payments, covered mortgage interest and covered utilities during the eight-week period beginning on the date of loan approval. Not more than 25% of the forgiven amount may be for non-payroll costs. The amount of the PPP loan eligible to be forgiven will be reduced if our full-time headcount declines, or if salaries and wages for employees with salaries of $100,000 or less annually are reduced by more than 25%. We will be required to repay any portion of the outstanding principal that is not forgiven, along with accrued interest, in accordance with the amortization schedule described above, and we cannot provide any assurance that we will be eligible for loan forgiveness, that we will ultimately apply for forgiveness, or that any amount of the PPP loan will ultimately be forgiven by the SBA. Furthermore, on April 28, 2020, the Secretary of the U.S. Department of the Treasury stated that the SBA will perform a full review of any PPP loan over $2.0 million before forgiving the loan.
The PPP loan application required us to certify, among other things, that the current economic uncertainty made the PPP loan request necessary to support our ongoing operations. While we made this certification in good faith after analyzing, among other things, our financial situation and access to alternative forms of capital, and believe that we satisfied all eligibility criteria for the PPP loan and that our receipt of the PPP loan is consistent with the broad objectives of the PPP and the CARES Act, the certification described above does not contain any objective criteria as of this date and is subject to interpretation. In addition, the SBA has stated that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith. The SBA intends to provide further clarification by May 14, 2020. The lack of clarity as of the date of this Report regarding loan eligibility under the PPP has resulted in significant media coverage and controversy with respect to public companies applying for and receiving loans. If, despite our good faith belief that we satisfied all eligibility requirements for the PPP loan, we are found to have been ineligible to receive the PPP loan or in violation of any of the laws or governmental regulations that apply to us in connection with the PPP loan, including the False Claims Act, we may be subject to penalties, including significant civil, criminal and administrative penalties and could be required to repay the PPP loan. We have submitted our application for forgiveness of all of the PPP loan, in which we made certain certifications which will be subject to audit and review by governmental entities and could subject us to significant penalties and liabilities if found to be inaccurate, including under the False Claims Act. In addition, our receipt of the PPP loan may result in adverse publicity and damage to our reputation, and a review or audit by the SBA or other government entity or claims under the False Claims Act could consume significant financial and management resources. Any of these events could harm our business, results of operations and financial condition.
We may acquire other assets or businesses, or form collaborations or make investments in other companies or technologies that could harm our operating results, dilute our stockholders'stockholders’ ownership, increase our debt or cause us to incur significant expense.
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As part of our business strategy, we may pursue acquisitions of assets, including preclinical, clinical or commercial stage products or product candidates, or businesses, or strategic alliances and collaborations, to expand our existing technologies and operations. We may not identify or complete these transactions in a timely manner, on a cost-effective basis, or at all, and we may not realize the anticipated benefits of any such transaction, any of which could have a detrimental effect on our financial condition, results of operations and cash flows. We have limited experience with acquiring other companies, products or product candidates, and limited experience with forming strategic alliances and collaborations. We may not be able to find suitable acquisition candidates, and if we make any acquisitions, we may not be able to integrate these acquisitions successfully into our existing business and we may incur additional debt or assume unknown or contingent liabilities in connection therewith. Integration of an acquired company or assets may also disrupt ongoing operations, require the hiring of additional personnel and the implementation of additional internal systems and infrastructure, especially the acquisition of commercial assets, and require management resources that would otherwise focus on developing our existing business. We may not be able to find suitable strategic alliances or collaboration partners or identify other investment opportunities, and we may experience losses related to any such investments.
To finance any acquisitions or collaborations, we may choose to issue debt or equity securities as consideration. Any such issuance of shares would dilute the ownership of our stockholders. If the price of our common stock is low or volatile, we may not be able to acquire other assets or companies or fund a transaction using our stock as consideration. Alternatively, it may be necessary for us to raise additional funds for acquisitions through public or private financings. Additional funds may not be available on terms that are favorable to us, or at all.
We may not be able to successfully integrate newly acquired businesses, joint ventures and other partnerships into our operations or achieve expected profitability from our acquisitions.
If we cannot successfully integrate acquisitions, joint ventures and other partnerships on a timely basis, we may be unable to generate sufficient revenue to offset acquisition costs, we may incur costs in excess of what we anticipate, and our expectations of future results of operations, including certain cost savings and synergies, may not be achieved. Acquisitions involve substantial risks, including:
unforeseen difficulties in integrating operations, technologies, services, accounting and personnel;
diversion of financial and management resources from existing operations;
unforeseen difficulties related to entering geographic regions where we do not have prior experience;
risks relating to obtaining sufficient equity or debt financing; and
potential loss of customers.
In addition, if we finance acquisitions by issuing equity securities or securities convertible into equity securities, our existing stockholders'stockholders’ interests would be diluted, which, in turn, could adversely impact the market price of our stock. Moreover, we could finance an acquisition with debt, resulting in higher leverage and interest costs.costs and could increase losses and losses per share which could impact the price of our stock.
Our laser treatments of psoriasis, vitiligo, atopic dermatitis and leukoderma andand/or any of our future products or services may fail to gain market acceptance or be impacted by competitive products, services or therapies which could adversely affect our competitive position.
We have generated limited worldwide commercial distribution for our products. OurIn the United States, our XTRAC systems are installedplaced at physician offices at no upfront charge to the physician and we are generally paid on a per-usage method where we retain ownership of the system. We cannot assure you that our products and services will find sufficient acceptance in the marketplace under our sales strategies.
We also face a risk that other companies in the market for dermatological products and services may be able to provide dermatologists a higher overall financial return on investment and therefore compromise our ability to increase our installed base of users and ensure they engage in optimal usage of our products. If, for example, such other companies have products (such as Botox or topical creams for disease management)medical devices that require less time commitment from the dermatologist and yield an attractive return on a dermatologist'sdermatologist’s time and investment, we may find that our efforts to increase our base of users are hindered.
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We also face a risk that the overall cost of systemic or biologic medications or treatment modalities become less expensive through the development of generics or other means. We may be faced with pressure to reduce our costs to be competitive which may negatively impact our business. In addition, our business could be negatively impacted if these medications are prescribed for less severe cases of the diseases or if new, more effective or less expensive medications are developed.
CPT codes for all procedures are subject to continued reevaluation. Should CMS reduce reimbursement for the CPT codes for XTRAC treatment or raise reimbursement for competitive products we may see a decline in our recurring revenue business as well as a decline in new XTRAC installations.
Whether a treatment may be delegated to non-physician staff members and, if so, to whom and to what extent, are matters that may vary state by state, as these matters are within the province of the state medical boards. In states that may be more restrictive in such delegation, a physician may decline to adopt the XTRAC system into his or her practice, deeming it to be fraught with too many constraints and finding other outlets for the physician'sphysician’s time and staffstaff’s time to be more remunerative. There can be no assurance that we will be successful in persuading such medical boards that a liberal standard for delegation is appropriate for the XTRAC system, based on its design for ease and safety of use. If we are not successful, we may find that even if a geographic region has wide insurance reimbursement, the region'sregion’s physicians may decline to adopt the XTRAC system into their practices.
We therefore cannot assure you that the marketplace will be receptive to our excimer laser technology over competing products, services and therapies or that a cure will not be found for the underlying diseases we are focused on treating. Failure of our products to achieve market acceptance could have a material adverse effect on our business, financial condition and results of operations.
We have introduced a new business which provides an at-home, insurance reimbursed treatment option for patients with skin diseases that might not be able to avail themselves of in-office treatments. We do not have experience with at-home therapies and we may not be successful at launching this business. The business relies on providers to prescribe our products to their patients, which we do not control. As a company selling durable medical equipment, we do not have contracts with insurance companies, therefore we sell our products through a third party. And, as previously discussed, insurance companies’ and Medicare reimbursements, as well as patients’ deductibles can impact and delay payment for our products, which could make the business unprofitable. While we believe we will be able to leverage internal resources, we may find that additional resources are necessary and those resources may negatively impact our cash flows and financial position.
In addition, while this introduction is specifically for those patients that might not be able to avail themselves of in-office treatments, it may be viewed by our partner clinics as a channel conflict and cause a deterioration in our relationships with our current partners or negatively impact our ability to grow the number of partner clinics.
The success of our products depends on third-party reimbursement of patients' costs, which could result in potentially reduced prices or reduced demand and adversely affect our revenues and business operations.
Our ability to market our products successfully, especially XTRAC treatments, depends in large part on the extent to which various third parties are willing to reimburse patients or providers for the costs of medical procedures utilizing such products. These third parties include government authorities, private health insurers and other organizations, such as health maintenance organizations, whose patterns of reimbursement may change as a result of new standards for reimbursement determined by these third parties or because of the programs and policies enacted under the ACA.
Third-party payorspayers are systematically challenging the prices charged for medical products and services. They may deny reimbursement if they determine that a prescribed device is not used in accordance with cost-effective treatment methods as determined by the payor,payer, or is experimental, unnecessary or inappropriate. Further, although third parties may approve reimbursement, such approvals may be under terms and conditions that discourage use of
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the XTRAC system. Accordingly, if less costly drugs or other treatments are available, third-party payorspayers may not authorize or may limit reimbursement for the use of our products, even if our products are safer or more effective than the alternatives.
In addition, medical insurance policies and treatment coverage have been and may be affected by the parameters of the ACA or successor policies enacted by the current or any new administration. While the ACA's stated purpose is to expand access to coverage, it also mandates certain requirements regarding the types and limitations of insurance coverage. There can be no guarantee that the changes in coverage under the ACA will not affect the type and level of reimbursement for our products.
Although we have received reimbursement approvals from a majority of private healthcare plans for the XTRAC system, we cannot give assurance that these private plans will continue to adopt or maintain favorable reimbursement policies or accept the XTRAC system in its clinical role as a second-line therapy in the treatment of psoriasis. Additionally, third-party payorspayers may require further clinical studies or changes to our pricing structure and revenue model before authorizing or continuing reimbursement.
As of March 9, 2017,10, 2020, we estimate, based on published coverage policies and on payment practices of private and Medicare insurance plans, that more than 90%86% of the insured population in the U.S. is covered by insurance coverage or payment policies that reimburse physicians for using the XTRAC system for treatment of psoriasis. We can give no assurance that health insurers will not adversely modify their reimbursement policies for the use of the XTRAC system in the future.
The continuing development of our products depends upon our developing and maintaining strong working relationships with physicians.
The research, development, marketing and sale of our current products and any potential new and improved products or future product indications for which we receive regulatory clearance or approval depend upon our maintaining working relationships with physicians. We rely on these professionals to provide us with considerable knowledge and experience regarding the development, marketing and sale of our products. Physicians assist us as researchers, marketing and product consultants and public speakers. If we cannot maintain our strong working relationships with these professionals and continue to receive their advice and input, the development and marketing of our products could suffer, which could have a material adverse effect on our business, financial condition, and results of operations. At the same time, companies in the medical device industry are under increasing scrutiny by the U.S. Department of Health and Human Services Office of Inspector General, or OIG, and the U.S. Department of Justice, or DOJ for improper relationships with physicians. Our failure to comply with requirements governing the industry’s relationships with physicians, including the reporting of certain payments to physicians under the National Physician Payment Transparency Program (Open Payments) or an investigation into our compliance by the OIG or the DOJ, could have a material adverse effect on our business, financial condition, and results of operations.
Any failure in our customer education efforts could significantly reduce product marketing.have a material adverse effect on our revenue and cash flow.
It is important to the success of our marketing efforts to educate physicians and technicians how to properly use our products. We rely on physicians to spend their time and money to participate in our pre-installation educational sessions. Moreover, if physicians and technicians use our products improperly, they may have unsatisfactory patient outcomes or, in the case of the XTRAC system, cause patient injury, which may give rise to negative publicity or lawsuits against us, any of which could have a material adverse effect on our reputation, revenues and profitability.
If revenue from a significant customer declines, we may have difficulty replacing the lost revenue, which would negatively affect our results and operations.
In our international business, we depend for a material portion of our sales in the international arena on several key sub-distributors, and especiallysub-distributors. Historically, we relied on The Lotus Global Group, Inc., doing business as GlobalMed Technologies Co., or GlobalMed, which is oura single master distributor, over theGlobalMed, for international sales of our XTRAC and VTRAC products. We have recently entered into direct relationships with in-country distributors and have retained GlobalMed’s services to facilitate the relationships and management of those parties. If we lose GlobalMed or one of these sub-distributors,distributors, our sales of phototherapy products are likely to suffer in the short term, which could have a negative effect on our revenues and profitability.
If we fail to execute our recurring revenue strategy outside the United States, we may have difficulty replacing the lost revenue from equipment sales, which would negatively affect our results and operations.
As we begin to transition our international business from capital sales to the recurring revenue model, we will reduce our capital sales in the short term for higher recurring revenue in the long term. If we and our in-country distributors fail to obtain recurring customers timely, it could have a negative impact on our revenues and profitability.
If we fail to manage our sales and marketing force or to market and distribute our products effectively, we may experience diminished revenues and profits.
There are significant risks involved in building and managing our sales and marketing force and marketing our products, including our ability:
to hire, as needed, a sufficient number of qualified sales and marketing personnel with the aptitude, skills and understanding to market our products;
to adequately train our sales and marketing force in the use and benefits of all our products and services, thereby making them more effective promoters;
to manage our sales and marketing force and our ancillary channels (e.g., telesales) such that variable and semi-fixed expenses grow at a lesser rate than our revenues; and
to set the prices and other terms and conditions for treatments using the XTRAC system in a complex legal environment so that treatments will be accepted as attractive skin health and appropriate alternatives to conventional modalities and treatments.
To increase acceptance and utilization of our products, we may have to expand our sales and marketing programs in the U.S. While we may be able to draw on currently available personnel within our organization to meet this need, we also expect that we will have to increase the number of representatives devoted to the sales and marketing programs and to broaden, through such representatives, the talents we have at our disposal. In some cases, we may look outside our organization for assistance in marketing our products.
We are reliant on a limited number of suppliers for production of our products.
Production of our products requires specific component parts obtained from our suppliers. While we believe that we could find alternate suppliers, in the event that our current suppliers fail to meet our needs, a change in suppliers or any significant delay in our ability to have access to such resources could have a material adverse effect on our delivery schedules, business, operating results and financial condition. Moreover, in the event we can no longer utilize this supplier or acquire this resource and must identify a new supplier or substitute a different resource, such change may trigger an obligation for us to comply with additional FDA regulatory requirements including, but not limited to, pre-marketingpremarketing authorization and QSR requirements.Quality System Requirements (“QSR”).
Our failure to respond to rapid changes in technology and ourother applications in the medical devices industry or the development of a cure for skin conditions treated by our products could make our treatment system obsolete.
The medical device industry is subject to rapid and substantial technological development and product innovations. To be successful, we must respond to new developments in technology, new applications of existing technology and new treatment methods. Our financial condition and operating results could be adversely affected if we fail to be responsive on a timely and effective basis to competitors' new devices, applications, treatments or price strategies. For example, the development of a cure for psoriasis, vitiligo, atopic dermatitis or leukoderma would eliminate the need for our XTRAC system for these diseases and would require us to focus on other uses of our technology, which could have a material adverse effect on our business and prospects.
As we develop new products or improve our existing products, we may accelerate the economic obsolescence of the existing, unimproved products and their components. The obsolete products and related components may have little to no resale value, leading to an increase in the reserves we have against our inventory. Likewise, there is a risk that the new products or improved existing products may not achieve market acceptance and therefore may also lead to an increase in the reserves against our inventory.
Our customers, or physicians and technicians, as the case may be, may misuse certain of our products, and product liability lawsuits and other damages imposed on us may exceed our insurance coverage, or we may be subject to claims that are not covered by insurance.
We face an inherent risk of product liability as a result of the marketing and sale of our products. For example, we may be subjectsued if our products cause or are perceived to cause injury or are found to be otherwise unsuitable during manufacturing, marketing or sale. Any such product liability claims from timeclaim may include allegations of defects in manufacturing, defects in design, a failure to time.warn of dangers inherent in the product, negligence, strict liability or breach of warranty. Our products are highly complex, and some are used to treat delicate skin conditions on and near a patient's face. In addition, the clinical testing, manufacturing, marketing and use of certain of our products and procedures may also expose us to product liability, FDA regulatory and/or legal actions, or other claims. If a physician elects to apply an off-label use and the use leads to injury, we may be involved in costly litigation. In addition, the fact that we train technicians whom we do not supervise in the use of our XTRAC system during patient treatment may expose us to third-party claims if those doing the trainingwe are accused of providing inadequate training. We may also be subject to claims against us even if the apparent injury is due to the actions of others or the pre-existing health of the patient. For example, we rely on physicians in connection with the use of our products on patients. If these physicians are not properly trained or are negligent, the capabilities and safety features of our products may be diminished or the patient may suffer critical injury. We may also be subject to claims that are caused by the actions of our suppliers, such as those who provide us with components and sub-assemblies.
We presently maintain liability insurance with coverage limits of at least $5,000,000$5.0 million per occurrence and overall aggregate, which we believe is an adequate level of product liability insurance, but product liability insurance is expensive and we might not be able to obtain product liability insurance in the future on acceptable terms or in sufficient amounts to protect us, if at all. Our insurance policy contains various exclusions, and we may be subject to a product liability claim for which we have no coverage. A successful claim brought against us in excess of our insurance coverage could have a material adverse effect on our business, results of operations and financial condition. Even successful defense would require significant financial and management resources. In addition, continuing insurance coverage may also not be available at an acceptable cost, if at all. Therefore, we may not be able to obtain insurance coverage that will be adequate to satisfy a liability that may arise. Regardless of merit or eventual outcome, product liability claims may result in decreased demand for a product, injuryharm to itsour reputation, withdrawal of clinical trial volunteers, initiation of investigations by regulators, costs to defend the related litigation, diversion of management’s time and our resources, monetary awards to trial participants or patients, product recalls, withdrawals or labeling, marketing or promotional restrictions, exhaustion of any available insurance and our capital resources, a resulting decline in the price of our common stock and loss of revenues. As a result, regardless of whether we are insured, a product liability claim or product recall may result in losses that could result in the FDA taking legal or regulatory enforcement action against us and and/or our products including recall, and could have a material adverse effect upon our business, financial condition and results of operations.
We must comply with complex statutes prohibiting fraud and abuse, and both we and physicians utilizing our products could be subject to significant penalties for noncompliance.
There are extensive federal and state laws and regulations prohibiting fraud and abuse in the healthcare industry that can result in significant criminal and civil penalties. These federal laws include:
the anti-kickback statute which prohibits certain business practices and relationships, including the payment or receipt of remuneration for the referral of patients whose care will be paid by Medicare or other federal healthcare programs, as modified by the ACA;
the physician self-referral prohibition, commonly referred to as the Stark Law;
the anti-inducement law, which prohibits providers from offering anything to a Medicare or Medicaid beneficiary to induce that beneficiary to use items or services covered by either program; the Civil False Claims Act, which prohibits any person from knowingly presenting or causing to be presented false or fraudulent claims for payment by the federal government, including the Medicare and Medicaid programs; and
the Civil Monetary Penalties Law, which authorizes HHS to impose civil penalties administratively for fraudulent or abusive acts. Sanctions for violating these federal laws include criminal and civil penalties that range from punitive sanctions, damage assessments, monetary penalties, and imprisonment, denial of Medicare and Medicaid payments, or exclusion from the Medicare and Medicaid programs, or both.
As federal and state budget pressures continue, federal and state administrative agencies may also continue to escalate investigation and enforcement efforts to root out waste and to control fraud and abuse in governmental healthcare programs. Private enforcement of healthcare fraud has also increased, due in large part to amendments to the Civil False Claims Act in 1986 that were designed to encourage private persons to sue on behalf of the government. A violation of any of these federal and state fraud and abuse laws and regulations could have a material adverse effect on our liquidity and financial condition. An investigation into the use of our products by physicians may dissuade physicians from either purchasing or using our products and could have a material adverse effect on our revenues.
We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws and regulations and could face substantial penalties if we are unable to fully comply with such laws.
While we do not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payers, many healthcare laws and regulations apply to our business. For example, we could be subject to healthcare fraud and abuse and patient privacy regulation and enforcement by both the federal government and the states in which we conduct our business. The healthcare laws and regulations that may affect our ability to operate include:
the federal healthcare programs’ anti-kickback laws, as modified by the ACA, which prohibits, among other things, persons or entities from soliciting, receiving, offering or providing remuneration, directly or indirectly, in return for or to induce either the referral of an individual for, or the purchase order or recommendation of, any item or service for which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs;
federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payers that are false or fraudulent, or are for items or services not provided as claimed and which may apply to entities like us to the extent that our interactions with customers may affect their billing or coding practices;
HIPAA, which established new federal crimes for knowingly and willfully executing a scheme to defraud any healthcare benefit program or making false statements in connection with the delivery of or payment for healthcare benefits, items or services, as well as leading to regulations imposing certain requirements relating to the privacy, security and transmission of individually identifiable health information; and
state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payer, including commercial insurers, and state laws governing the privacy of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
The medical device industry has been under heightened scrutiny as the subject of government investigations and regulatory or legal enforcement actions involving manufacturers who allegedly offered unlawful inducements to potential or existing customers in an attempt to procure their business, including arrangements with physician consultants. If our operations or arrangements are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from the Medicare and Medicaid programs and the curtailment or restructuring of its operations. Any penalties, damages, fines, exclusions, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. The risk of us being found in violation of these laws is increased by the fact that many of these laws are broad and their provisions are open to a variety of interpretations. Any action against us for violation of these laws, even if we successfully defend against that action and the underlying alleged violations, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. If the physicians or other providers or entities with whom we do business are found to be non-compliant with applicable laws, they may be subject to sanctions, which could also have a negative impact on our business.
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If the effectiveness and safety of our devices are not supported by long-term data, and the level of acceptance of our products by dermatologists does not increase or is not maintained, our revenues could decline.
Our products may not be accepted in the market if we do not produce clinical data supported by the independent efforts of clinicians. We received clearance from the FDA for the use of the XTRAC system to treat psoriasis based upon our study of a limited number of patients. Safety and efficacy data presented to the FDA for the XTRAC system was based on studies on these patients. For the treatment of vitiligo, atopic dermatitis and leukoderma, we have received clearance from the FDA for the use of the XTRAC system based primarily on a showing of substantial equivalence to other previously cleared predicate devices. However, we may discover that physicians will expect clinical data on such treatments with the XTRAC system. We also may find that data from longer-term psoriasis patient follow-up studies may be inconsistent with those indicated by our relatively short-term data. If longer-term patient studies or clinical experience indicate that treatment with the XTRAC system does not provide patients with sustained benefits or that treatment with our product is less effective or less safe than our current data suggests, our revenues could decline. In addition, the FDA could then bring legal or regulatory enforcement actions against us and/or our products including, but not limited to, recalls or requirements for pre-marketpremarket 510(k) authorizations. We can give no assurance that our data will be substantiated in studies involving more patients. In such a case, we may never achieve significant revenues or profitability.
Our failure to obtain or maintain necessary FDA clearances and approvals, or approvals,to maintain continued clearances, or equivalents thereof in the U.S. and relevant foreign markets, could hurt our ability to distribute and market our products.
In both our U.S. and foreign markets, we are affected by extensive laws, governmental regulations, administrative determinations, court decisions and similar constraints. Such laws, regulations and other constraints may exist at the federal, state or local levels in the U.S. and at analogous levels of government in foreign jurisdictions. In addition, the formulation, manufacturing, packaging, labeling, distribution, importation, sale and storage of our products are subject to extensive regulation by various federal agencies, including, but not limited to, the FDA and the FTC, State Attorneys General in the U.S., as well as by various other federal, state, local and international regulatory authorities in the countries in which itsour products are manufactured, distributed or sold. If we or our manufacturers fail to comply with those regulations, we could become subject to significant penalties or claims, which could harm our results of operations or our ability to conduct our business. In addition, the adoption of new regulations or changes in the interpretations of existing regulations may result in significant compliance costs or discontinuation of product sales and may impair the marketing of our products, resulting in significant loss of net sales. Our failure to comply with federal or state regulations, or with regulations in foreign markets that cover our product claims and advertising, including direct claims and advertising by us, may result in enforcement actions and imposition of penalties or otherwise harm the distribution and sale of its products. Further, our businesses are subject to laws governing our accounting, tax and import and export activities. Failure to comply with these requirements could result in legal and/or financial consequences that might adversely affect our sales and profitability. Each medical device that we wish to market in the U.S. must first receive either 510(k) clearance or PMA from the FDA unless an exemption applies. Either process can be lengthy and expensive. The FDA's 510(k) clearance process may take from three to twelve months, or longer, and may or may not require human clinical data. The PMA process is much more costly and lengthy. It may take from eleven months to three years, or even longer, and will likely require significant supporting human clinical data. Delays in obtaining regulatory clearance or approval could adversely affect our revenues and profitability. Although we have obtained a PMA for the MelaFind system to aid in the diagnosis of melanoma and 510(k) clearances for our XTRAC system for use in treating psoriasis, vitiligo, atopic
dermatitis and leukoderma, these approvals and clearances may be subject to revocation if post-marketing data demonstrates safety issues or lack of effectiveness. Similar clearance
Many medical devices, such as medical lasers, are also regulated by the FDA as “electronic products.” In general, manufacturers and marketers of “electronic products” are subject to certain FDA regulatory requirements intended to ensure the radiological safety of the products. These requirements include, but are not limited to, filing certain reports with the FDA about the products and defects/safety issues related to the products as well as complying with radiological performance standards.
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The medical device industry is now experiencing greater scrutiny and regulation by federal, state and foreign governmental authorities. Companies in our industry are subject to more frequent and more intensive reviews and investigations, often involving the marketing, business practices, and product quality management. Such reviews and investigations may result in civil and criminal proceedings; the imposition of substantial fines and penalties; the receipt of warning letters, untitled letters, demands for recalls or the seizure of our products; the requirement to enter into corporate integrity agreements, stipulated judgments or other administrative remedies, and result in our incurring substantial unanticipated costs and the diversion of key personnel and management’s attention from their regular duties, any of which may have an adverse effect on our financial condition, results of operations and liquidity, and may result in greater and continuing governmental scrutiny of our business in the future.
Additionally, federal, state and foreign governments and entities have enacted laws and issued regulations and other standards requiring increased visibility and transparency of our interactions with healthcare providers. For example, the U.S. Physician Payment Sunshine Act, now known as Open Payments, requires us to report to the Centers for Medicare & Medicaid Services, or CMS, payments and other transfers of value to all U.S. physicians and U.S. teaching hospitals, with the reported information made publicly available on a searchable website. Effective January 2022 we will also be required to collect and report information on payments or transfers of value to physician assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists and certified nurse-midwives. Failure to comply with these legal and regulatory requirements could impact our business, and we have had and will continue to spend substantial time and financial resources to develop and implement enhanced structures, policies, systems and processes to comply with these legal and regulatory requirements, which may also impact our business and which could have a material adverse effect on our business, financial condition, and results of operations.
International regulatory approval processes may applytake more or less time than the FDA clearance or approval process. If we fail to comply with applicable FDA and comparable non-U.S. regulatory requirements, we may not receive regulatory clearances or approvals or may be subject to FDA or comparable non-U.S. enforcement actions. We may be unable to obtain future regulatory clearance or approval in foreign countries. a timely manner, or at all, especially if existing regulations are changed or new regulations are adopted. For example, the FDA clearance or approval process can take longer than anticipated due to requests for additional clinical data and changes in regulatory requirements. A failure or delay in obtaining necessary regulatory clearances or approvals would materially adversely affect our business, financial condition, and results of operations.
Further, more stringent regulatory requirements or safety and quality standards may be issued in the future with an adverse effect on our business. We have ceased manufacturing and marketing MelaFind but must still maintain records for FDA and foreign regulatory purposes.
If required, clinical trials necessary to support a 510(k) notice or PMA application, for new or modified products, will be expensive and will require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Delays or failures in our clinical trials will prevent us from commercializing any modified or new products and will adversely affect our business, operating results and prospects.
Initiating and completing clinical trials necessary to support a 510(k) notice or a PMA application will be time-consuming and expensive and the outcome uncertain. Moreover, the results of early clinical trials are not necessarily predictive of future results, and any product we advance into clinical trials may not have favorable results in early or later clinical trials.
Conducting successful clinical studies will require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Patient enrollment in clinical trials and completion of patient participation and follow-up depend on many factors, including the size of the patient population, the nature of the trial protocol, the attractiveness of, or the discomforts and risks associated with, the treatments received by patients enrolled as subjects, the availability of appropriate clinical trial investigators, support staff, and proximity of patients to clinical sites and ability to comply with the eligibility and exclusion criteria for participation in the clinical trial and patient compliance. For example, patients may be discouraged from enrolling in our clinical trials if the trial protocol requires them to undergo extensive post-treatment procedures or follow-up to assess the safety and effectiveness of our products or if they determine that the treatments received under the trial protocols are not attractive or involve unacceptable risks or discomforts. Patients may also not participate in our clinical trials if they choose to participate in contemporaneous clinical trials of competitive products. In addition, patients participating in clinical trials may die before completion of the trial or suffer adverse medical events unrelated to investigational products.
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Development of sufficient and appropriate clinical protocols to demonstrate safety and efficacy may be required and we may not adequately develop such protocols to support clearance and approval. Further, the FDA may require us to submit data on a greater number of patients than we originally anticipated and/or for a longer follow-up period or change the data collection requirements or data analysis for any clinical trials. Delays in patient enrollment or failure of patients to continue to participate in a clinical trial may cause an increase in costs and delays in the approval and attempted commercialization of our products or result in the failure of the clinical trial. The FDA may not consider our data adequate to demonstrate safety and efficacy. Such increased costs and delays or failures could adversely affect our business, operating results and prospects.
Our medical device operations are subject to pervasive and continuing FDA regulatory requirements.
Medical devices regulated by the FDA are subject to "general controls"“general controls” which include: registration with the FDA; listing commercially distributed products with the FDA; complying with good manufacturing practices under the quality system regulations; filing reports with the FDA of and keeping records relative to certain types of adverse events associated with devices under the medical device reporting regulation; assuring that device labeling complies with device labeling requirements; reporting certain device field removals and corrections to the FDA; and obtaining premarket notification 510(k) clearance for devices prior to marketing. Some devices known as "510(k)-exempt"“510(k)-exempt” can be marketed without prior marketing clearance or approval from the FDA. In addition to the "general“general controls,"” some Class II medical devices are also subject to "special“special controls,"” including adherence to a particular guidance document and compliance with the performance standard. Instead of obtaining 510(k) clearance, some Class III devices are subject to PMA. In general, obtaining PMA to achieve marketing authorization from the FDA is a more onerous process than seeking 510(k) clearance.
Many medical devices, such as medical lasers, are also regulated by the FDA as "electronic“electronic products."” In general, manufacturers and marketers of "electronic products"“electronic products” are subject to certain FDA regulatory requirements intended to ensure the radiological safety of the products. These requirements include, but are not limited to, filing certain reports with the FDA about the products and defects/safety issues related to the products as well as complying with radiological performance standards.
The medical device industry is now experiencing greater scrutiny and regulation by federal, state and foreign governmental authorities. Companies in our industry are subject to more frequent and more intensive reviews and investigations, often involving the marketing, business practices, and product quality management including standards for device recalls and product labeling. Such reviews and investigations may result in the civil and criminal proceedings; the imposition of substantial fines and penalties; the receipt of Warning Letters,warning letters, untitled letters, demands for recalls or the seizure of our products; the requirement to enter into corporate integrity agreements, stipulated judgments or other administrative remedies, and result in our incurring substantial unanticipated costs and the diversion of key personnel and management'smanagement’s attention from their regular duties, any of which may have an adverse effect on our financial condition, results of operations and liquidity, and may result in greater and continuing governmental scrutiny of our business in the future.
We must also have the appropriate FDA clearances and/or approvals from other governmental entities in order to lawfully market devices and or/and/or drugs. The FDA, federal, state or foreign governments and agencies may disagree that we have such clearance and/or approvals for all of our products and may take action to prevent the marketing and sale of such devices until such disagreements have been resolved.
Additionally, federal, state and foreign governments and entities have enacted laws and issued regulations and other standards requiring increased visibility and transparency of our interactions with healthcare providers. For example, the U.S. Physician Payment Sunshine Act requires us to disclose payments and other transfers of value to all U.S. physicians and U.S. teaching hospitals at the U.S. federal level made. Failure to comply with these legal and regulatory requirements could impact our business, and we have had and will continue to spend substantial time and financial resources to develop and implement enhanced structures, policies, systems and processes to comply with these legal and regulatory requirements, which may also impact our business.
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Healthcare policy changes may have a material adverse effect on us.
Healthcare costs have risen significantly over the past decade. As a result, there have been and continue to be proposals by federal, state and foreign governments and regulators as well as third-party insurance providers to limit the growth of these costs. Among these proposals are regulations that could impose limitations on the prices we will be able to charge for our products, the amounts of reimbursement available for our products from governmental agencies or third-party payors,payers, requirements regarding the usage of comparative studies, technology assessments and healthcare delivery structure reforms to determine the effectiveness and select the products and therapies used for treatment of patients. While we believe our products provide favorable clinical outcomes, value and cost efficiency, the resources necessary to demonstrate this value to our customers, patients, payors,payers, and regulators is significant and may require longer periods of time and effort in which to obtain acceptance of our products. There is no assurance that our efforts will be successful, and these limitations could have a material adverse effect on our financial position and results of operations.
These changes and additional proposed changes in the future could adversely affect the demand for our products as well as the way in which we conduct our business. For example, the ACA was enacted into law in the U.S. in March 2010. The lawThey imposed, on medical device manufacturers, a 2.3 percent excise tax on U.S. sales of Class I, II and III medical devices, which includes certain products marketed and sold by us, as well as requiringrequirement to research into the effectiveness of treatment modalities and institutinginstitute changes to the reimbursement and payment systems for patient treatments. In addition, governments and regulatory agencies continue to study and propose changes to the laws governing the clearance or approval, manufacture and marketing of medical devices, which could adversely affect our business and results of operations.
FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. The FDA is currently exploring ways to modify its 510(k) clearance process. In addition, due to changes at the FDA in general, it has become increasingly more difficult to obtain 510(k) clearance as data requirements have increased. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be. However, any changes could make it more difficult for us to maintain or attain clearance or approval to develop and commercialize our products and technologies.
Various healthcare reform proposals have also emerged at the state level. We cannot predict what healthcare initiatives, if any, will be implemented at the federal or state level, or the effect any future legislation or regulation will have on us. However,Furthermore, an expansion in government'sgovernment’s role in the U.S. healthcare industry may lower reimbursements for our products, reduce medical procedure volumes and adversely affect our business, possibly materially. In addition, if the excise taxes contained in the House or Senate health reform bills are enacted into law, our operating expensesloss from continuing operations resulting from such an excise tax and results of operations would be materially and adversely affected.
Our market acceptance in international markets requires regulatory approvals from foreign governments and may depend on third party reimbursement of participants' cost.
We have introduced our XTRAC and VTRAC products into markets in more than 30 countries in Europe, the Middle East, Asia, Australia, South Africa and parts of Central and South America through distributors. We cannot be certain that our salesforce and distributor network will be successful in marketing our products in these or other countries or that our distributors will purchase XTRAC or VTRAC systems beyond their current contractual obligations or in accordance with our expectations.
Even if we obtain and maintain the necessary foreign regulatory registrations or approvals, market acceptance of our products in international markets may be dependent, in part, upon the availability of reimbursement within applicable healthcare payment systems. Reimbursement and healthcare payment systems in international markets vary significantly by country, and include both government-sponsored healthcare and private insurance. We may seek international reimbursement approvals for our products, but we cannot assure you that any such approvals will be obtained in a timely manner, if at all. Failure to receive international reimbursement approvals in any given market could have a material adverse effect on the acceptance or growth of our products in that market or others.
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We face substantial competition, which may result in others discovering, developing or commercializing products more successfully than us.
The medical device industry is intensely competitive and subject to rapid and significant technological change. Many of our competitors have significantly greater financial, technical and human resources. Smaller and early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies.
Our competitors in medical device or pharmaceutical industries may also develop products that are more effective, more convenient, more widely used, less costly, or have a better safety profile than our products and these competitors may also be more successful than us in manufacturing and marketing their products.
Our competitors also compete with us in recruiting and retaining qualified scientific, management and commercial personnel, as well as in acquiring technologies complementary to, or necessary for, our programs. Competition for these people in the medical device industry is intense and we may face challenges in retaining and recruiting such individuals if, for example, other companies may provide more generous compensation and benefits, more diverse opportunities, and better chances for career advancement than we do. Some of these advantages may be more appealing to high-quality candidates and employees than those we have to offer. In addition, the decline in our stock price has created additional challenges by reducing the retention value of our equity awards. Because of the complex and technical nature of our systems and the dynamic market in which we compete, any failure to attract and retain a sufficient number of qualified employees could materially harm our ability to develop and commercialize our technology, which would have a material adverse effect on our business, financial condition, and results of operations.
Consolidation in the medical device industry could have an adverse effect on our revenue and results of operations.
Many medical device industry companies are consolidating to create new companies with greater market power. As the medical device industry consolidates, competition to provide goods and services to industry participants will become more intense. These industry participants may try to use their market power to bundle the sale of more products to our customers in return for lower prices. If we reduce our prices because of consolidation in the healthcare industry, our revenue would decrease and our earnings, financial condition, or cash flows would suffer, which would have a material adverse effect on our business, financial condition, and results of operations.
We actively employ social media as part of our marketing strategy, which could give rise to regulatory violations, liability, breaches of data security or reputational damage.
Despite our efforts to monitor evolving social media communication guidelines and comply with applicable rules, there is risk that the use of social media by us, our employees or our customers to communicate about our products or business may cause us to be found in violation of applicable requirements, including requirements of regulatory bodies such as the FDA and Federal Trade Commission. For example, promotional communications and endorsements on social media that, among other things, promote our products for uses or in patient populations that are not described in the product’s approved labeling (known as “off-label uses”), do not contain a fair balance of information about risks associated with using our products, make comparative or other claims about our products that are not supported by sufficient evidence, and/or do not contain required disclosures could result in enforcement actions against us. In addition, adverse events, product complaints, off-label usage by physicians, unapproved marketing or other unintended messages posted on social media could require an active response from us, which may not be completed in a timely manner and could result in regulatory action by a governing body. Further, our employees may knowingly or inadvertently make use of social media in ways that may not comply with our corporate policies or other legal or contractual requirements, which may give rise to liability, lead to the loss of trade secrets or other intellectual property, or result in public exposure of personal information of our employees, clinical trial patients, customers and others. Furthermore, negative posts or comments about us or our products in social media could seriously damage our reputation, brand image and goodwill, which would have a material adverse effect on our business, financial condition, and results of operations.
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We may become subject to claims of infringement or misappropriation of the intellectual property rights of others, which could prohibit us from shipping affected products, require us to obtain licenses from third parties or to develop non-infringing alternatives, and subject us to substantial monetary damages and injunctive relief. Our patents may also be subject to challenge on validity grounds, and our patent applications may be rejected.
Third parties could, in the future, assert infringement or misappropriation claims against us with respect to our current or future products. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain. Therefore, we cannot be certain that we have not infringed the intellectual property rights of such third parties. Our potential competitors may assert that some aspect of our products infringes their patents. There also may be existing patents of which we are unaware that one or more components of our products may inadvertently infringe.
Any infringement or misappropriation claim could cause us to incur significant costs, could place significant strain on our financial resources, divert management'smanagement’s attention from our business and harm our reputation. If the relevant patents were upheld as valid and enforceable and we were found to infringe, we could be prohibited from selling our product unless we could obtain licenses to use the technology covered by the patent or are able to design around the patent. We may be unable to obtain a license on terms acceptable to us, if at all, and we may not be able to redesign the affected product to avoid infringement.
A court could order us to pay compensatory damages for such infringement, plus prejudgment interest and could, in addition, treble the compensatory damages and award attorney fees. These damages could be substantial and could harm our reputation, business, financial condition and operating results. A court also could enter orders that temporarily, preliminarily or permanently enjoin us and our customers from making, using, selling, offering to sell or importing MelaFind,our products, and/or could enter an order mandating that we undertake certain remedial activities. Depending on the nature of the relief ordered by the court, we could become liable for additional damages to third parties.
We rely on our patents, patent applications and other intellectual property rights to give us a competitive advantage. Whether a patent is valid, or whether a patent application should be granted, is a complex matter of science and law. Therefore, we cannot be certain that, if challenged, our patents, patent applications and/or other intellectual property rights would be upheld. If one or more of those patents, patent applications and other intellectual property rights are invalidated, rejected or found unenforceable, those outcomes could reduce or eliminate any competitive advantage we might otherwise have had.
If we or our third-party manufacturers or suppliers fail to comply with the FDA'sFDA’s Quality System Regulation or any applicable state equivalent, our manufacturing operations could be interrupted and our potential product sales and operating results could suffer.
We and some of our third-party manufacturers and suppliers are required to comply with some or all of the FDA's drugFDA’s Good Manufacturing Practices or its QSR, which delineates the design controls, document controls, purchasing controls, identification and traceability, production and process controls, acceptance activities, nonconforming product requirements, corrective and preventive action requirements, labeling and packaging controls, handling, storage, distribution and installation requirements, records requirements, servicing requirements, and statistical techniques potentially applicable to the production of our medical devices. We and our manufacturers and suppliers are also subject to the regulations of foreign jurisdictions regarding the manufacturing process if we market its products overseas. The FDA enforces the QSR through periodic and announced or unannounced inspections of manufacturing facilities. Our facilities have been inspected by the FDA and other regulatory authorities, and we anticipate that we and certain of our third-party manufacturers and suppliers will be subject to additional future inspections. If our facilities or those of our manufacturers or suppliers are found to be in non-compliance or fail to take satisfactory corrective action in response to adverse QSR inspectional findings, FDA could take legal or regulatory enforcement actions against us and/or our products, including but not limited to the cessation of sales or the recall of distributed products, which could impair our ability to produce our products in a cost-effective and timely manner in order to meet our customers'customers’ demands. We may also be required to bear other costs or take other actions that may have a negative impact on our future sales and our ability to generate profits.
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Current regulations depend heavily on administrative interpretation. If the FDA does not believe that we are in substantial compliance with applicable FDA regulations, the agency could take legal or regulatory enforcement actions against us and/or our products. We are also subject to periodic inspections by the FDA, other governmental regulatory agencies, as well as certain third-party regulatory groups. Future interpretations made by the FDA or other regulatory bodies made during the course of these inspections may vary from current interpretations and may adversely affect our business and prospects. The FDA'sFDA’s and foreign regulatory agencies'agencies’ statutes, regulations, or policies may change, and additional government regulation or statutes may be enacted, which could increase post-approval regulatory requirements, or delay, suspend, prevent marketing of any cleared / cleared/approved products or necessitate the recall of distributed products. We cannot predict the likelihood, nature or extent of adverse governmental regulation that might arise from future legislative or administrative action, either in the U.S. or abroad.
The medical device industry has been under heightened FDA scrutiny as the subject of government investigations and enforcement actions. If our operations and activities are found to be in violation of any FDA laws or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines and other legal and/or agency enforcement actions. Any penalties, damages, fines, or curtailment or restructuring of our operations or activities could adversely affect our ability to operate our business and our financial results. The risk of us being found in violation of FDA laws is increased by the fact that many of these laws are broad and their provisions are open to a variety of interpretations. Any action against us for violation of these laws, even if we successfully defend ourselves against that action and its underlying allegations, could cause us to incur significant legal expenses and divert management'smanagement’s attention from the operation of our business. Where there is a dispute with a federal or state governmental agency that cannot be resolved to the mutual satisfaction of all relevant parties, we may determine that the costs, both real and contingent, are not justified by the commercial returns to us from maintaining the dispute or the product.
Various claims, design features or performance characteristics of our medical devices, that we regarded as permitted by the FDA without marketing clearance or approval, may be challenged by the FDA or state regulators. The FDA or state regulatory authorities may find that certain claims, design features or performance characteristics, in order to be made or included in the products, may have to be supported by further studies and marketing clearances or approvals, which could be lengthy, costly and possibly unobtainable.
If we fail to comply with ongoing regulatory requirements, or if we experience unanticipated problems with products, these products could be subject to restrictions or withdrawal from the market.
We are also subject to similar state requirements and licenses. Failure by us to comply with statutes and regulations administered by the FDA and other regulatory bodies, discovery of previously unknown problems with our products (including unanticipated adverse events or adverse events of unanticipated severity or frequency), manufacturing problems, or failure to comply with regulatory requirements, or failure to adequately respond to any FDA observations concerning these issues, could result in, among other things, any of the following actions:
warning letters or untitled letters issued by the FDA;
fines, civil penalties, injunctions and criminal prosecution;
unanticipated expenditures to address or defend such actions;
delays in clearing or approving, or refusal to clear or approve, our products;
withdrawal or suspension of clearance or approval of our products by the FDA or other regulatory bodies;
product recall or seizure;
orders for physician or customer notification or device repair, replacement or refund;
interruption of production; and
operating restrictions.
If any of these actions were to occur, it would harm our reputation and adversely affect our business, financial condition and results of operations.
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Our medical products may in the future be subject to product recalls that could harm our reputation, business and financial results.
The FDA has the authority to require the recall of commercialized medical device products in the event of material deficiencies or defects in design or manufacture. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the device would cause serious injury or death. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. A government-mandated or voluntary recall by us or one of our distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of our products would divert managerial and financial resources and have an adverse effect on our financial condition and results of operations. The FDA requires that certain classifications of recalls be reported to the FDA within ten working days after the recall is initiated. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA. We may initiate voluntary recalls involving our products in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, they could require us to report those actions as recalls. A future recall announcement could harm our reputation with customers and negatively affect its sales. In addition, the FDA could take enforcement action for failing to report the recalls when they were conducted.
If any of our medical products cause or contribute to a death or a serious injury, or malfunction in certain ways, we will be subject to medical device reporting regulations, which can result in voluntary corrective actions or agency enforcement actions.
Under the FDA medical device reporting regulations, medical device manufacturers are required to report to the FDA information that a device has or may have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or contribute to death or serious injury if the malfunction of the
device or one of our similar devices were to recur. If we fail to report these events to the FDA within the required timeframes, or at all, the FDA could take enforcement action against us. Any such adverse event involving our products also could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection or enforcement action. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require our time and capital, distract management from operating our business, and may harm our reputation and financial results.
We may have a need for operatingadditional funds in the future and there is no guarantee that we will be able to generate those funds from our business.
Our capitalexisting cash position and ability to borrow funds and future revenue may not be sufficient to support the expenses of our operations in the near term, although based upon our cash and cash equivalents, current budgeting and projected cash flow models, we believe that we will be able to support our operations for at least the next twelve months following the filing of this Form 10-K.Report. We plan to fund operations by the recurring revenue generated by the use of the XTRAC lasers in the U.S. plusand international markets, as well as domestic and international sales of the XTRAC and VTRAC units internationally.our products. If revenues from the sale and use of our existing products are inadequate to fund our operations, we may need to raise additional financing. We cannot assure you that we will be able to raise additional capital or secure alternate financing to fund operations, if necessary, or that we will be able to raise additional capital under terms that are favorable to us. Further, we cannot assure that the Acquisitionan acquisition will in any way negate or mitigate our need for future capital. Any additional financing may dilute the ownership interest of our existing stockholders and could adversely affect the market price of our common stock.
If we do not have enough capital to fund operations, then we will have to cut costs or raise funds.
If we are unable to raise additional funds, if necessary, under terms acceptable to us and in the interests of our stockholders, then we will have to take measures to cut operating costs or obtain funds using alternative methods, such as:
Sell or license some of our technologies that we would not otherwise sell or license if we were in a stronger financial position;
Sell or license some of our technologies under terms that are less favorable than they otherwise might have been if we were in a stronger financial position; and
Consider further business combination transactions with other companies or positioning ourselves to be acquired by another company.
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If it became necessary to take one or more of the above-listed actions, then our perceived valuation may be lower, which could impact the market price of our stock. Further, the effects on our operations, financial performance and stock price may be significant if we do not or cannot take one or more of the above-listed actions in a timely manner and when needed, and our ability to do so may be limited significantly due to the instability of the global financial markets and the resulting limitations on available financing to us and to potential licensees, buyers and investors. Additionally, these options may not be available to us as all of our assets have been pledged as security for the various financings.
Included in accrued state sales and use taxes are certain permitted liens. These restrictions may limitknown and estimated sales and use taxes and related penalties and interest to taxing authorities. In our ability to obtain additional financing, withstand downturnsrecurring revenue model, we place the XTRAC system in the physician’s office under an arrangement for no upfront charge and generate our business or take advantagerevenue on a per-use basis.
In the ordinary course of business, opportunities. Moreover, additional debt financing we may seek may contain termsare, from time to time, subject to audits performed by state taxing authorities. These actions and proceedings are generally based on the state’s position that include more restrictive covenants, may require repayment onthe arrangements entered into by the Company are subject to state sales and use tax rather than exempt from applicable law. We are currently under audit by two taxing jurisdictions as it pertains to state sales and/or use tax. One jurisdiction has assessed us, in two assessments, an accelerated schedule or may impose other obligations that limit our abilityaggregate amount of $1,484,000 for the period from March 2014 through February 2020 including penalties and interest. We have declined an informal offer to grow our business, acquire needed assets, or take other actions we might otherwise consider appropriate or desirable.
As of December 31, 2020, and 2019, we have estimated our sales and use tax liability to be approximately $3.1 million and $3.2 million, respectively. We believe our sales and use tax accruals have properly recognized that if our arrangements with customers are deemed more likely than not that we would not be exempt from sales tax in a particular state are the registration rights,basis for measurement of the Selling Stockholdersstate sales and use tax is calculated in accordance with ASC 405, Liabilities as a transaction tax. While we believe we have strong positions that our recurring revenue is exempt from sales tax, if it is found that we are entitledsubject to receive liquidated damagessales tax in those particular states where we believe it is more likely than not that we would be exempt from sales tax, then potential tax liabilities including interest and penalties would be higher than accrued amounts. If and when we are successful in defending ourselves 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 settlements remain uncertain.
We may be subject to disruptions or failures in our information technology systems and network infrastructures, including through cyber-attacks or other third-party breaches that could have a material adverse effect on our business.
We rely on efficient and uninterrupted operation of complex information technology systems and network infrastructures to operate our business. We also hold data in various data center facilities upon which our business depends. A disruption, infiltration or failure of our information technology systems or any of our data centers as a result of software or hardware malfunctions, system implementations or upgrades, computer viruses, third-party security breaches, employee error, theft or misuse, malfeasance, power disruptions, natural disasters or accidents could cause breaches of data security, loss of intellectual property and critical data and the occurrencerelease and misappropriation of sensitive competitive information.
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While we have implemented a number of events relatingprotective measures, including firewalls, antivirus, patches, data encryption, log monitors, routine back-ups with offsite retention of storage media, system audits, data partitioning, routine password modifications and disaster recovery procedures, such measures may not be adequate or implemented properly to filing, becoming effectiveprevent or fully address the adverse effect of such events. If our systems were to fail or we are unable to successfully expand the capacity of these systems, or we are unable to integrate new technologies into our existing systems, our operations and financial results could suffer.
We have also outsourced significant elements of our information technology infrastructure and as a result we depend on third parties who are responsible for maintaining an effective registration statement covering the shares underlying the Debenturessignificant elements of our information technology systems and the Warrants.infrastructure and who may or could have access to our confidential information. The liquidated damages willsize and complexity of our information technology systems, and those of our third-party vendors, make such systems potentially vulnerable to service interruptions and security breaches from inadvertent or intentional actions by its employees, partners or vendors. These systems are also vulnerable to attacks by malicious third parties, and may be payable upon the occurrence of each of those events and each monthly anniversary thereof until cured. The amount of liquidated damages payable is equalsusceptible to 2.0% of the aggregate purchase price paid by each Purchaser, provided, however, the maximum aggregate liquidated damages payable to a Purchaser shall be 12% of the aggregate subscription amount paid by such Purchaser pursuantintentional or accidental physical damage to the Purchase Agreement. The liquidated damages shall accrue interest at a rate of 12% per annum (or such lesser maximum amount that is permitted to be paidinfrastructure maintained by applicable law), accruing on a daily basis for each event until such event is cured.
Environmental and health safety laws may result in liabilities, expenses and restrictions on our operations.
Federal, state, local and foreign laws regarding environmental protection, hazardous substances and human health and safety may adversely affect our business. Using hazardous substances in our operations exposes us to the lender seizingrisk of accidental injury, contamination or other liability from the use, storage, importation, handling, or disposal of hazardous materials. If our assets.or our suppliers’ operations result in the contamination of the environment or expose individuals to hazardous substances, we could be liable for damages and fines, and any liability could significantly exceed our insurance coverage and have a material adverse effect on our business, financial condition, and results of operations. Future changes to environmental and health and safety laws could cause us to incur additional expenses or restrict our operations, which could have a material adverse effect on our business, financial condition, and results of operations.
Risks Relating to Our Common Stock
In the event of certain contingencies, the investors in the May 2018 equity financing may receive additional shares issued pursuant to cure the deficiency, or if we are otherwise not eligible,Retained Risk Provisions as defined in the Staff will notify us that our common stock will be delisted from the NASDAQ Capital Market. We may appeal the Staff's determination to delist our common stock to a Hearing Panel. During any appeal process, our common stock would continue to trade on the NASDAQ Capital Market. The Notice has no immediate effect on the listing or trading of our common stock on the NASDAQ Capital Market.
Our stock price may be volatile, meaning purchasers of our common stock could incur substantial losses.
Our stock price has been and is likely to continue to be volatile. The stock market in general and the market for medical technology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. The following factors, in addition to other risk factors described in this section and general market and economic conditions, may have a significant impact on the market price of our common stock:
failure of any of our products to achieve or continue to have commercial success;
the timing of regulatory approval for our future products;
adverse regulatory determinations with respect to our existing products;
results of our research and development efforts and our clinical trials;
the announcement of new products or product enhancements by us or our competitors;
regulatory developments in the U.S. and foreign countries;
our ability to manufacture our products to commercial standards;
developments concerning our clinical collaborators, suppliers or marketing partners;
changes in financial estimates or recommendations by securities analysts;
public concern over our products;
developments or disputes concerning patents or other intellectual property rights;
product liability claims and litigation against us or our competitors;
the departure of key personnel;
the strength of our balance sheet and any perceived need to raise additional funds;
variations in our financial results from expected financial results or those of companies that are perceived to be similar to us;
changes in the structure of third-party reimbursement in the U.S. and other countries;
changes in accounting principles or practices;
general economic, industry and market conditions; and
future sales of our common stock.
A decline in the market price of our common stock could cause you to lose some or all of your investment, limit your ability to sell your shares of stock and may adversely impact our ability to attract and retain employees and raise capital. In addition, stockholders have, and may in the future, initiate securities class action lawsuits if the market price of our stock drops significantly. Whether or not meritorious, litigation brought against us could result in substantial costs and could divert the time and attention of our management. Our insurance to cover claims of this sort may not be adequate.
Our charter documents and Delaware law may inhibit a takeover that stockholders consider favorable and could also limit the market price of our stock.
Provisions of our restated certificate of incorporation and bylaws and applicable provisions of Delaware law may make it more difficult for or prevent a third party from acquiring control of us without the approval of our board of directors. These provisions:
limit who may call a special meeting of stockholders;
establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon at stockholder meetings;
do not permit cumulative voting in the election of our directors, which would otherwise permit less than a majority of stockholders to elect directors;
prohibit stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders; and
provide our board of directors the ability to designate the terms of and issue a new series of preferred stock without stockholder approval.
In addition, Section 203 of the Delaware General Corporation Law generally limits our ability to engage in any business combination with certain persons who own 15% or more of our outstanding voting stock or any of our associates or affiliates who at any time in the past three years have owned 15% or more of our outstanding voting stock. In connection with the financing in May 2018, our board of directors exempted AGP SPVI, L.P. from the application of this provision in connection with its investment.
These provisions may have the effect of entrenching our management team and may deprive you of the opportunity to sell your shares to potential acquirers at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price of our common stock.
Not applicable.
Item 2.Properties
We lease a 10,672an 8,513 sq. ft. facility in Horsham, Pennsylvania that houses our executive offices and marketing. The term of the lease runs through November 30, 2018.January, 2023.
We lease 28,000a 17,000 sq. ft. facility consisting of office, manufacturing and warehousing space in Carlsbad, California. The lease was set to expire on September 30, 2019. On May 1, 2019, we entered into the Fifth Amendment to the lease. The term of the lease commenced on October 1, 2019 and expires on September 30, 2017.2024. Our Carlsbad facility houses the manufacturing and development operations for our excimer laser business, as well as the patient call center and reimbursement center.
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.
We are currently under audit by two taxing jurisdictions, pertaining to sales and/or use tax. One jurisdiction has assessed us an amount of $1,484,000, in two assessments, for the period from March 2014 through February 2020. We have declined an informal offer to settle the first assessment at a substantially lower amount and are currently in that jurisdiction’s administrative process of appeal.
In January 2021, we received notification that the administrative law judge had issued an opinion finding in favor of us that the sale of XTRAC treatment codes are not taxable as sales tax with respect to the first assessment. The jurisdiction has 30 days plus potential extensions to file an appeal and on March 25th we received an advisory from the jurisdiction that it would file an appeal.
A second jurisdiction has made an assessment of $720,000 from June 2015 through March 2018 plus interest of $171 through April 2020. We are in this jurisdiction’s administrative process of appeal as well and the timing of the process has been impacted by the COVID-19 pandemic. If it is found we are not exempt from sales tax in these or other states then potential tax liabilities including interest and penalties would be higher than accrued amounts.
Effective August 10, 2020, we entered into a Settlement Agreement and Release (“Settlement Agreement”) with Ra Medical Systems, Inc. (“Ra Medical”), under which the Company and Ra Medical agreed that within five business days of final execution of the Settlement Agreement, the parties are to file stipulations and/or documentation necessary to cause each of the pending lawsuits between them and with other third-parties to be dismissed with prejudice, with each party to bear its own attorneys’ fees and costs. The pending lawsuits were: Strata Skin Sciences, Inc. and Uri Geiger v. Ra Medical Systems, Inc., civil action no. 18-21421, Court of Common Pleas, Montgomery County, Pennsylvania; and Ra Medical Systems, Inc. v. Uri Geiger, Strata Skin Sciences, Inc., and Accelmed Growth Partners, L.P., civil action no. 3:19-cv-00920, United States District Court for the Southern District of California.
Pursuant to the terms of the Settlement Agreement, each party agreed to release the opposing parties from any and all claims, demands, and causes of action of any kind whatsoever, whether known or unknown, fixed or contingent, asserted or unasserted, arising in contract, tort, statute, or operation of law, which they now have or ever had against any of the Ra Medical Releases, from the beginning of time to the date of the Settlement Agreement, in any way arising from or relating to the allegations, claims, causes of action, allegations and/or assertions set forth in the pending lawsuits.
Not applicable.
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PART II
Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
As of March 9, 2017,17, 2021, we had 10,909,49033,801,045 shares of common stock issued and outstanding. This did not include (i) options to purchase 4,500,5226,925,478 shares of common stock, of which 2,222,0464,243,387 were vested as of March 9, 2017,17, 2021 or (ii) warrants to purchase up to 12,033,098 sharesvested, unissued restricted stock units of common stock, all of which warrants were vested or (iii) convertible debentures convertible into 46,005,715 shares of common stock.88,194.
| High | Low | |||||||
| Year Ended December 31, 2016: | ||||||||
| Fourth Quarter | $ | 0.61 | $ | 0.44 | ||||
| Third Quarter | 0.74 | 0.50 | ||||||
| Second Quarter | 0.96 | 0.61 | ||||||
| First Quarter | 1.15 | 0.93 | ||||||
| Year Ended December 31, 2015: | ||||||||
| Fourth Quarter | $ | 1.21 | $ | 1.07 | ||||
| Third Quarter | 1.25 | 1.05 | ||||||
| Second Quarter | 2.48 | 1.15 | ||||||
| First Quarter | 3.57 | 1.22 | ||||||
Dividend Policy
We have not declared or paid any dividend on our common stock, since our inception. We do not anticipate that any dividends on our common stock will be declared or paid in the future.
Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on then existing conditions, including our earnings, financial condition, results of operations, level of indebtedness, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant. Our board of directors'directors’ ability to declare a dividend is also subject to limits imposed by Delaware law.law and our credit facility.
Securities Authorized for Issuance Under Equity Compensation Plans
The following is a summary of all of our equity compensation plans, including plans that were assumed through acquisitions and individual arrangements that provide for the issuance of equity securities as compensation, as of December 31, 2016.2020. See Notes 1 and 14 to the consolidated financial statements for additional discussion.
Number of Securities to be Issued Upon Exercise of Outstanding Options | Weighted- Average Exercise Price of Outstanding Options | Number of Securities Remaining Available Under Equity Compensation Plans (excluding securities reflected in column (A)) | ||||||||||
| (A) | (B) | (C) | ||||||||||
| Equity compensation plans | ||||||||||||
| approved by security holders | 4,500,522 | $ | 1.02 | 8,294,400 | ||||||||
| Equity compensation plans not approved by security holders | - | - | - | |||||||||
| Total | 4,500,522 | $ | 1.02 | 8,294,400 | ||||||||
| Number of Securities to be issued Upon Exercise of Outstanding Options | Weighted Average Exercise Price of Outstanding Options | Number of Securities Remaining Available Under Equity Compensation Plans (excluding securities reflected in column (A)) | ||||||||||
| (A) | (B) | (C) | ||||||||||
| Equity compensation plans approved by security holders | 5,292,888 | $ | 1.87 | 41,774 | ||||||||
| Equity compensation plans not approved by security holders | - | - | - | |||||||||
5,292,888 | $ | 1.87 | 41,774 | |||||||||
Recent Issuances of Unregistered Securities
None.
Purchases of Equity Securities
None.
Not applicable.
Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations
The following financial data, in this narrative, are expressed in thousands, except for the earnings per share. The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and related notes included elsewhere in this Report. Dollar amounts are reported in thousands, except per share and per treatment data.
Introduction, Outlook and Overview of Business Operations
STRATA Skin Sciences is a medical technology company in Dermatology and Plastic Surgery dedicated to developing, commercializing and commercializingmarketing innovative products for the treatment of dermatological disorders. In June 2015, we completeddermatologic conditions. Its products include the acquisition of the XTRAC SystemXTRAC® excimer laser and the VTRAC System businesses from PhotoMedex, Inc. The XTRAC and VTRAC products are FDA cleared devices forVTRAC® lamp systems utilized in the treatment of psoriasis, vitiligo and various other skin disorders. The purchase price was $42,403 plus the assumption of certain business-related liabilities. Management believes that these businesses acquired create a platform on which to transform STRATA into a leading medical dermatology company. Management further believes that the cash flow generated by these businesses will be sufficient to finance our operations for the at least the next twelve months following the filing of this Form 10-K.conditions.
The XTRAC device is utilized to treat psoriasis, vitiligo and other skin diseases. The XTRAC device received FDA clearance in 2000 and has since become a widely recognized treatment among dermatologists. The system delivers targeted 308um ultraviolet light to affected areas of skin, leading to psoriasis clearing and vitiligo repigmentation, following a series of treatments. As of December 31, 2016,2020, there were 775832 XTRAC systems placed in dermatologists'dermatologists’ offices in the United States under our dermatology recurring revenueprocedure model, up from 718820 at the end of December 2015.31, 2019. Under the dermatology recurring revenueprocedure model, the XTRAC system is placed in a physician's office and revenue is recognizedfees are charged on a per procedure basis.basis or a fee is charged on a periodic basis not to exceed an agreed upon number of procedures. The XTRAC system'ssystem’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, system, provides targeted therapeutic efficacy demonstrated by excimer technology with the simplicity of design and reliability of a lamp system. 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'sworld’s population suffers from vitiligo. In 2016,2020, domestically, we estimate over 351,000241,000 XTRAC laser treatments were performedperformed.
Effective February 1, 2017, we entered into an exclusive OEM distribution agreement with Esthetic Education, LLC to be the exclusive marketer and seller of private label versions of the SkinStylus® MicroSystem and associated parts under the name of STRATAPEN. This three-year agreement has minimum annual sales requirements for renewal. The agreement expired in January 2020, but we continue to sell the product on approximately 22,000 patientsa purchase order basis.
Since 2019, we have been transitioning our international equipment sales through our master distributor to a direct distribution model for equipment sales and recurring revenue on a country by country basis. We have signed contracts in Korea (in 2019), Japan (in 2020) and China (in January 2021).
These agreements are expected to increase recurring revenues over time, but will have an initial impact of reducing sales of dermatology procedures equipment in the near term as the contract is to apply a similar recurring revenue model as we have in the United States.
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 resultsmarkets. In addition, the pandemic led 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 XTRACimpact on our customers and VTRAC businessestheir potential for permanent closure. While many offices have been includedreopening, the on-going impact of the COVID-19 pandemic on the Company’s operational and financial performance, including its ability to execute its business strategies and initiatives in the results of operations subsequent to June 22, 2015,expected time frames, will depend on future developments, including the dateduration and spread of the acquisition. The assetsCOVID-19 outbreak, continued restrictions on business operations and transport and the continued impact on worldwide economic and geopolitical conditions, all of the acquired businesseswhich are uncertain and liabilities assumed have been consolidated as of June 22, 2015.cannot be predicted.
Domestically, as the procedures in which our devices are used are elective in the process of discontinuing our efforts to developnature; and commercialize the MelaFind System. MelaFind is a non-invasive, point-of-care (i.e., in the doctor's office) instrument designed to aid in the dermatologists' decision to biopsy pigmented skin lesions, particularly melanoma. Weas social distancing, travel restrictions, quarantines and other restrictions have been unsuccessful in commercializing the MelaFind product in a way that would bring financial benefit to our shareholders. In March 2017, we sent a notice to the 90 owners of MelaFind devicesbecome prevalent in the United States, informing them that, effective September 30, 2017, we no longerthis has had a negative impact on our recurring revenue model and our financial position and cash flow. The impact to the resources toCompany’s customers may also result in an increase in past due accounts receivable or customer bankruptcies. The virus has disrupted the supply chain from China and other countries and may continue to supportdo so. We depend upon our supply chain to provide a steady source of components to manufacture and repair our devices. A shut-down of suppliers within our supply chain would severely disrupt our ability to sell, place and repair our products, and this would have a material impact on our financial position and cash flow.
To mitigate the deviceimpact of COVID-19, the Company has taken a variety of measures to ensure the availability and thatfunctioning of its critical infrastructure by implementing business continuity plans and 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, such as providing face masks for employees at facilities significantly impacted and requiring on-site body temperature monitoring before entering facilities. In addition, we have created programs utilizing its direct to consumer advertising and call center contact to patients and partner clinics to restart our partners’ businesses. In order to conserve its cash during this time period, the Company furloughed employees, reduced all discretionary spending, reduced all inventory purchases and delayed payments to vendors. We continue to manage our expenses and cash disbursements. Delayed payments to vendors were cumulatively, approximately $678 as of spare parts was being offered for sale to themDecember 31, 2020. With the receipt of the PPP loan, we brought back most of our employees on a first-come, first-serve basis.leave of absence. In December 2020, we submitted an application for loan forgiveness to the SBA and subject to the SBA’s approval, of 100% of the loan proceeds.
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 COVID-19 pandemic has had a negative impact on the Company’s results of operations and financial performance for the first three quarters of fiscal 2020, and the Company expects it will continue to have a negative impact on its revenue, earnings and cash flows in the next quarter and as long as the pandemic continues. Accordingly, current results and financial condition discussed herein may not be indicative of future operating results and trends.
Key Technology
XTRAC® Excimer Laser. XTRAC originally received FDA clearance in 2000 and has since become a widely recognized treatment among dermatologists for psoriasis and other skin diseases. The XTRAC Systemexcimer laser delivers ultra-narrowband ultraviolet B ("UVB"(“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.
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Recent Developments
Home by XTRAC™
In January 2020, we introduced Home by XTRAC business, leveraging in-house resources including an at-home insurance reimbursed treatment option for patients with certain skin diseases that do not qualify for in-office treatments.
Chinese Distribution Agreement
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 initial term ends December 2024 and thereafter automatically renews for a period of twelve months subject to certain conditions.
Japanese Distribution Agreement
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. This agreement is expected to increase recurring revenues over time, but will have an initial impact of reducing sales of dermatology procedures equipment in the near term as the contract is to apply a similar recurring revenue model as we have in the United States. The term ended December 2020 and is automatically renewed for twelve months, subject to certain conditions.
Korean Distribution Agreement
In the third quarter of 2019, we signed a direct distribution agreement with our Korean distributor for a combination of direct capital sales and recurring revenues for the country of South Korea. This agreement is expected to increase recurring revenues over time, but will have an initial impact of reducing sales of dermatology procedures equipment in the near term as the contract is to apply a similar recurring revenue model as we have in the United States. The current term is until July 2021 with up to three additional twelve-month terms, subject to certain conditions.
MidCap Credit Facility Extinguishment and Fixed Rate-Term Promissory Note
On May 29, 2018, we entered into a Fourth Amendment to Credit Agreement (the “Amendment”), pursuant to which the Company repaid $3.0 million in principal of the existing $10.6 million credit facility established with MidCap Financial Trust in 2015. The terms of the credit facility were amended to impose less restrictive covenants and lower prepayment fees for the Company and extended the maturity date to May 2022. The Amendment modified the principal payments payable under the Credit Agreement including a period of 18 months where there were no principal payments due. Principal payments beginning December 2019 were $252 plus interest per month. The interest rate on the credit facility was one-month LIBOR plus 7.25%.
On December 30, 2019, we closed on a $7.3 million loan with a commercial bank pursuant to a one-year Fixed Rate – Term Promissory Note (the “Note”). Our obligations under the Note are secured by an Assignment and Pledge of Time Deposit, under which we have pledged, to the commercial bank, the proceeds of a time deposit account in the amount of the Note. We concurrently fully repaid (including payment of termination and exit fees) our existing long-term debt credit facility with MidCap Financial Trust. The Note was renewed through December 30, 2021.
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 matures on May 1, 2022 and bears an interest rate of 1% per annum. Payments of principal and interest of any unforgiven balance was scheduled to commence on December 1, 2020 but is deferred until the SBA approves of the forgiveness amount. Under the Paycheck Protection Program Flexibility Act of 2020 (the “PPP Flexibility Act”), (i) the first payment date for the PPP loan will be the earlier of (a) 10 months after the end of the “covered period” (as determined under the PPP) or (b) the date the bank receives a remittance of the forgiven amount from the SBA, and (ii) the PPP loan’s maturity is extended to five years (from 2 years).
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All or a portion of the PPP loan may be forgiven by the lender upon application by US beginning 60 days after loan approval and upon documentation of expenditures in accordance with the requirements set forth by the Small Business Administration (the “SBA”) pursuant to the CARES Act. Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments, covered mortgage interest and covered utilities at either; our discretion, the eight-week period or twenty-four week period beginning on the date of disbursement of proceeds from the PPP loan. For purposes of the CARES Act, payroll costs exclude compensation of an individual employee in excess of $100, prorated annually. Not more than 40% of the forgiven amount may be for non-payroll costs. Forgiveness is reduced under certain circumstances if full-time headcount declines or if salaries and wages for employees with salaries of $100 or less annually are reduced. In the event the PPP loan, or any portion thereof, is forgiven pursuant to the PPP, the amount forgiven is applied to outstanding principal. In December 2020, we submitted for forgiveness to the SBA, and subject to the SBA’s approval, of 100% of the loan proceeds.
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 the Company’s business. The principal amount of the EIDL Loan is up to $500, with proceeds to be used for working capital purposes. 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, are due monthly beginning March 26, 2021 (twelve months from the date of the promissory note) in the amount of $2. 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 is not required to be refinanced by the PPP loan.
Sales and Marketing
As of December 31, 2016,2020, our sales and marketing personnel consisted of 4857 full-time employees, inclusive of a vice president of sales, a 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.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations in this Report are based upon our Consolidated Financial Statements,consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.States of America (“U.S. GAAP”). The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and disclosures at the date of the financial statements. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to revenue recognition, accounts receivable, deferred revenues, inventories, useful lives and impairment of property and equipment and of intangibles and goodwill, fair value of equity-based awards, sales and use tax, deferred taxes, financial instruments (derivative instruments and warrants) and accruals for warranty claims. We use authoritative pronouncements, historical experience and other assumptions as the basis for making estimates. Actual results could differ from those estimates.
Management believes that the following critical accounting policies affect our more significant judgments and estimates in the preparation of our Consolidated Financial Statements. These critical accounting policies andconsolidated financial statements.
Revenue Recognition
In the significant estimates made in accordance with these policies have been discussed with our Audit Committee.
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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 we sell the physician access codes in order to operate the treatment equipment, these are similar to operating leases for accounting purposes since we provide the customers limited arrangement rights to use the treatment equipment and the treatment equipment resides in the physician’s office and we 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. 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 our Korean, Japanese and, in 2021, Chinese distributors, we sell 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 includes a potential buy-out at the end of the term of the contract. 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, we adopted the practical expedient to account for the arrangement as a single lease component.
In the Dermatology Procedures Equipment segment we sell our lasersproducts internationally through a distributor ordistributors and domestically, directly to a physician. In some cases,For the product sales, we recognize revenues when control of the promised products is transferred to either our distributors or end-user customers, in an amount that reflects the consideration we expect 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, we must have a present right to payment and legal title must have passed to the customer. We ship most of our products FOB shipping point, and as such, we primarily transfer control and record revenue upon shipment. From time to time we will grant certain customers, for example governmental customers, FOB destination terms, and the transfer of control for revenue recognition occurs upon receipt. We have 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. 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 laser is placed in a physician's office at no charge, we andrights become unconditional. Currently, the customer stipulateCompany does not have any contract assets which have not transferred to a quarterly or other periodic targetreceivable. 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 procedures to be performed, and accordingly revenuethe transaction price are based on the price of standalone 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.
With respect to treatments to be performed through laser-access codes that are sold to physicians free of a periodic commitment, but not yet used, are deferredcontract acquisition costs, we applied the practical expedient and recognized as a liability until the physician performs the treatment. Unused treatments remain our obligation because the treatments can only be performed on our-owned equipment. Once the treatments are performed, this obligation has been satisfied.expense these costs immediately.
Our XTRAC laser is either (i) sold to distributors or physicians directly or (ii) placed in a physician's office and remains our property. The cost to build a laser, whether for sale or for placement, is accumulated in inventory. When a laser is placed in a physician'sphysician’s office, the cost is transferred from inventory to "lasers“lasers in service"service” within property and equipment. At times, units are shipped to distributors but revenue is not recognized until all of the revenue recognition criteria havehas been met and, until that time, the unit is carried on our books asincluded in inventory. Revenue is not recognized from these distributors until payment is either assured or paid in full.
Reserves for slow-moving, excess and obsolete inventories, reduce the historical carrying value of our inventories, and are provided based on historical experience and product demand. Management evaluates the adequacy of these reserves periodically based on forecasted sales and market trends.
Allowance for Doubtful Accounts.
Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. From time to time, our customers dispute the amounts due to us, and, in other cases, our customers experience financial difficulties and cannot pay on a timely basis. In certain instances, these factors ultimately result in uncollectible accounts. The determination of the appropriate reserve needed for uncollectible accounts involves significant judgment. Such factors include changes in the financial condition of our customers as a result of industry, economic or customer-specific factors. A change in the factors used to evaluate collectability could result in a significant change in the allowance needed. As of December 31, 20162020, and 2015,2019, allowance for doubtful accounts was $135$274 and $45,$184, respectively.
Property and Equipment.Equipment
As of December 31, 20162020, and 2015,2019, we had net property and equipment of $10,180$5,529 and $13,851,$5,369, respectively. The most significant component relates to the XTRAC lasers placed by us in physicians'physicians’ offices. We own the equipment and charge the physician on a per-treatment basis for useaccess codes for an agreed upon number of the equipment.treatments. The recoverability of the net carrying value of the lasers is predicated on continuing revenues from the physicians' use of the lasers.recurring revenue business model. If the physician does not generate sufficient treatments, then we may remove the laser from the physician'sphysician’s office and redeploy it elsewhere. XTRAC lasers placed in service are depreciated on a straight-line basis over the estimated useful life of five-years. For other property and equipment, depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, primarily three to seven years for computer hardware and software, furniture and fixtures, automobiles and machinery and equipment. Leasehold improvements are amortized over the lesser of the useful lives or lease terms. Useful lives are determined based upon an estimate of either physical or economic obsolescence, or both.
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We organized our business into threetwo operating segments, which also serve as our goodwill reporting units and are defined as Dermatology Recurring Procedures and Dermatology Procedures Equipment and Dermatology Imaging.Equipment. The balance of our goodwill for each of our segments as of December 31, 20162020, is as follows: Dermatology Recurring Procedures $7,958 and Dermatology Procedures Equipment $845 and Dermatology Imaging $0.$845. We completed our annual goodwill impairment analysis as of December 31, 20162020, for our reporting units. Our assessment concluded that there was not anyno impairment of goodwill. Our analysis employed the use of both a market and income approach, with each method given equal weighting. Significant assumptions used in the income approach include growth and discount rates, profit margins and our weighted average cost of capital. We used historical performance and management estimates of future performance to determine profit margins and growth rates. Discount rates selected for each reporting unit varied. Our weighted average cost of capital included a review and assessment of market and capital structure assumptions. Of the twoFor both reporting units with goodwill, Dermatology Recurring Procedures has athe fair value that is in excess of its carrying value by approximately 16.7%, while Dermatology Procedures Equipment has a fair value that is approximately 48.8%was in excess of its carrying value. Considerable management judgment is necessary to evaluate the impact of operating changes and to estimate future cash flows. Changes in our actual results and/or estimates or any of our other assumptions used in our analysis could result in a different conclusion.
Intangibles
All of our intangibles are definite lived assets, with amortization recorded over the estimated useful life on a straight-line basis. As of December 31, 2020, and 2019, we had $6,345 and $7,955 of intangible assets accounting for approximately 13.6% and 16.8% of our total assets, respectively. The definite lived assets are tested for impairment when events or changes in circumstances indicate that the carrying value of the asset group may not be recoverable. Our intangible assets are grouped into five categories: core technology, product technology, customer relationships, and trade names. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to the undiscounted cash flows attributable to the asset group. If the carrying amount of an asset group exceeds its undiscounted cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset group exceeds its fair value of the asset group.
Considerable management judgment is necessary to assess recoverable amounts of intangible assets and measure fair value of the intangible assets that were impaired as such measurements involve estimation of future revenues, royalty rates, profit margins and other cash flows. Changes in our actual results and/or estimates or any of our other assumptions used in our analysis could result in a different conclusion.
Income taxes. taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process requires us to estimate our actual current tax exposure and make an assessment of temporary differences resulting from differing treatment of items, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not more likely than not, we establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the consolidated statement of operations. Significant management judgment is required in determining our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. In the event that we generate taxable income in the jurisdictions in which we operate and in which we hashave net operating loss carry-forwards,carry forwards, we may be required to adjust our valuation allowance.
ASC Topic 740-10 requires that we recognize in our financial statements the impact of a tax position, if that position will more likely than not be sustained upon examination, based on the technical merits of the position, without regard to the likelihood that the tax position may be challenged. If an uncertain tax position meets the "more-likely-than-not"“more-likely-than-not” threshold, the largest amount of tax benefit, that is greater than 50%, likely to be recognized upon ultimate settlement with the taxing authority is recorded. We do not have any unrecognizeduncertain tax benefitspositions or accrued penalties and interest. If such matters were to arise, we would recognize interest and penalties related to income tax matters in income tax expense.
Stock-based compensation. Compensation
We account for stock basedstock-based compensation to employees in accordance with "Share-Based Payment"the “Share-Based Payment” accounting standard. The standard requires estimating the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in our consolidated statementstatements of operations. For performance-based awards, we recognize the expense only if we deem it probable that the vesting condition will occur. There were no performance awards granted in 2020 or 2019.
The fair value of employee stock options is estimated using a Black-Scholes valuation model. Compensation costs are recorded using the graded vesting attribution methodrecognized over the vesting period, net of estimated forfeitures. The total share-basedrequisite service period. Total stock-based compensation expense was $113$1,633 and $1,753$1,195 for the years ended December 31, 20162020, and 2015,2019, respectively.
Fair Value Measurements.Measurements
We measure fair value in accordance with Financial Accounting Standards Board Accounting Standards Codification 820, Fair Value Measurements and Disclosures ("(“ASC Topic 820"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. 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. Our derivative financial instruments are considered to be significant unobservable inputs (level 3).
Results of Operations(
The following financial data, in this narrative, are expressed in thousands, except for the earnings per share.)share and per treatment data.
Revenues
The following table presents revenues from our threetwo segments for the periods indicated below:
For the Year Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Dermatology Recurring Procedures | $ | 24,558 | $ | 14,616 | ||||
| Dermatology Procedures Equipment | 7,065 | 3,591 | ||||||
| Dermatology Imaging | 134 | 288 | ||||||
| Total Revenues | $ | 31,757 | $ | 18,495 | ||||
| For the Year Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Dermatology Recurring Procedures | $ | 17,409 | $ | 23,713 | ||||
| Dermatology Procedures Equipment | 5,681 | 7,873 | ||||||
| Total Revenues | $ | 23,090 | $ | 31,586 | ||||
Dermatology Recurring Procedures
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 limitedhad an impact on the growth of theprescribed use of XTRAC treatments from those who suffer fromfor psoriasis and vitiligo.vitiligo patients. Specifically, we believe that there is a lack of awareness of the positive effects of XTRAC treatments has not been understood well enough among both sufferers and providers; and the treatment regimen requiringwhich can sometimes require up to 12 or more treatments has limited XTRAC use to certain patient populations. Therefore, we haveuse a direct to patient awareness program for XTRAC advertising in the United States, targeted attargeting psoriasis and vitiligo patients through a variety of media
including television and radio; and through our use of social media such as FaceBookFacebook and Twitter. We continue to increasemonitor the results of our advertising expenditures in this area to reach the more than 10 million patients in the United States afflicted with these diseases. We have and expect to continue to increase spending in
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During 2020, our recurring procedures revenue was negatively impacted by and deliveredthe COVID-19 pandemic. The pandemic led to the customer withinsuspension of elective procedures, such as XTRAC procedures and to the last two weekstemporary closure of many physician practices which are our primary customers. We do not know the full extent of the impact on our customers including the potential of permanent closure.
Revenues from Dermatology Recurring Procedures are recognized over the estimated usage period in determiningof the amountagreed upon number of procedures performed by our physician-customers. Management believes this approach closely approximatestreatments, as the actual amount of unused treatments that existed at the end of a period.are being used. As of December 31, 20162020, and 2015,2019, we deferred net revenues of $91$1,765 and $20,$2,286, respectively, under this approach.which will be recognized as revenue over the remaining usage period.
Dermatology Procedures Equipment
For the year ended December 31, 20162020, dermatology equipment revenues were $7,065.$5,681. Internationally, we sold 8836 systems for the year ended December 31, 2016, 272020, 22 of which were VTRAC systems. Domestically, we sold 32 systems for the year ended December 31, 2016.2020. For the year ended December 31, 20152019, dermatology equipment revenues were $3,591.$7,873. Internationally, we sold 5274 systems for the year ended December 31, 2015, 312019, 7 of which were VTRAC systems.
Additionally, included in the year ended December 31, 2019, was $185 in revenues were $134 and $288, respectively. Imaging revenues are generated from the MelaFind systems, through direct capital equipment sales and through a leasing model. Under the leasing model, there is an upfront installation fee and a monthly usage fee based on the number of lesions examined.for 5 Nordlys units (and accessories).
Cost of Revenues
The following table illustrates cost of revenues from our threetwo business segments for the periods listed below:
For the Year Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Dermatology Recurring Procedures | $ | 8,763 | $ | 4,680 | ||||
| Dermatology Procedures Equipment | 3,506 | 1,989 | ||||||
| Dermatology Imaging | 367 | 7,050 | ||||||
| Total Cost of Revenues | $ | 12,636 | $ | 13,719 | ||||
| For the Year Ended December 31 | ||||||||
| 2020 | 2019 | |||||||
Dermatology Recurring Procedures | $ | 5,832 | $ | 7,033 | ||||
Dermatology Procedures Equipment | 3,124 | 4,283 | ||||||
| Total Cost of Revenues | $ | 8,956 | $ | 11,316 | ||||
Gross profit decreased to $12,636$14,134 for the year ended December 31, 2016 compared to $13,719 for the year ended December 31, 2015. During the year ended December 31, 2015 we initiated plans to develop an updated version of the MelaFind system and, accordingly, determined that a majority of our existing inventory of MelaFind systems and related parts exceeded our requirements. As a result, we wrote-off the excess and obsolete inventory on our MelaFind systems and related components and incurred a charge of $4,818. We also had an impairment charge of $920 of property and equipment related to the MelaFind systems. Offsetting these expenses for the 2015 periods, were the XTRAC and VTRAC expenses that were included only2020, from June 23, 2015 through December 31, 2015 compared to the entire period presented for 2016.
2019. The following tables analyze changes in our gross margin, by segment, for the periods presented below:
Company Profit Analysis | For the Year Ended December 31, | |||||||
| 2016 | 2015 | |||||||
| Revenues | $ | 31,757 | $ | 18,495 | ||||
| Percent increase | 71.7 | % | ||||||
| Cost of revenues | 12,636 | 13,719 | ||||||
| Percent decrease | (7.9 | %) | ||||||
| Gross profit | $ | 19,121 | $ | 4,776 | ||||
| Gross margin percentage | 60.2 | % | 25.8 | % | ||||
42
| Company Profit Analysis | For the Year Ended December 31, | |||||||
| 2020 | 2019 | |||||||
Revenues | $ | 23,090 | $ | 31,586 | ||||
| Percent (decrease) | (26.9 | %) | ||||||
Cost of revenues | 8,956 | 11,316 | ||||||
| Percent (decrease) | (20.9 | %) | ||||||
Gross profit | $ | 14,134 | $ | 20,270 | ||||
| Gross profit percentage | 61.2 | % | 64.2 | % | ||||
| Dermatology Recurring Procedures | For the Year Ended December 31, | |||||||
| 2020 | 2019 | |||||||
Revenues | $ | 17,409 | $ | 23,713 | ||||
| Percent (decrease) | (26.6 | %) | ||||||
Cost of revenues | 5,832 | 7,033 | ||||||
| Percent (decrease) | (17.1 | %) | ||||||
Gross profit | $ | 11,577 | $ | 16,680 | ||||
| Gross profit percentage | 66.5 | % | 70.3 | % | ||||
The primary reasons for the decrease in gross profit were the result of lower revenues as a result of the COVID-19 pandemic and unapplied costs partially offset by lower depreciation expense on lasers placed in the field. Decreases in utilization of lasers placed in the field will result in lower margins as we have certain fixed costs in the business.
| Dermatology Procedures Equipment | For the Year Ended December 31, | |||||||
| 2020 | 2019 | |||||||
Revenues | $ | 5,681 | $ | 7,873 | ||||
| Percent (decrease) | (27.8 | %) | ||||||
Cost of revenues | 3,124 | 4,283 | ||||||
| Percent (decrease) | (27.1 | %) | ||||||
Gross profit | $ | 2,557 | $ | 3,590 | ||||
| Gross profit percentage | 45.0 | % | 45.6 | % | ||||
The primary reason for the changedecrease in gross profit for the year ended December 31, 2016,2020, compared to the same period in 2015,2019, was primarily the acquisitionresult of the XTRAClower sales and VTRAC businesses on June 22, 2015. The gross profit related to these businesses for the 2015 period was included from June 23, 2015 through December 31, 2015 and was allocated to the two Dermatology Procedures segments. Incremental treatments delivered on existing equipment incur negligible incremental costs, so increases and/or decreases on in those treatments have an impact on gross margin.
Dermatology Procedures Equipment | For the Year Ended December 31, | |||||||
| 2016 | 2015 | |||||||
| Revenues | $ | 7,065 | $ | 3,591 | ||||
| Percent increase | 96.7 | % | ||||||
| Cost of revenues | 3,506 | 1,989 | ||||||
| Percent increase | 76.3 | % | ||||||
| Gross profit | $ | 3,559 | $ | 1,602 | ||||
| Gross margin percentage | 50.4 | % | 44.6 | % | ||||
Dermatology Imaging | For the Year Ended December 31, | |||||||
| 2016 | 2015 | |||||||
| Revenues | $ | 134 | $ | 288 | ||||
| Percent decrease | (53.5 | %) | ||||||
| Cost of revenues | 367 | 7,050 | ||||||
| Percent decrease | (94.8 | %) | ||||||
| Gross profit | $ | (233 | ) | $ | (6,762 | ) | ||
| Gross margin percentage | (173.9 | %) | (2,347.9 | %) | ||||
Engineering and Product Development
Engineering and product development expenses for the year ended December 31, 2016 remained consistent at $1,9292020, increased to $1,274 from $2,029$1,002 for the year ended December 31, 2015. As the XTRAC and VTRAC acquisition2019. The increase was completed on June 22, 2015, the expenses were included only from June 23, 2015 through December 31, 2015. Ongoing research and development efforts for the MelaFind technology on product enhancements have been ended.due to higher consulting costs associated with certain engineering projects.
Selling and Marketing Expenses
For the year ended December 31, 2016,2020, selling and marketing expenses increaseddecreased to $13,152$9,038 from $9,194$12,003 for the year ended December 31, 2015.2019. The increasedecrease was relatedprimarily due to the inclusion of sales and marketing expenses related to the acquired XTRAC and VTRAC businesses of $12,966 for the year ended December 31, 2016downturn in business as compared to $7,323 for the year ended December 31, 2015. As the XTRAC and VTRAC acquisition was completed on June 22, 2015, the expenses were included only from June 23, 2015 through December 31, 2015. Offsetting somea result of the increases, were decreases in the MelaFind Division primarily relatedCOVID-19 pandemic. We managed our costs with lower tradeshow costs, travel costs, direct to salaryconsumer advertising and headcount decreases and overall impact of cost reduction initiatives.compensation.
General and Administrative Expenses
For the year ended December 31, 2016,2020, general and administrative expenses decreased to $7,637$7,898 from $10,028$10,275 for the year ended December 31, 2015.2019. The changes were due todecrease was primarily the following reasons:result of approximately $2.0 million in accounting and legal costs associated with our restatement of our financial statements as disclosed in our Annual Report on Form 10-K in 2019. We did not incur these costs in 2020.
Interest Expense, Netnet
Interest expense for the year ended December 31, 20162020 was $4,900$61 compared to $10,200 in the year ended December 31, 2015. Interest expense during the periods of 2016 and 2015 relate to the 4% senior convertible debentures issued in July 2014, which included amortization of the related debt discount and deferred financing fees. The periods also include interest expense related to the 2.25% senior convertible debentures issued on June 22, 2015. The 2015 periods included interest and related amortization of debt discount on the June 22, 2015 short-term senior notes. Additionally, approximately $217 of interest expense was recognized as a result of the conversion of $265 of debentures into common stock during the year ended December 31, 2016. Approximately $3,601 of interest expense was recognized as a result of the conversion of $4,815 of debentures into common stock during the year ended December 31, 2015.
Other (Expense) Income, (Expense), net
Income Taxes
Income tax expense for the year ended December 31, 20162020, was $255$275 compared to $119a benefit of $149 for the year ended December 31, 2015.2019. The expense is comprisedactivity was the result of the change in deferred tax liability related to goodwill. Goodwill is an amortizing asset according to tax regulations. This generates a deferred tax liability that is not used to offset deferred tax assetsthe Tax Cut and Jobs Act (the “Tax Act”) in the accounting for valuation allowance considerations.the net operating losses.
Net Loss
The factors described above resulted in net loss of $3,335$4,412 during the year ended December 31, 2016,2020, as compared to a net loss of $24,947$3,790 during the year ended December 31, 2015.2019.
Non-GAAP adjusted income (loss)EBITDA
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'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 GAAP measure of all non-GAAP measures included in this reportReport is as follows:
| For the Year Ended December 31, | ||||||||||||||||||||
| 2016 | 2015 | Change | For the Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||
| Net loss | $ | (3,335 | ) | $ | (24,947 | ) | $ | 21,612 | $ | (4,412 | ) | $ | (3,790 | ) | ||||||
| Adjustments: | ||||||||||||||||||||
| Income taxes | 255 | 119 | 136 | 275 | (149 | ) | ||||||||||||||
| Depreciation and amortization * | 6,366 | 4,051 | 2,315 | 3,911 | 4,821 | |||||||||||||||
| Interest expense, net | 2,226 | 1,329 | 897 | 61 | 515 | |||||||||||||||
| Non-cash interest expense | 2,674 | 8,871 | (6,197 | ) | ||||||||||||||||
| EBITDA | 8,186 | (10,577 | ) | 18,763 | ||||||||||||||||
Non-GAAP EBITDA | (165 | ) | 1,397 | |||||||||||||||||
| Stock-based compensation expense | 113 | 1,753 | (1,640 | ) | 1,633 | 1,195 | ||||||||||||||
| Acquisition costs | - | 456 | (456 | ) | ||||||||||||||||
| Change in fair value of warrants | (5,396 | ) | (1,814 | ) | (3,582 | ) | ||||||||||||||
| Impairment of MelaFind property and equipment | - | 920 | (920 | ) | ||||||||||||||||
| MelaFind Inventory write off | - | 4,818 | (4,818 | ) | ||||||||||||||||
| Impairment of lasers placed-in-service | 24 | 30 | ||||||||||||||||||
| Loss on extinguishment of debt | - | 414 | ||||||||||||||||||
| Non-GAAP adjusted EBITDA | $ | 2,903 | $ | (4,444 | ) | $ | 7,347 | $ | 1,492 | $ | 3,036 | |||||||||
* Includes depreciation on lasers placed-in-service of $4,410$1,930 and $2,364$2,660 for the yearyears ended December 31, 20162020, and 2015,2019, respectively.
44
Liquidity and Capital Resources
As of December 31, 2016,2020, we had $4,619$5,993 of working capital compared to $4,900$6,121 as of December 31, 2015.2019. Cash and cash equivalents and restricted cash were $3,928$18,112 as of December 31, 2016,2020, as compared to $3,318, including restricted cash of $15,$15,629, as of December 31, 2015.2019. The increase to our cash was the result of the receipt of proceeds from the PPP and EIDL loans and management of payables. Delayed payment to vendors totaled $678 at December 31, 2020.
On December 30, 2015, we entered into2019, the Company closed on a $12,000 credit facility$7,275 loan with a commercial bank pursuant to a Credit and Security Agreementone-year Fixed Rate – Term Promissory Note (the "Agreement"“Note”) and related financing documents with MidCap Financial Trust ("MidCap") and the lenders listed therein. Under the Agreement, the credit facility may be drawn down in two tranches, the first of, which was drawn for $10,500 onrenewed effective December 30, 2015.2020 primarily to extend the term of the Note one-year. The proceeds of this first tranche were used to repay $10,000 principal amount of short-term senior secured promissory notes, plus associated interest, loan fees and expenses. The second tranche was drawn for $1,500 on January 29, 2016. OurCompany's obligations under the credit facilityNote are secured by an Assignment and Pledge of Time Deposit (the “Agreement”), under which the Company has pledged the proceeds of a first priority lien on alltime deposit account in the amount of our assets. Other financing documents included subordination agreementsthe loan to the commercial bank. The Company fully repaid (including payment of termination and other amendmentsexit fees) its existing long-term debt credit facility with our existing debenture holders from its 2014Midcap Financial Trust. The transaction was accounted for as a debt extinguishment and 2015 financings.the Company recorded a loss of $414. The Note was renewed for another year through December 30, 2021.
We have been negatively impacted by the COVID-19 pandemic, have historically experienced recurring losses and negative cash flow from operations since inception. Historically, we have been dependent on raising capital from the sale of securities in order to continue to operate and to meet our obligations in the ordinary course of business. Since the equity financing in May 2018 and a change in management, and prior to COVID, we had improved revenues, gross profit, generated positive cash flow from operations, refinanced our debt at a lower interest rate and received cash proceeds from the PPP loan and the EIDL loan. We believe that our cash as of December 31, 2016and 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 operatingoperations through the next twelve12 months following the filing of this Form 10-K.
Net cash and cash equivalents provided by operating activities was $322$2,096 for the year ended December 31, 20162020, compared to cash used inprovided by operating activities of $6,570$2,229 for the year ended December 31, 2015.2019. The primary reasonscash flows provided by operating activities for the change wasyear ended December 31, 2020, were unfavorably impacted by lower accrued expenses, lower deferred revenue and net loss, lower depreciation and higher inventory partially offset by collection of accounts receivable, higher accounts payables as we are managing our payments to vendors and the cash from operations generated by the XTRAC and VTRAC business, which was acquired on June 22, 2015, and a continued effort to reduce expenses.non-cash impact of higher stock-based compensation.
Net cash and cash equivalents used in investing activities was $868$2,159 for the year ended December 31, 20162020, compared to cash used in investing activities of $44,239$2,791 for the year ended December 31, 2015.2019. The primary reason for the changedecrease in cash used was our investment in lasers placed in service in the asset purchasedermatology recurring procedures business segment due to the impact of the XTRAC and VTRAC business during year ended December 31, 2015.COVID-19.
Net cash and cash equivalents provided by financing activities was $1,167$2,546 for the year ended December 31, 20162020, compared to cash provided byused in financing activities of $42,670$296 for the year ended December 31, 2015. In2019 due to the year ended December 31, 2016, we drew down $1,500 on a long-termreceipt of the proceeds from the PPP and EIDL loans in 2020 and the payoff of the MidCap debt facility. In the year ended December 31, 2015, we completed a financing consisting of Senior secured notes amounting to $10,000 and senior secured convertible debentures of $32,500; repaid the Senior secured notes of $10,000 and drew down $10,500 on a long-term debt facility.in 2019.
Off-Balance Sheet Arrangements
At December 31, 2016,2020, we had no off-balance sheet arrangements.
Impact of Inflation
We have not operated in a highly inflationary period, and we do not believe that inflation has had a material effect on our revenues or expenses. If we enter an inflationary period, it could have a material impact on our expenses.
Not applicable.
45
The financial statements required by this Item 8 are included in this Report and begin on page F-1.
None.