SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20172018
OR
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission File Number 0-51481
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.) |
100 Lakeside Drive, Suite 100, Horsham, Pennsylvania 19044
(Address of principal executive offices, including zip code)
(215) 619-3200
(Registrant's telephone number, including area code)
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 ý 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer | |||
Non-accelerated filer | Smaller reporting company | |||
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 is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No ý
The number of shares outstanding of the issuer's common stock as of November 10, 201713, 2018 was 4,076,08929,943,086 shares.
STRATA SKIN SCIENCES, INC.
TABLE OF CONTENTS
| Part I. Financial Information: | PAGE | ||
| Statements: | |||
| a. | 3 | ||
| b. | 4 | ||
| c. | 5 | ||
| d. | 6 | ||
| e. | 7 | ||
| f. | |||
| E-31.1 | |||
PART I – Financial Information
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
(In thousands, except share and per share amounts)
| September 30, 2017 | December 31, 2016 | |||||||
| ASSETS | (unaudited) | |||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 3,127 | $ | 3,928 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $177 and $135, respectively | 3,184 | 3,390 | ||||||
| Inventories | 3,533 | 2,817 | ||||||
| Prepaid expenses and other current assets | 209 | 617 | ||||||
| Total current assets | 10,053 | 10,752 | ||||||
| Property and equipment, net | 8,658 | 10,180 | ||||||
| Intangible assets, net | 12,302 | 13,412 | ||||||
| Goodwill | 8,803 | 8,803 | ||||||
| Other assets | 48 | 46 | ||||||
| Total assets | $ | 39,864 | $ | 43,193 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Note payable | $ | 34 | $ | 339 | ||||
| Current portion of long-term debt | 1,936 | 1,714 | ||||||
| Accounts payable | 1,907 | 1,853 | ||||||
| Other accrued liabilities | 1,899 | 1,992 | ||||||
| Deferred revenues | 350 | 235 | ||||||
| Total current liabilities | 6,126 | 6,133 | ||||||
| Long-term liabilities: | ||||||||
| Long-term debt, net | 8,842 | 9,752 | ||||||
| Senior secured convertible debentures, net | - | 12,028 | ||||||
| Warrant liability | 28 | 105 | ||||||
| Deferred tax liability | 539 | 359 | ||||||
| Other liabilities | 412 | 97 | ||||||
| Total liabilities | 15,947 | 28,474 | ||||||
| Commitment and contingencies | ||||||||
| Stockholders' equity: | ||||||||
| Series B Convertible Preferred Stock, $.10 par value, 10,000,000 shares authorized; 2,928 and 6,000 shares issued and outstanding, as of September 30, 2017 and December 31, 2016, respectively | - | 1 | ||||||
| Series C Convertible Preferred Stock, $.10 par value, 10,000,000 shares authorized; 40,482 and 0 shares issued and outstanding, as of September 30, 2017 and December 31, 2016,respectively | 4 | - | ||||||
| Common Stock, $.001 par value, 150,000,000 shares authorized; 2,477,743 and 2,166,898 shares issued and outstanding, as of September 30, 2017 and December 31, 2016, respectively | 3 | 2 | ||||||
| Additional paid-in capital | 251,594 | 225,289 | ||||||
| Accumulated deficit | (227,686 | ) | (210,575 | ) | ||||
| Accumulated other comprehensive income | 2 | 2 | ||||||
| Total stockholders' equity | 23,917 | 14,719 | ||||||
| Total liabilities and stockholders' equity | $ | 39,864 | $ | 43,193 | ||||
(unaudited)
| September 30, 2018 | December 31, 2017 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 15,888 | $ | 4,069 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $176 and $172, respectively | 2,728 | 3,141 | ||||||
| Inventories | 2,488 | 3,009 | ||||||
| Prepaid expenses and other current assets | 670 | 533 | ||||||
| Total current assets | 21,774 | 10,752 | ||||||
| Property and equipment, net | 5,698 | 7,703 | ||||||
| Intangible assets, net | 9,867 | 11,325 | ||||||
| Goodwill | 8,803 | 8,803 | ||||||
| Other assets | 48 | 48 | ||||||
| Total assets | $ | 46,190 | $ | 38,631 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Note payable | $ | - | $ | 357 | ||||
| Current portion of long-term debt | - | 2,387 | ||||||
| Accounts payable | 1,663 | 2,277 | ||||||
| Other accrued liabilities | 2,697 | 2,360 | ||||||
| Warrant liability | 104 | - | ||||||
| Deferred revenues | 327 | 291 | ||||||
| Total current liabilities | 4,791 | 7,672 | ||||||
| Long-term liabilities: | ||||||||
| Long-term debt, net | 7,362 | 7,853 | ||||||
| Deferred tax liability | 392 | 414 | ||||||
| Warrant liability | - | 3 | ||||||
| Other liabilities | 268 | 444 | ||||||
| Total liabilities | 12,813 | 16,386 | ||||||
| Commitments and contingencies (Note 16) | ||||||||
| Stockholders' equity: | ||||||||
| Series C Convertible Preferred Stock, $.10 par value, 10,000,000 shares authorized; 9,968 and 36,182 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively | 1 | 4 | ||||||
| Common Stock, $.001 par value, 150,000,000 shares authorized; 29,943,086 and 4,304,425 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively | 30 | 4 | ||||||
| Additional paid-in capital | 266,854 | 251,643 | ||||||
| Accumulated deficit | (233,508 | ) | (229,406 | ) | ||||
| Total stockholders' equity | 33,377 | 22,245 | ||||||
| Total liabilities and stockholders' equity | $ | 46,190 | $ | 38,631 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
(In thousands, except share and per share amounts)
(unaudited)
For the Three Months Ended September 30, | ||||||||
| 2018 | 2017 | |||||||
| Revenues (Note 3) | $ | 7,892 | $ | 7,285 | ||||
| Cost of revenues | 3,049 | 3,276 | ||||||
| Gross profit | 4,843 | 4,009 | ||||||
| Operating expenses: | ||||||||
| Engineering and product development | 224 | 411 | ||||||
| Selling and marketing | 2,487 | 2,492 | ||||||
| General and administrative | 2,184 | 1,678 | ||||||
| 4,895 | 4,581 | |||||||
| Operating loss before other expense, net | (52 | ) | (572 | ) | ||||
| Other income (expense), net: | ||||||||
| Interest expense, net | (239 | ) | (1,343 | ) | ||||
| Change in fair value of warranty liability | (79 | ) | 81 | |||||
| Loss on extinguishment of debentures | - | (11,799 | ) | |||||
| (318 | ) | (13,061 | ) | |||||
| Loss before income taxes | (370 | ) | (13,633 | ) | ||||
| Income tax benefit (expense) | 80 | (38 | ) | |||||
| Net loss | $ | (290 | ) | $ | (13,671 | ) | ||
| Net loss per common share - basic and diluted | $ | (0.01 | ) | $ | (3.32 | ) | ||
| Shares used in computing net loss per basic and diluted common share | 29,912,827 | 2,477,743 | ||||||
| Net loss per Preferred C share - basic and diluted | $ | (3.23 | ) | $ | (1,235.43 | ) | ||
| Shares used in computing net loss per basic and diluted Preferred C share | 10,049 | 4,400 | ||||||
For the Three Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Revenues | $ | 7,480 | $ | 7,767 | ||||
| Cost of revenues | 3,276 | 3,070 | ||||||
| Gross profit | 4,204 | 4,697 | ||||||
| Operating expenses: | ||||||||
| Engineering and product development | 411 | 382 | ||||||
| Selling and marketing | 2,687 | 2,840 | ||||||
| General and administrative | 1,678 | 1,880 | ||||||
| 4,776 | 5,102 | |||||||
| Operating loss before other income (expense), net | (572 | ) | (405 | ) | ||||
| Other income (expense), net: | ||||||||
| Interest expense, net | (1,343 | ) | (1,175 | ) | ||||
| Change in fair value of warrant liability | 81 | 132 | ||||||
| Other income, net | - | 3 | ||||||
| Loss on extinguishment of debentures | (11,799 | ) | - | |||||
| (13,061 | ) | (1,040 | ) | |||||
| Loss before income taxes | (13,633 | ) | (1,445 | ) | ||||
| Income tax expense | 38 | 64 | ||||||
| Net loss | $ | (13,671 | ) | $ | (1,509 | ) | ||
| Net loss per common share - basic and diluted | $ | (3.32 | ) | $ | (0.71 | ) | ||
| Shares used in computing net loss per basic and diluted common share | 2,477,743 | 2,135,952 | ||||||
| Net loss per Preferred C share - basic and diluted | $ | (1,235.43 | ) | $ | - | |||
| Shares used in computing net loss per basic and diluted Preferred C share | 4,400 | - | ||||||
| Other comprehensive loss: | ||||||||
| Foreign currency translation adjustments | - | $ | (1 | ) | ||||
| Comprehensive loss | $ | (13,671 | ) | $ | (1,510 | ) | ||
The accompanying notes are an integral part of these condensed consolidated financial statements.
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
(In thousands, except share and per share amounts)
(unaudited)
For the Nine Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2018 | 2017 | |||||||||||||
| Revenues | $ | 23,454 | $ | 23,126 | ||||||||||||
| Revenues (Note 3) | $ | 21,892 | $ | 22,852 | ||||||||||||
| Cost of revenues | 9,182 | 9,631 | 9,842 | 9,182 | ||||||||||||
| Gross profit | 14,272 | 13,495 | 12,050 | 13,670 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Engineering and product development | 1,309 | 1,541 | 831 | 1,309 | ||||||||||||
| Selling and marketing | 8,914 | 10,073 | 7,737 | 8,312 | ||||||||||||
| General and administrative | 4,999 | 5,882 | 6,319 | 4,999 | ||||||||||||
| 15,222 | 17,496 | 14,887 | 14,620 | |||||||||||||
| Operating loss before other income (expense), net | (950 | ) | (4,001 | ) | ||||||||||||
| Operating loss before other expense, net | (2,837 | ) | (950 | ) | ||||||||||||
| Other income (expense), net: | ||||||||||||||||
| Other expense, net: | ||||||||||||||||
| Interest expense, net | (4,264 | ) | (3,571 | ) | (930 | ) | (4,264 | ) | ||||||||
| Change in fair value of warrant liability | 77 | 5,316 | (101 | ) | 77 | |||||||||||
| Other income, net | 6 | (1 | ) | - | 6 | |||||||||||
| Loss on extinguishment of debentures | (11,799 | ) | - | - | (11,799 | ) | ||||||||||
| (15,980 | ) | 1,744 | (1,031 | ) | (15,980 | ) | ||||||||||
| Loss before income taxes | (16,930 | ) | (2,257 | ) | (3,868 | ) | (16,930 | ) | ||||||||
| Income tax expense | 181 | 191 | - | (181 | ) | |||||||||||
| Net loss | $ | (17,111 | ) | $ | (2,448 | ) | $ | (3,868 | ) | $ | (17,111 | ) | ||||
| Net loss per common share: | ||||||||||||||||
| Basic | $ | (5.94 | ) | $ | (1.16 | ) | ||||||||||
| Diluted | $ | (5.94 | ) | $ | (3.55 | ) | ||||||||||
| Net loss per common share – basic and diluted: | $ | (0.15 | ) | $ | (5.94 | ) | ||||||||||
| Shares used in computing net loss per common share: | ||||||||||||||||
| Basic | 2,328,274 | 2,107,365 | ||||||||||||||
| Diluted | 2,328,274 | 2,189,543 | ||||||||||||||
| Shares used in computing net loss per basic and diluted share: | 16,099,752 | 2,328,274 | ||||||||||||||
Net loss per Preferred C share - basic and diluted | $ | (2,208.96 | ) | $ | - | |||||||||||
| Net loss per Preferred C share – basic and diluted: | $ | (57.58 | ) | $ | (2,208.96 | ) | ||||||||||
| Shares used in computing net loss per basic and diluted Preferred C share | 1,483 | - | 23,872 | 1,483 | ||||||||||||
| Other comprehensive income: | ||||||||||||||||
| Foreign currency translation adjustments | - | $ | 1 | |||||||||||||
| Comprehensive loss | $ | (17,111 | ) | $ | (2,447 | ) | ||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 20172018
(In thousands, except share and per share amounts)
| Convertible Preferred Stock – Series B | Convertible Preferred Stock – Series C | Common Stock | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | |||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Total | |||||||||||||||||||||||||||||||
| BALANCE, JANUARY 1, 2017 | 6,000 | $ | 1 | - | $ | - | 2,166,898 | $ | 2 | $ | 225,289 | $ | (210,575 | ) | $ | 2 | $ | 14,719 | ||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | - | - | 136 | - | - | 136 | ||||||||||||||||||||||||||||||
| Conversion of senior secured convertible debentures | - | - | - | - | 70,000 | - | 262 | - | - | 262 | ||||||||||||||||||||||||||||||
| Conversion of convertible preferred stock | (3,072 | ) | (1 | ) | - | - | 239,500 | 1 | - | - | - | - | ||||||||||||||||||||||||||||
| Issuance of common stock for fractional shares in reverse stock split | - | - | - | - | 1,345 | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Issuance of convertible preferred stock in exchange for convertible debentures | - | - | 40,482 | 4 | - | - | 25,906 | - | - | 25,910 | ||||||||||||||||||||||||||||||
| Net loss for the nine months ended September 30, 2017 | - | - | - | - | - | - | - | (17,111 | ) | - | (17,111 | ) | ||||||||||||||||||||||||||||
| BALANCE, SEPTEMBER 30, 2017 | 2,928 | $ | - | 40,482 | $ | 4 | 2,477,743 | $ | 3 | $ | 251,594 | $ | (227,686 | ) | $ | 2 | $ | 23,917 | ||||||||||||||||||||||
Series C Convertible Preferred Stock | Common Stock | Additional Paid-In | Accumulated | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| BALANCE, DECEMBER 31, 2017 | 36,182 | $ | 4 | 4,304,425 | $ | 4 | $ | 251,643 | $ | (229,406 | ) | $ | 22,245 | |||||||||||||||
| Adoption of accounting standard | - | - | - | - | - | (234 | ) | (234 | ) | |||||||||||||||||||
| BALANCE, JANUARY 1, 2018 | 36,182 | 4 | 4,304,425 | 4 | 251,643 | (229,640 | ) | 22,011 | ||||||||||||||||||||
| Stock-based compensation | - | - | - | - | 570 | - | 570 | |||||||||||||||||||||
| Conversion of convertible preferred stock into common stock | (26,214 | ) | (3 | ) | 9,744,916 | 10 | (7 | ) | - | - | ||||||||||||||||||
| Sale of common stock, net of expenses of $2,336 | - | - | 15,893,745 | 16 | 14,648 | - | 14,664 | |||||||||||||||||||||
| Net loss for the nine months ended September 30, 2018 | - | - | - | - | - | (3,868 | ) | (3,868 | ) | |||||||||||||||||||
| BALANCE, SEPTEMBER 30, 2018 | 9,968 | $ | 1 | 29,943,086 | $ | 30 | $ | 266,854 | $ | (233,508 | ) | $ | 33,377 | |||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
(In thousands, unaudited)
| For the Nine Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net loss | $ | (17,111 | ) | $ | (2,448 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | 4,811 | 4,844 | ||||||
| Provision for doubtful accounts | 58 | 91 | ||||||
| Loss on disposal of property, plant and equipment | - | 124 | ||||||
| Gain on cancelation of distributor rights agreement | (40 | ) | - | |||||
| Intangible asset write-off | 23 | - | ||||||
| Stock-based compensation | 136 | 401 | ||||||
| Deferred tax provision | 180 | 180 | ||||||
| Amortization of debt discount | 2,344 | 1,821 | ||||||
| Amortization of deferred financing costs | 171 | 145 | ||||||
| Loss on extinguishment of debt | 11,799 | - | ||||||
| Change in fair value of warrant liability | (77 | ) | (5,316 | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 130 | 1,041 | ||||||
| Inventories | (716 | ) | 899 | |||||
| Prepaid expenses and other assets | 406 | 202 | ||||||
| Accounts payable | 71 | (2,559 | ) | |||||
| Other accrued liabilities | (162 | ) | (623 | ) | ||||
| Other liabilities | 108 | (40 | ) | |||||
| Deferred revenues | 115 | 154 | ||||||
| Net cash provided by (used in) operating activities | 2,246 | (1,084 | ) | |||||
| Cash Flows From Investing Activities: | ||||||||
| Lasers placed-in-service, net | (1,450 | ) | (607 | ) | ||||
| Purchases of property and equipment, net | (321 | ) | - | |||||
| Payments on distributor rights liability | (115 | ) | - | |||||
| Acquisition costs, net of cash received | - | 125 | ||||||
| Restricted cash | - | 15 | ||||||
| Net cash used in investing activities | (1,886 | ) | (467 | ) | ||||
For the Nine Months Ended September 30, | ||||||||
| 2018 | 2017 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net loss | $ | (3,868 | ) | $ | (17,111 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 3,993 | 4,811 | ||||||
| Provision for doubtful accounts | 53 | 58 | ||||||
| Loss on disposal of property and equipment | 503 | - | ||||||
| Gain on cancelation of distributor rights agreement | - | (40 | ) | |||||
| Net impairment of intangible asset and liability | (11 | ) | 23 | |||||
| Stock-based compensation | 570 | 136 | ||||||
| Deferred tax provision | (22 | ) | 180 | |||||
| Amortization of debt discount | 44 | 2,344 | ||||||
| Amortization of deferred financing costs | 79 | 171 | ||||||
| Loss on extinguishment of debt | - | 11,799 | ||||||
| Change in fair value of warrant liability | 101 | (77 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 361 | 130 | ||||||
| Inventories | 521 | (716 | ) | |||||
| Prepaid expenses and other assets | (137 | ) | 406 | |||||
| Accounts payable | (614 | ) | 71 | |||||
| Other accrued liabilities | 423 | (162 | ) | |||||
| Other liabilities | (3 | ) | 108 | |||||
| Deferred revenues | (198 | ) | 115 | |||||
| Net cash provided by operating activities | 1,795 | 2,246 | ||||||
| Cash Flows From Investing Activities: | ||||||||
| Lasers placed-in-service | (1,254 | ) | (1,450 | ) | ||||
| Purchases of property and equipment, net | (6 | ) | (321 | ) | ||||
| Payments on distributor rights liability | (23 | ) | (115 | ) | ||||
| Net cash used in investing activities | (1,283 | ) | (1,886 | ) | ||||
| Cash Flows From Financing Activities: | ||||||||
| Proceeds from issuance of common stock | 14,664 | - | ||||||
| Repayments of long-term debt | (3,000 | ) | (857 | ) | ||||
| Payments on notes payable | (357 | ) | (304 | ) | ||||
| Net cash provided by (used in) financing activities | 11,307 | (1,161 | ) | |||||
| Net increase (decrease) in cash and cash equivalents | 11,819 | (801 | ) | |||||
| Cash and cash equivalents, beginning of period | 4,069 | 3,928 | ||||||
| Cash and cash equivalents, end of period | $ | 15,888 | $ | 3,127 | ||||
| Supplemental information: | ||||||||
| Cash paid for interest | $ | 808 | $ | 1,934 | ||||
| Supplemental information of non-cash investing and financing activities: | ||||||||
| Conversion of senior secured convertible debentures into common stock | $ | - | $ | 262 | ||||
| Acquisition of distributor rights asset and license liability | $ | - | $ | 286 | ||||
| Issuance of convertible preferred stock in exchange for convertible debentures | - | 25,910 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statementsstatements.
| For the Nine Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Cash Flows From Financing Activities: | ||||||||
| Proceeds from long-term debt | - | 1,500 | ||||||
| Repayments of long-term debt | (857 | ) | - | |||||
| Payments on notes payable | (304 | ) | (299 | ) | ||||
| Net cash (used in ) provided by financing activities | (1,161 | ) | 1,201 | |||||
| Effect of exchange rate changes on cash | - | 4 | ||||||
| Net decrease in cash and cash equivalents | (801 | ) | (346 | ) | ||||
| Cash and cash equivalents, beginning of period | 3,928 | 3,303 | ||||||
| Cash and cash equivalents, end of period | $ | 3,127 | $ | 2,957 | ||||
| Supplemental information: | ||||||||
| Cash paid for interest | $ | 1,934 | $ | 1,517 | ||||
| Supplemental information of non-cash investing and financing activities: | ||||||||
| Conversion of senior secured convertible debentures into common stock | $ | 262 | $ | 248 | ||||
| Conversion of series A convertible preferred stock into common stock | $ | 309 | ||||||
| Recognition of warrants issued as debt discount | $ | - | $ | 47 | ||||
| Reclassification of warrant liabilities to equity | $ | - | $ | 1,541 | ||||
| Acquisition of distributor rights asset and license liability | $ | 286 | $ | - | ||||
| Issuance of convertible preferred stock in exchange for convertible debentures | $ | 25,910 | $ | - | ||||
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Inin thousands, except share and per share amounts and number of lasers)
(unaudited)
The Company:
Background
STRATA Skin Sciences Inc. (and its subsidiary) ("STRATA" or "we" or the "Company") is a medical technology company focused onin Dermatology and Plastic Surgery dedicated to developing, commercializing and marketing innovative products for the therapeutic and aesthetic dermatology market. STRATA salestreatment of dermatologic conditions. Its products include the following products: XTRAC®XTRAC® excimer laser and VTRAC® excimerVTRAC® lamp systems utilized in the treatment of psoriasis, vitiligo and various other skin conditions; and the STRATAPEN™STRATAPEN® MicroSystem, a micropigmentation device; and Nordlys, a multi-technology aesthetic laser devicemarketed specifically for treating vascular and pigmented lesions.the intended use of micropigmentation.
The XTRAC is an ultraviolet light excimer laser system utilized to treat psoriasis, vitiligo and other skin diseases. The XTRAC received FDA clearance from the United States Food and Drug Administration (the "FDA") in 2000 and has since become a recognized treatment among dermatologists. The system delivers targeted 308um ultraviolet light to affected areas of the skin, leading to psoriasis clearing and vitiligo repigmentation, following a series of treatments.2000. As of September 30, 2017,2018, there were 776746 XTRAC systems placed in dermatologists' offices in the United States under the Company's recurring revenue business model. The XTRAC systems employeddeployed under the recurring revenue model generate revenue on a per procedure basis.basis or include a fixed payment over an agreed upon period with a capped number of treatments, which if exceeded would incur additional fees. The per-procedure charge is inclusive of the use of the system and the services provided by the Company to the customer which includes system maintenance, reimbursement support service and participation in the direct to patient marketing programs employed by the Company. The XTRAC system's use for psoriasis is covered by nearly all major insurance companies, including Medicare.other services. The VTRAC Excimer Lamp system, offered in addition to the XTRAC system internationally, provides targeted therapeutic efficacy demonstrated by excimer technology with the simplicity of design and reliability of a lamp system.
Effective February 1, 2017, the Company 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.STRATAPEN. This three-year agreement allows for two one yearone-year extensions.
Basis of Presentation:
Accounting Principles
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP").
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary.subsidiary in India. All significant intercompany balances and transactions have been eliminated in consolidation. In 2018, there are no operations in the subsidiary in India.
Unaudited interim consolidated financial statementsInterim Condensed Consolidated Financial Statements
The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission ("SEC") for interim financial reporting. These consolidated statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to state fairly the condensed consolidated balance sheets, condensed consolidated statements of operations condensed consolidated statements of cash flows and consolidated statementsstatement of stockholders'changes in equity, for the periods presented in accordance with GAAP. The consolidated balance sheet at December 31, 2016,2017 has been derived from the audited consolidated financial statements at that date. Operating results and cash flows for the three and nine months ended September 30, 20172018 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017,2018, or any other future period. Certain information and footnote disclosures normally included in annual financial statements
STRATA SKIN SCIENCES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts and number of lasers)
(unaudited)
prepared in accordance with US GAAP have been omitted in accordance with the rules and regulations for interim reporting of the SEC. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016 ("2016 Form 10-K"),2017, and other forms filed with the SEC from time to time.
Certain reclassifications from the prior year presentation have been made to conform to the current year presentation. These reclassifications did not have a material impact on the Company's equity, results of operations or cash flows.
The Company records co-pay reimbursements made to patients receiving laser treatments as a reduction of revenue. For the three and nine months ended September 30, 2017, the Company reclassified such reimbursements in the amount of $195 and $602, respectively, from selling and marketing expenses to reduction in revenues. The Company has determined that this reclassifcation is not material to the condensed consolidated financial statements.statements for the three and nine months ended September 30, 2017.
Significant Accounting Policies
The significant accounting policies used in preparation of these condensed consolidated financial statements are disclosed in our 20162017 Form 10-K, and there have been no changes to the Company's significant accountingaccount policies during the three and nine months ended September 30, 2017.2018, except for the adoption of the new revenue recognition standard as discussed under Adoption of New Accounting Standards later within this Note 1.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect amounts reported of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates and be based on events different from those assumptions. As of September 30, 2017,2018, the moremost significant estimates include (1) revenue recognition, in regards to deferred revenues and valuation allowances(2) allowance for doubtful accounts of accounts receivable, (2)(3) the estimated useful lives of intangible assets and property and equipment, (3)(4) the inputs used in determining the fair value of equity-based awards, (4)(5) the valuation allowance related to deferred tax assets and (5)(6) the fair value of financial instruments, including derivative instruments.
Fair Value Measurements
The Company measures and discloses fair value in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification 820, Fair Value Measurements and Disclosures ("ASC Topic 820"). ASC Topic 820 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions there exists a three-tier fair-valuefair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
| • | Level 1 – unadjusted quoted prices are available in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date. | |
| • | Level 2 – pricing inputs are other than quoted prices in active markets that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data. | |
| • | Level 3 – pricing inputs are unobservable for the non-financial asset or liability and only used when there is little, if any, market activity for the non-financial asset or liability at the measurement date. The inputs into the determination of fair value require significant management judgment or estimation. Fair value is determined using comparable market transactions and other valuation methodologies, adjusted as appropriate for liquidity, credit, market and/or other risk |
This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.
STRATA SKIN SCIENCES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and December 31, 2016 are as follows:per share amounts and number of lasers)
Fair Value as of September 30, 2017 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Liabilities: | ||||||||||||||||
| Warrant liability (Note 8) | $ | 28 | $ | - | $ | - | $ | 28 | ||||||||
Fair Value as of December 31, 2016 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Liabilities: | ||||||||||||||||
| Warrant liability (Note 8) | $ | 105 | $ | - | $ | - | $ | 105 | ||||||||
(unaudited)
The fair value of cash and cash equivalents are based on their respective demand value, which are equal to the carrying value. The fair value of derivative warrant liabilities is estimated using option pricing models that are based on the fair value of the Company's common stock as well as assumptions for volatility, remaining expected life, and the risk-free interest rate and, in some cases, credit spread.rate. The derivative warrant liabilities are the only recurring Level 3 fair value measures.measures and the only asset or liability that is measured at fair value on a recurring basis. The carrying value of all other short-term monetary assets and liabilities is estimated to be approximate to their fair value due to the short-term nature of these instruments. TheAs of September 30, 2018, and December 31, 2017, the Company assessed its long-term debt (including the current portion) and determined that the fair value of total debt was $10,778 as of September 30, 2017. As of December 31, 2016approximated its book value due to the fair value of long-term debt and convertible debentures was $20,082.
Several of the warrants outstanding as of September 30, 20172018 and 20162017 have non-standard terms as they relate to a fundamental transaction and require a net-cash settlement upon change in control of the Company and other warrants as of September 30, 2016 contained full ratchet provisions that reduce the exercise price of the warrants in the event of a transaction resulting in the issuance of equity below the current price of the warrants. Therefore theseCompany. All such warrants are or were, classified as derivatives.derivatives and are the Company's only recurring fair value measurement. These warrants have been recorded at their fair value using a binomialBlack Scholes option pricing model and willcontinue to be recorded at their respective fair value at each subsequent balance sheet date.date until such terms expire. See Note 8,10, Warrants,, for additional discussion.
Recurring level 3 Activity and Recalculation
The table below provides a reconciliation of the beginning and ending balance for the liability measured at fair value using significant unobservable inputs (Level 3).
| Issuance Date | December 31, 2017 | Increase in Fair Value | September 30, 2018 | |||||||||
| 10/31/2013 | 2 | 51 | 53 | |||||||||
| 2/5/2014 | 1 | 50 | 51 | |||||||||
| $ | 3 | $ | 101 | $ | 104 | |||||||
| Issuance Date | December 31, 2016 | Decrease in Fair Value | December 31, 2017 | |||||||||
| 10/31/2013 | 39 | (37 | ) | 2 | ||||||||
| 2/5/2014 | 66 | (65 | ) | 1 | ||||||||
| $ | 105 | $ | (102 | ) | $ | 3 | ||||||
Earnings Per Share
The Company calculates net income (loss)loss per share in accordance with ASC 260, Earnings per Share.Share. Under ASC 260, basic net income (loss)loss per common share is calculated by dividing net income by the weighted-average number of common shares outstanding during the reporting period and excludes dilution for potentially dilutive securities. Diluted earnings per share ("EPS") gives effect to dilutive options, warrants and other potential common shares outstanding during the period.
The Company's Series C Preferred Shares are subordinate to all other securities at the same subordination level as common stock and they participate in all dividends and distributions declared or paid with respect to common stock of the Company, on an as-converted basis. Therefore, the Series C Preferred Shares meet the definition of common stock under ASC 260. Earnings per share is presented for each class of security meeting the definition of common stock. The net loss is allocated to each class of security meeting the definition of common stock based on their contractual terms.
The following table presents the calculation of basic and diluted net loss per share by each class of security for the three and nine months ended September 30, 2017:2018:
For the Three Months ended September 30, 2017 | For the Three Months ended September 30, 2017 | |||||||||||||||
| Common stock | Series C Preferred stock | Common stock | Series C Preferred stock | |||||||||||||
| Net loss | $ | (8,235 | ) | $ | (5,436 | ) | $ | (13,835 | ) | $ | (3,276 | ) | ||||
| Weighted average number of shares outstanding during the period | 2,477,743 | 4,400 | 2,328,274 | 1,483 | ||||||||||||
| Basic and Diluted net loss per share | $ | (3.32 | ) | $ | (1,235.43 | ) | $ | (5.94 | ) | $ | (2,208.96 | ) | ||||
STRATA SKIN SCIENCES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts and number of lasers)
(unaudited)
Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2018 | |||||||||||||||
| Common Stock | Series C Preferred Stock | Common Stock | Series C Preferred Stock | |||||||||||||
| Net loss | $ | (257 | ) | $ | (33 | ) | $ | (2,493 | ) | $ | (1,375 | ) | ||||
| Weighted average number of shares outstanding during the period | 29,912,827 | 10,049 | 16,099,752 | 23,872 | ||||||||||||
| Basic and Diluted net loss per share | $ | (0.01 | ) | $ | (3.23 | ) | $ | (0.15 | ) | $ | (57.58 | ) | ||||
The following table presents the calculation of basic and diluted net loss per share by each class of security for the three and nine months ended September 30, 2017:
For the Three Months Ended September 30, 2017 | For the Nine Months Ended September 30, 2017 | |||||||||||||||
| Common stock | Series C Preferred stock | Common stock | Series C Preferred stock | |||||||||||||
| Net loss | $ | (8,235 | ) | $ | (5,436 | ) | $ | (13,835 | ) | $ | (3,276 | ) | ||||
| Weighted average number of shares outstanding during the period | 2,477,743 | 4,400 | 2,328,274 | 1,483 | ||||||||||||
| Basic and Diluted net loss per share | $ | (3.32 | ) | $ | (1,235.43 | ) | $ | (5.94 | ) | $ | (2,208.96 | ) | ||||
For the three and nine months ended September 30, 20172018 and the three months ended September 30, 2016,2017, diluted net loss per common share and Series C Preferred share is equal to the basic net loss per common share and Series C Preferred share, respectively, since all potentially dilutive securities are anti-dilutive. The gain on the change in fair value of the warrant liability was considered when calculating the diluted earnings per share and was deemed to be antidilutive.
The weighted average of potential common stock equivalents outstanding during the three and nine months ended September 30, 20172018 and 20162017 consist of common stock equivalents of senior secured convertible debentures, common stock purchase warrants, senior secured convertible debentures, convertible preferred stock, restricted stock units and common stock options, which are summarized as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
| 2017 | 2016 | 2017 | 2016 | |||||
| Common stock equivalents of convertible debentures | 7,546,299 | 8,541,577 | 8,191,777 | 8,561,343 | ||||
| Common stock purchase warrants | 2,406,625 | 2,656,816 | 2,406,625 | 2,724,584 | ||||
| Common stock equivalents of convertible Preferred B stock | 228,336 | 493,782 | 343,261 | 502,661 | ||||
| Common stock options | 855,389 | 600,914 | 873,554 | 563,155 | ||||
| Total | 11,036,649 | 12,293,089 | 11,815,217 | 12,351,743 | ||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
| 2018 | 2017 | 2018 | 2017 | |||||
| Common stock equivalents of convertible debentures | - | 7,546,299 | - | 8,191,777 | ||||
| Common stock purchase warrants | 2,392,760 | 2,406,625 | 2,398,651 | 2,406,625 | ||||
| Common stock equivalents of convertible Preferred B stock | - | 228,336 | - | 343,261 | ||||
| Common stock equivalents of convertible Preferred C stock | 3,777,033 | - | 8,874,092 | - | ||||
| Restricted stock units | 140,097 | - | 58,717 | - | ||||
| Common stock options | 4,371,764 | 855,389 | 2,786,400 | 873,554 | ||||
| Total | 10,681,654 | 11,036,649 | 14,117,860 | 11,815,217 | ||||
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Inin thousands, except share and per share amounts and number of lasers)
(unaudited)
Adoption of New Accounting Standards
Effective January 1, 2018, the Company adopted Accounting Standards Update ("ASU") 2014-09, In July 2015,Revenue from Contracts with Customers (Topic 606) using the modified retrospective method with a cumulative adjustment that increased its accumulated deficit and deferred revenue by approximately $234 as of January 1, 2018. The FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (Topic 330) ("ASU 2015-11"). ASU 2015-11 outlines that inventory within the scope of its guidance be measured at the lower of cost and net realizable value. Priorcumulative adjustment was related to the issuancepromise to provide service type contracts related to sales of ASU 2015-11, inventory was measured atdermatology procedures equipment for all outstanding contracts, outstanding as of January 1, 2018. A portion of the lowertransaction price of cost or market (where market was defined as replacement cost,equipment sold with these service type warranties is allocated to such warranties based on their stand-alone selling price, and the Company now recognizes revenue from these service type warranties ratably over the warranty term. The method used to estimate stand-alone selling price is the price observed in transactions where the customer is charged a ceiling of net realizable value and floor of net realizable value less a normal profit margin). For a public entity, the amendments in ASU 2015-11 are effective, in a prospective manner, for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period (the first quarter of fiscal year 2017discrete price for the Company). Theextended warranty.
Other than the above change related to warranties, the adoption of this ASUstandard did not have a significantmaterial impact on the Company's consolidated financial statements.results of operations for the three and nine months ended September 30, 2018. The impact from adopting this standard on the Company's statement of operations for the three and nine months ended September 30, 2018 is as follows:
| For the Three Months Ended September 30, 2018 | ||||||||||||
| Statement of Operations | As Reported | Balances Without Adoption of ASC 606 | Effect of Adoption Higher / (Lower) | |||||||||
| Revenues | $ | 7,892 | $ | 7,946 | $ | (54 | ) | |||||
| For the Nine Months Ended September 30, 2018 | ||||||||||||
| Statement of Operations | As Reported | Balances Without Adoption of ASC 606 | Effect of Adoption Higher / (Lower) | |||||||||
| Revenues | $ | 21,892 | $ | 22,006 | $ | (114 | ) | |||||
See Note 3 for additional information.
Recently Issued Accounting Standards
In July 2017, the FASB issued a two-part ASU 2017-11, "(Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controllingNon-Controlling Interests with a Scope Exception." For public business entities, the amendments in Part 1 of ASU 2017-11 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in Part 2 of ASU 2017-11 do not require any transition guidance because those amendments do not have an accounting effect. The Company is currently evaluating the impact of this guidance on the Company's condensed consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new guidance eliminated Step 2 from the goodwill impairment test which was required in computing the implied fair value of goodwill. Instead, under the new amendments, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. If applicable, an entity should consider income tax effects from any tax deductibletax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss. The amendments in this guidance are effective for public business entities for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019 with early adoption permitted after January 1, 2017. TheAs the Company ishas not identified a goodwill impairment loss, currently evaluating the impact of this guidance does not have an impact on the Company's condensed consolidated financial statements.
STRATA SKIN SCIENCES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts and number of lasers)
(unaudited)
In February 2016, the FASB issued ASU 2016-02,2016-02: Leases This statement requires lessees to present right-of-use assets and lease liabilities on(Topic 842, as amended). The guidance introduces a lessee model that results in most leases impacting the balance sheet. Under ASU 2016-02, lessees will be required to recognize, for all leases with terms longer than 12 months, at the commencement date of the lease, a lease liability, which is a lessee's obligation to make lease payments arising from a lease measured on a discounted basis, and a right-to-use asset, which is an asset that represents the lessee's right to use or control the use of a specified asset for the lease term. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition. Also, the new standard aligns many of the underlying principles of the new lessor model with those in ASC 606, the FASB's new revenue recognition model. The standardupdate is effective for public companies for annual periodsfiscal years beginning after December 15, 2018, including interim periods within those fiscal years. While we continue to evaluate the effect of adopting this guidance on our condensed consolidated financial statements and related disclosures, including the use of optional practical expedients, we expect our operating leases will be subject to the new standard. We will recognize right-of-use assets and operating lease liabilities on our consolidated balance sheets upon adoption, which will increase our total assets and liabilities. Regarding the Company's revenue from short-term leases, we do not expect the new standard to have a material impact on our condensed consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, "Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting," with the objective of simplifying several aspects of the accounting for nonemployee share-based payment transactions resulting from expanding the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The provisions of this update are effective for fiscal years beginning after December 15, 2018. Although we are evaluating the impact of adopting ASU No. 2018-07 on our financial position, results of operations and cash flows, we currently do not expect a material effect upon adoption because we do not have any nonemployee share-based payment transactions.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The new guidance improves and clarifies the fair value measurement disclosure requirement of ASC 820. The new disclosure requirements include the changes in unrealized gains or losses included in other comprehensive income for recurring Level 3 fair value measurement held at the end of reporting period and the explicit requirement to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The other provisions of ASU 2018-13 also include eliminated and modified disclosure requirements. The guidance is effective for fiscal years beginning after December 15, 2019 with early adoption permitted, including in an interim period for which financial statements have not been issued or made available for issuance. The Company is currently evaluatinghas evaluated the effect the guidanceimpact of early adoption of this ASU and determined that it will have no significant impact on its condensed consolidated financial conditionstatements.
Note 2
Equity Financing and resultsLiquidity
Equity Financing
On March 30, 2018, the Company entered into multiple agreements in order to obtain $17,000 of equity financing (the "Financing") from the following sources:
| | On March 30, 2018 the Company entered into a Stock Purchase Agreement (the "Accelmed SPA") and a Registration Rights Agreement with Accelmed Growth Partners L.P. ("Accelmed") investing $13,000 into the Company at a price per share of $1.08; upon closing Accelmed received 12,037,037 shares of its common stock. |
| | In connection with the Accelmed investment, the Company entered into two separate stock purchase agreements, each for approximately $1,000 with its then current shareholders, Broadfin Capital ("Broadfin") and Sabby Management ("Sabby"). Upon closing of these transactions, each of Sabby and Broadfin received 925,926 shares of the Company's common stock at a price per share of $1.08. |
STRATA SKIN SCIENCES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts and number of lasers)
(unaudited)
| | Two separate subscription agreements were also executed on in connection with the Accelmed investment: (i) a subscription agreement with Gohan Investments, Ltd. for $1,000 to purchase 925,926 shares of the Company's common stock at $1.08 per share; and (ii) a subscription agreement with Dr. Dolev Rafaeli, the new CEO of the Company effective May 29, 2018, for $1,000 to purchase 925,926 shares of the Company's common stock at $1.08 per share. |
The Company incurred $2,336 of costs related to the equity financing during the nine months ended September 30, 2018, which have been offset against the proceeds in the accompanying financial statements. These costs included reimbursing Accelmed $500 for legal fees, consulting, due diligence and administrative costs related to the stock purchase agreement. In addition, the Company incurred placement agent fees in the amount of $1,359, among other costs directly related to the financing.
In further consideration of entering into their respective stock purchase agreements, Sabby and Broadfin have each entered into separate agreements restricting their abilities to sell their holdings (the "Leak-Out Agreements"). Under the terms of each of the respective Leak-Out Agreements, the stockholder has agreed that from the later of (a) the date that the approval by the shareholders of the transactions is deemed effective and (b) the closing of the transactions contemplated pursuant to the SPA, the stockholder shall not sell dispose or otherwise transfer, directly or indirectly, (including, without limitation, any sales, short sales, swaps or any derivative transactions that would be equivalent to any sales or short positions) any shares of Common Stock of the Company held by the Stockholder on the date hereof or issuable to the Stockholder upon conversion of shares of the Company's Preferred Stock held by the Stockholder on the date hereof, (a) if prior to April 1, 2019, at a price per Company Share less than $1.296, subject to adjustment for reverse and forward stock splits and the like, or (b) thereafter, at a price per share reflecting less than the price set forth on the schedule in the Leak-Out Agreements subject to adjustment for reverse and forward stock splits and the like, unless, (1) in the case of either clauses (a) or (b), otherwise approved by the Company's Board of Directors, (2) in the case of clause (b), under a shelf prospectus or such other controlled offering as may be agreed to by the Principal Stockholders (as defined in the Stock Purchase Agreement) or (3) in the case of either clauses (a) or (b), in a sale pursuant to which any other stockholder(s) of the Company are offered the same terms of sale, including in a merger, consolidation, transfer or conversion involving the Company or any of its subsidiaries.
In addition, Sabby and Broadfin delivered to the Company a voting undertaking obligating Sabby and Broadfin to increase their respective "blocker" to 9.99% prior to the record date for the meeting of the shareholders.
On May 23, 2018 the Company held a special meeting of stockholders where the stockholders approved pursuant to Nasdaq Listing Rules 5635(b) and (d), the issuance of an aggregate of 15,740,741 shares of the Company's common stock pursuant to the Financing plus all additional shares that may be issued pursuant to the Retained Risk Provisions, as defined in the purchase agreements.
The investors in the Financing may receive additional shares, in the event of certain contingencies, as described in the Stock Purchase Agreements. At the closing, the Company determined certain contingencies had been met and in July 2018 the Company issued 153,004 shares associated with those contingencies. There are additional contingencies included in the SPA's that the Company has determined are not probable or estimable at this time.
In connection with the Agreements, we entered into a Registration Rights Agreement (the "Registration Rights Agreement") with the Investors to prepare and file with the SEC a registration statement covering the shares of common stock issued in the Financing. The Company filed a registration statement on Form S-3 which became effective on September 24, 2018.
Liquidity
We have experienced recurring operating losses and prior to 2017 negative cash flow from operations. 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. We believe that our cash as of September 30, 2018, combined with the anticipated revenues from the rental or sale of our products and the investment discussed above, will be
STRATA SKIN SCIENCES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts and number of lasers)
(unaudited)
sufficient to satisfy our working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with our existing operations through the next 12 months following the filing of this Form 10-Q. In the Company's debt modification with MidCap, MidCap reduced the restrictive covenants. However, if we fail to meet the monthly revenue covenants per the MidCap loan agreement, we may be declared in breach of the credit facility agreement and MidCap will have the option to call the loan balance, for which the Company currently has sufficient funds to repay.
Note 3
Revenue:
In the Dermatology Recurring Procedures Segment the Company has two types of arrangements for its phototherapy treatment equipment as follows: (i) the Company places its lasers in a physician's office at no charge to the physician, and generally charges the physician a fee for an agreed upon number of treatments; or (ii) the Company places its lasers in a physician's office and charges the physician a fixed fee for a specified period of time not to exceed an agreed upon number of treatments; if number is exceeded additional fees will have to be paid.
For the purposes of U.S. GAAP only, these two types of arrangements are treated as short term operating leases, and thus are outside the scope of ASC 606 and are accounted for in accordance with ASC 840, Leases. While these are not operating leases contractually, these are viewed as operating leases for accounting purposes since in these arrangements the Company provides the customers the rights to use the treatment equipment and the customers control physical access to the treatment equipment while controlling the utility and output of such equipment during the term of the arrangement. For the first type of arrangement, fees are recognized as revenue over the contract term, which equates to the usage period of the agreed upon number of treatments, as the treatments are being used. For the second type of arrangement fees are recognized as revenue ratably on a straight-line basis over the term period specified in the agreement. Contingent amounts that are due only if the customer exceeds the agreed upon number of treatments are recognized as revenue only once such treatments are exceeded and used. Prepaid amounts under the agreements 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 customers.
The fee charged is inclusive of the use of the system and the services provided by the Company to the customer, which include system maintenance, and other services. The Company considers the other service and support elements in the contract to be perfunctory and inconsequential.
In the Dermatology Procedures Equipment segment the Company sells its products internationally through a distributor, and domestically directly to a physician. For the product sales, the Company fulfills its performance obligations and recognizes revenues when control of the promised products is transferred to the Company's customers. To indicate the transfer of control, the Company must have a present right to payment and legal title must have passed to the customer. The Company ships most of its products FOB shipping point, and as such, the Company primarily transfers control and records revenue upon shipment. From time to time the Company will grant certain customers, for example governmental customers, FOB destination terms, and the transfer of control for revenue recognition occurs upon receipt.
Remaining performance obligations related to ASC 606 represent the aggregate transaction price allocated to performance obligations with an original contract term greater than one year which are fully or partially unsatisfied at the end of the period. Remaining performance obligations include the potential obligation to perform under extended warranties, but excludes any equipment accounted for as leases. As of September 30, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was $313, and the Company expects to recognize $137 of the remaining performance obligations over the subsequent twelve months and the remainder thereafter. Contract assets primarily relate to the Company's rights to consideration for work completed in relation to its services performed but not billed at the reporting date. The contract assets are transferred to receivables when the rights become unconditional. Currently, the Company does not have any contract assets which have not transferred to a receivable. Contract liabilities primarily relate to extended warranties where we have received payments, but we have not yet satisfied the related performance obligations. The advance consideration received from customers for the services is a contract liability until services are provided to the customer.
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Inin thousands, except share and per share amounts and number of lasers)
(unaudited)
The FASB issued ASU 2014-09, Revenue$82 of short-term contract liabilities is presented as deferred revenues on the September 30, 2018 Condensed Consolidated Balance Sheet, and the $231 of long-term contract liabilities is presented within Other Liabilities. For the three and nine months ended September 30, 2018, $14 and $35, respectively, was recognized as revenue from Contracts with Customers (Topic 606). ASU 2014-09 outlines a single comprehensive modelamounts classified as contract liabilities (i.e. deferred revenues) as of January 1, 2018.
With respect to use in accounting for revenue arising from contractscontract acquisition costs, as the agreements with customers can be cancelled by either party with a 60-day notice, the Company applied the practical expedient and supersedes most currentexpenses these costs immediately. This practical expedient is applied for all contracts.
The following table presents the Company's revenue recognition guidance, including industry-specific guidance. ASU 2014-09 also requires entitiesdisaggregated by geographical region for the three and nine months ended September 30, 2018. The revenue for the three and nine months ended September 30, 2017 have not been adjusted for the adoption of ASC 606. Domestic refers to disclose sufficient information, both quantitativerevenue from customers based in the United States, and qualitative,substantially all foreign revenue is derived from dermatology procedures equipment sales to enable usersthe Company's international master distributor for physicians based primarily in Asia.
| Three Months Ended September 30, 2018 | ||||||||||||
| Dermatology Recurring Procedures | Dermatology Procedures Equipment | TOTAL | ||||||||||
| Domestic | $ | 5,556 | $ | 366 | $ | 5,922 | ||||||
| Foreign | - | $ | 1,970 | 1,970 | ||||||||
| Total | $ | 5,556 | $ | 2,366 | $ | 7,892 | ||||||
| Nine Months Ended September 30, 2018 | ||||||||||||
| Dermatology Recurring Procedures | Dermatology Procedures Equipment | TOTAL | ||||||||||
| Domestic | $ | 15,221 | $ | 1,337 | $ | 16,558 | ||||||
| Foreign | - | $ | 5,334 | 5,334 | ||||||||
| Total | $ | 15,221 | $ | 6,671 | $ | 21,892 | ||||||
| Three Months Ended September 30, 2017 | ||||||||||||
| Dermatology Recurring Procedures | Dermatology Procedures Equipment | TOTAL | ||||||||||
| Domestic | $ | 5,525 | $ | 617 | $ | 6,142 | ||||||
| Foreign | - | $ | 1,143 | 1,143 | ||||||||
| Total | $ | 5,525 | $ | 1,760 | $ | 7,285 | ||||||
| Nine Months Ended September 30, 2017 | ||||||||||||
| Dermatology Recurring Procedures | Dermatology Procedures Equipment | TOTAL | ||||||||||
| Domestic | $ | 17,051 | $ | 1,959 | $ | 19,010 | ||||||
| Foreign | - | $ | 3,842 | 3,842 | ||||||||
| Total | $ | 17,051 | $ | 5,801 | $ | 22,852 | ||||||
STRATA SKIN SCIENCES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts and number of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. An entity should apply the amendments in this ASU using onelasers)
(unaudited)
The comparability of the following two methods: 1. retrospectively to each prior reporting periodperiods presented with a possibility to elect certain practical expedients, or, 2. usingare impacted by the modified retrospective method withsales of the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. If an entity elects the latter transition method, it also should provide certain additional disclosures. The new guidance will be effective for annual and interim periods beginning on or after December 15, 2017. The ASU may change our accountingterminated Nordlys product line. Our overall sales for the revenues from recurring procedures based uponthree months ended September 30, 2018 and 2017, excluding Nordlys, were $7,835 and $7,165, respectively, and $21,558 and $22,343 for the determination of when the Company has transferred control of the services. The potential impact of that change could increase or decrease our revenues in any given periodnine months ended September 30, 2018 and will depend, among others, on the estimated unused treatments as of the end of any reporting period. We are still evaluating the ASU for its potential impact on our consolidated financial statements. We currently plan to adopt the ASU using the "modified retrospective" approach, which requires the cumulative effect of initially applying the guidance to be recognized as an adjustment to our accumulated deficit as of the January 1, 2018 adoption date.2017, respectively.
Note 24
Inventories:
September 30, 2017 | December 31, 2016 | September 30, 2018 | December 31, 2017 | |||||||||||||
| (unaudited) | ||||||||||||||||
| Raw materials and work in progress | $ | 2,448 | $ | 2,440 | $ | 2,391 | $ | 2,490 | ||||||||
| Finished goods | 1,085 | 377 | 97 | 519 | ||||||||||||
| Total inventories | $ | 3,533 | $ | 2,817 | $ | 2,488 | $ | 3,009 | ||||||||
Work-in-process is immaterial, given the Company's typically short manufacturing cycle, and therefore is disclosed in conjunction with raw materials.
Note 35
Property and Equipment, net:
| September 30, 2017 | December 31, 2016 | September 30, 2018 | December 31, 2017 | |||||||||||||
| (unaudited) | ||||||||||||||||
| Lasers placed-in-service | $ | 18,018 | $ | 16,712 | $ | 18,352 | $ | 17,820 | ||||||||
| Equipment, computer hardware and software | 468 | 160 | 185 | 462 | ||||||||||||
| Furniture and fixtures | 118 | 111 | 130 | 124 | ||||||||||||
| Leasehold improvements | 31 | 25 | 31 | 31 | ||||||||||||
| 18,635 | 17,008 | 18,698 | 18,437 | |||||||||||||
| Accumulated depreciation and amortization | (9,977 | ) | (6,828 | ) | (13,000 | ) | (10,734 | ) | ||||||||
| Property and equipment, net | $ | 8,658 | $ | 10,180 | $ | 5,698 | $ | 7,703 | ||||||||
Depreciation and related amortization expense was $3,292$850 and $3,482$1,097 for the three months ended September 30, 2018 and 2017, respectively; and $2,762 and $3,292 for the nine months ended September 30, 2018 and 2017, respectively. XTRAC lasers placed in service are depreciated on a straight-line basis over the estimated useful life of five-years. For other property and 2016, respectively.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.
Note 6
Intangible Assets, net:
Set forth below is a detailed listing of definite-lived intangible assets as of September 30, 2018:
| Balance | Accumulated Amortization | Intangible Assets, net | ||||||||||
| Core technology | $ | 5,700 | $ | (1,853 | ) | $ | 3,847 | |||||
| Product technology | 1,500 | (1,150 | ) | 350 | ||||||||
| Customer relationships | 6,900 | (2,243 | ) | 4,657 | ||||||||
| Tradenames | 1,500 | (487 | ) | 1,013 | ||||||||
| $ | 15,600 | $ | (5,733 | ) | $ | 9,867 | ||||||
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Inin thousands, except share and per share amounts and number of lasers)
(unaudited)
Set forth below is a detailed listing of definite-lived intangible assets:assets as of December 30, 2017:
| September 30, 2017 | December 31, 2016 | Balance | Accumulated Amortization | Intangible Assets, net | ||||||||||||||||
| (unaudited) | ||||||||||||||||||||
| Core technology | $ | 5,700 | $ | 5,974 | 5,700 | (1,425 | ) | 4,275 | ||||||||||||
| Product technology | 2,000 | 2,000 | 1,500 | (1,000 | ) | 500 | ||||||||||||||
| Customer relationships | 6,900 | 6,900 | 6,900 | (1,725 | ) | 5,175 | ||||||||||||||
| Tradenames | 1,500 | 1,500 | 1,500 | (375 | ) | 1,125 | ||||||||||||||
| Distribution rights | 286 | - | 286 | (36 | ) | 250 | ||||||||||||||
| 16,386 | 16,374 | $ | 15,886 | $ | (4,561 | ) | $ | 11,325 | ||||||||||||
| Accumulated amortization | (4,084 | ) | (2,962 | ) | ||||||||||||||||
| Patents and licensed technologies, net | $ | 12,302 | $ | 13,412 | ||||||||||||||||
Related amortization expense was $1,519$402 and $1,362$505 for the three months ended September 30, 2018 and 2017, respectively and $1,231 and $1,519 for the nine months ended September 30, 20172018 and 2016,2017, respectively. During the three and nine months ended September 30, 2017, the Company wrote off core technology of $274 and accumulated amortization of $251 related to the discontinuance of the MELAfindMelaFind product. The value written off of $23 was recorded in cost of revenues.
| Remaining 2017 | $ | 476 | ||
| 2018 | 1,905 | |||
| 2019 | 1,905 | |||
| 2020 | 1,670 | |||
| 2021 | 1,410 | |||
| Thereafter | 4,936 | |||
| Total | $ | 12,302 |
During the first quarter of 2017 is considered to be an acquisition of a single asset, therefore,2018, the acquisition is not considered to be an acquisition of a business. TheCompany wrote off distribution rights asset had been assigned a value of $900 which was comprised$286 and accumulated amortization of $60 related to the discontinuance of the presentNordlys product. The net value written off of the license fee payments. Effective August 2017 the transaction$226 was terminatedrecorded in selling and a new agreement was negotiated among the parties. See Note 1 for further details regarding these agreements. Asmarketing expense. The Company wrote off distribution liabilities of $237 as a result of the termination of the old agreement and the signingon May 31, 2018. The net value written off of the new agreements the Company reversed the intangible asset and corresponding liability$11 was recorded on March 1, 2017 and recorded the distribution rights at the present value of the payments under the new agreements, amounting to $286. The reversal of the aforementioned intangible asset and corresponding liability resulted in a $40 gain, recognized in salesselling and marketing expense. (See Note 1)
Estimated amortization expense for the above amortizable intangible assets for future periods is as follows:
| Remaining 2018 | $ | 402 | ||
| 2019 | 1,610 | |||
| 2020 | 1,510 | |||
| 2021 | 1,410 | |||
| 2022 | 1,410 | |||
| Thereafter | 3,525 | |||
| Total | $ | 9,867 |
Note 7
Other Accrued Liabilities:
| September 30, 2018 | December 31, 2017 | |||||||
| Accrued warranty, current | $ | 146 | $ | 109 | ||||
| Accrued compensation, including commissions and vacation | 1,196 | 785 | ||||||
| Accrued sales and other taxes | 869 | 904 | ||||||
| Distributor rights liability, current | - | 85 | ||||||
| Accrued professional fees and other accrued liabilities | 486 | 477 | ||||||
| Total other accrued liabilities | $ | 2,697 | $ | 2,360 | ||||
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Inin thousands, except share and per share amounts and number of lasers)
(unaudited)
Included in accrued sales and other taxes are certain estimated sales and use taxes and related penalties and interest currently assessed but not adjudicated by taxing authorities. All the Company's tax positions are subject to audit. The Company has been subject to audits performed by the taxing authorities. The Company uses estimates when accruing its sales and use tax liability, including interest and penalties. While the Company believes all its estimates and assumptions are reasonable and will be sustained upon audit, actual liabilities and credits may differ significantly. The Company believes its accruals cover all probable payments relating to sales and use taxes.
Accrued Warranty Costs
The Company offers a standard warranty on product sales generally for a one to two-year period, however, the Company has offered longer warranty periods, ranging from three to four years, in order to meet competition or meet customer demands. The Company provides for the estimated cost of the future warranty claims on the date the product is sold. Total accrued warranty is included in Other Accrued Liabilities:Liabilities and Other liabilities on the condensed consolitated balance sheet. The activity in the warranty accrual during the nine months ended September 30, 2018 and 2017 is summarized as follows:
September 30, 2017 | December 31, 2016 | |||||||
| (unaudited) | ||||||||
| Accrued warranty, current | $ | 98 | $ | 102 | ||||
| Accrued compensation, including commissions and vacation | 861 | 1,177 | ||||||
| Accrued sales and other taxes | 520 | 439 | ||||||
| Distributor rights liability, current | 82 | - | ||||||
| Accrued professional fees and other accrued liabilities | 338 | 274 | ||||||
| Total other accrued liabilities | $ | 1,899 | $ | 1,992 | ||||
September 30, 2018 | December 31, 2017 | |||||||
| Balance at beginning of period | $ | 178 | $ | 115 | ||||
| Additions charged to warranty expense | 91 | 161 | ||||||
| Expiring warranties/claimed satisfied | (19 | ) | (98 | ) | ||||
| Balance at end of period | $ | 250 | $ | 178 | ||||
Note 68
| September 30, 2018 | December 31, 2017 | |||||||
| Term note, net of debt discount of $117 and $160, respectively; and deferred financing cost of $92 and $171, respectively | $ | 7,362 | $ | 10,240 | ||||
| Less: current portion | - | (2,387 | ) | |||||
| Total long-term debt | $ | 7,362 | $ | 7,853 | ||||
Term-Note Credit Facility
| December 31, 2016 | ||||
| Senior secured 2.25% convertible debentures, net of unamortized debt discount of $24,314; and deferred financing costs of $524 | $ | 7,174 | ||
| Senior secured 4% convertible debentures, net of unamortized debt discount of $3,469; and deferred financing costs of $392 | 4,854 | |||
| Total convertible debt | $ | 12,028 | ||
On March 26, 2018 the Company entered into a Third Amendment to the Credit Agreement with MidCap. For the period beginning on the closing date of the loan and ending on January 31, 2018, the gross revenue in accordance with GAAP for the twelve-month period ending on the last day of the most recently completed calendar month was amended to be less than the minimum amount on the Covenant Schedule, as defined in the Credit Agreement. This amendment waived the event of default related to the revenue covenant for the period ending February 2018. This amendment also amended the monthly net revenue covenant for March and April 2018.
STRATA SKIN SCIENCES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts and number of lasers)
(unaudited)
On May 29, 2018, the Company entered into a Fourth Amendment to Credit Agreement (the "Amendment"), pursuant to which the Company repaid $3,000 in principal of the existing $10,600 credit facility established with MidCap in 2015. The total outstanding convertible debenturesterms of the credit facility have been amended to impose less restrictive covenants and lower prepayment and exit fees for the Company. The Amendment modified the principal payments including a period of 18 months where there are no principal payments due. The interest rate on the credit facility is one-month LIBOR plus 7.25%. Principal payments begin December 2019. Principal and interest payments beginning December 2019 are $252. The Company was exchanged for convertible Preferred C stock on September 20, 2017, thus there was no remaining outstanding balancein compliance with all covenants as of September 30, 2017.2018.
These amendments have been accounted for as debt modifications as the present value of the cash flows changed by less than 10%.
The following table summarizes the future payments that the Company is obligated to make for the long-term debt for the future periods:
| Remaining in 2018 | $ | - | ||
| 2019 | 252 | |||
| 2020 | 3,029 | |||
| 2021 | 3,029 | |||
| 2022 | 1,261 | |||
| $ | 7,571 |
Note 9
Convertible Debentures:
The Company issued $32,500 aggregate principal amount of Debentures (the "June 2015 Debentures") that, subject to certain ownership limitations and stockholder approval conditions, was convertible into 8,666,668 shares of Company common stock at an initial conversion price of $3.75 per share. The June 2015 Debentures were bearing interest at the rate of 2.25% per year, and, unless previously converted, were to mature on the five-year anniversary of the date of issuance, June 22, 2020.
The June 2015 Debentures included a beneficial conversion feature valued at $27,300 that was recorded as a discount to the debentures. On the date of issuance, the beneficial conversion feature value was calculated as the difference resulting from subtracting the conversion price of $3.75 from $6.90, the opening market value of the Company's common stock following the announcement of the transaction, multiplied by the number of common shares into which the June 2015 Debentures were convertible. This discount was being amortized over the five yearfive-year life of the June 2015 Debentures using the effective interest method. The embedded conversion feature contained an anti-dilution provision that allowed for downward exercise price adjustments in certain situations. The embedded conversion feature was not bifurcated as it did not meet all of the elements of a derivative.
On July 21, 2014, the Company entered into a definitive Securities Purchase Agreement (the "Purchase Agreement") with institutional investors (the "Investors") providing for the issuance of Senior Secured Convertible Debentures in the aggregate principal amount of $15,000, due, subject to the terms therein, in July 2019 (the "July 2014 Debentures"), and warrants (the "July 2014 Series A Warrants") to purchase up to an aggregate of 1,239,769 shares of common stock, $0.001 par value per share, at an exercise price of $12.25 per share expiring in July 2019. The July 2014 Debentures were bearing interest at an annual rate of 4%, payable quarterly or upon conversion into shares of common stock. The Debentures were convertible at any time into an aggregate of 1,169,595 shares of common stock at an initial conversion price of $12.825 per share. The Company's obligations under the July 2014 Debentures was secured by a first priority lien on all of the Company's intellectual property pursuant to the terms of a security agreement ("Security Agreement") dated July 21, 2014 among the Company and the Investors. In connection with the Purchase Agreement, the Company entered into a Registration Rights Agreement with the Investors pursuant to which the Company was obligated to file a registration statement to register for resale the shares of Common Stock issuable upon conversion of the Series B Preferred Stock, (Seesee Note 8,10, WarrantsWarrants,) and Debentures and upon exercise of the Warrants. Under the terms of the Registration Rights Agreement, the Company filed a registration statement on August 19, 2014, which was declared effective by the SEC on October 20, 2014 (File No. 333-198249).
STRATA SKIN SCIENCES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts and number of lasers)
(unaudited)
For financial reporting purposes, out of the $15,000 funded by the Investors on July 21, 2014 $5,296 was allocated first to the Warrants issued, then $4,565 to the intrinsic value of the beneficial conversion feature on the July 2014 Debentures. The balance was further reduced by the fair value of warrants issued to the placement agent for services rendered of $491, resulting in an initial carrying value of the Debentures of $4,647. The initial debt discount on the July 2014 Debentures totaled $10,353 and was being amortized using the effective interest method over the five yearfive-year life of the July 2014 Debentures.
During the nine months ended September 30, 2017, the investors converted debentures amounting to $262 into 70,000 shares of common stock for the June 2015 note. The debt discount and deferred financing cost adjustment resulting from the conversions increased interest expense by $197 for the nine months ended September 30, 2017.
As a condition of the new note facility, (Seesee Note 78, Long-term Debt,) each of the June 2015 Debentures from bothand the July 2014 and 2015 financingsDebentures collectively the "Debentures" were amended. The Debentures holders' first priority lien was subordinated to the new term note facility. Additionally, as a condition of the term note facility, the maturity date of both Debentures was extended to June 30, 2021 and treated as a modification.
On June 6, 2017, the Company entered into a Securities Exchange Agreement (the "Agreement") with the holders of its 2.25% Senior Series A Secured Convertible Debentures due June 30, 2021 and 4% Senior Secured Convertible Debentures due July 30, 2021, pursuant to which the holders have agreed to exchange all of such outstanding debentures into shares of newly created Series C Convertible Preferred Stock. The elimination of the senior secured debt will also eliminateeliminated the Company's obligation to pay approximately $4,000 of interest payments over the next four years. The stockholders approved the exchange at the stockholders' meeting held on September 14, 2017. The closing of the exchange was effective on September 20, 2017 and $40,465 of principleprincipal was exchanged for 40,482 shares of Series C Preferred Stock. In accordance with ASC Topic 470, Debt, the aforementioned exchange was treated as an extinguishment of debt. As there was no intrinsic value for the conversion feature on the date of extinguishment, none of the proceeds were allocated to the extinguishment of the beneficial conversion feature. As such, the difference between the fair value of the convertible preferred stock issued (determined based on the market value of the underlying common stock) and the net carrying value of the convertible debenturesDebentures (adjusted for unamortized premium discount), of $11,799 was recognized as a loss on extinguishment of debentures.
Debentures.
Other than the limitations on conversions to keep each such holdersholder's beneficial ownership below 9.99%, the terms of the Series C Convertible Preferred Stock generally bestow the same rights to each holder as such holder would receive if they are common stock shareholder and are not redeemable by the holders, except the Series C Convertible Preferred Stock shares do not have voting rights. The Series C Convertible Preferred Stock have the same level of subordination as common stock. Each share of Series C Convertible Preferred Stock has a stated value of $1,000 and is convertible into 372 shares of common stock (at a conversion price equal to $2.69) for a total of approximately 15,049,000 shares of common stock.
| September 30, 2017 | December 31, 2016 | |||||||
| (unaudited) | ||||||||
| Term note, net of debt discount of $177 and $258, respectively; and deferred financing cost of $188 and $276, respectively | $ | 10,778 | $ | 11,466 | ||||
| Less: current portion | (1,936 | ) | (1,714 | ) | ||||
| Total long-term debt | $ | 8,842 | $ | 9,752 | ||||
Total interest expense related to the minimum net revenue covenantDebentures was amended prospectively. Additionally on November 10, 2017,$961 and $3,116 for the Company entered into an amendment to modify the principal payments including a period of sixthree and nine months where there is no principal payments due. Interest rate on the credit facility is one month LIBOR plus 8.25%, subject to a LIBOR floor of 0.5% (9.49% as of September 30, 2017). As ofended September 30, 2017, the net balance of long-term debt is $8,842.
| Remaining in 2017 | $ | 572 | ||
| 2018 | 2,387 | |||
| 2019 | 4,092 | |||
| 2020 | 4,092 | |||
| $ | 11,143 | |||
respectively.
Note 810
Warrants:
The Company accounts for warrants that require net cash settlement upon change of control of the Company and warrants that have provisions that protect holders from a decline in the issue price of its common stock (or "down-round" provisions) as liabilities instead of equity. WarrantsCurrently there are warrants to purchase 403,090 shares of common stock with "downround" provisions did not existan exercise price of $3.75 per share and they expire between February 5, 2019 and April 30, 2019. The fair value of these derivatives was $104 and $3 as of or duringSeptember 30, 2018 and December 31, 2017, respectively. The change in fair value of these derivatives was recorded as $79 of other expense and $81 of other income for the three months ended September 30, 2018 and 2017, and $101 and $77 in other expense for the nine months ended September 30, 2018 and 2017 or as of December 31, 2016.
| September 30, 2017 | December 31, 2016 | |||||||
| Number of shares underlying the warrants | 403,090 | 403,090 | ||||||
| Stock price | $ | 1.77 | $ | 2.20 | ||||
| Volatility | 48.00 | % | 47.00 | % | ||||
| Risk-free interest rate | 1.31 – 1.45 | % | 1.22 | % | ||||
| Expected dividend yield | 0 | % | 0 | % | ||||
| Expected warrant life | 1.37 – 1.60 years | 2.12 – 2.35 years | ||||||
Issuance Date | December 31, 2016 | Decrease in Fair Value | September 30, 2017 | |||||||||
| 10/31/2013 | $ | 39 | $ | (28 | ) | $ | 11 | |||||
| 2/5/2014 | 66 | ( 49 | ) | 17 | ||||||||
| Total | $ | 105 | $ | (77 | ) | $ | 28 | |||||
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Inin thousands, except share and per share amounts and number of lasers)
(unaudited)
Issuance Date | December 31, 2015 | Decrease in Fair Value | Reclassification to Equity | September 30, 2016 | ||||||||||||
| 10/31/2013 | $ | 379 | $ | (312 | ) | $ | - | $ | 67 | |||||||
| 2/5/2014 | 715 | (597 | ) | - | 118 | |||||||||||
| 7/24/2014 Series A | 2,415 | (1,573 | ) | (842 | ) | - | ||||||||||
| 7/24/2014 Series B | 1,726 | (1,713 | ) | (13 | ) | - | ||||||||||
| 6/22/2015 | 1,807 | (1,121 | ) | (686 | ) | - | ||||||||||
| Total | $ | 7,042 | $ | (5,316 | ) | $ | (1,541 | ) | $ | 185 | ||||||
Outstanding common stock warrants consist at September 30, 20172018 consist of the following:
Issue Date | Expiration Date | Total Warrants | Exercise Price | Expiration Date | Total Warrants | Exercise Price | ||||||||||||
| 4/26/2013 | 4/26/2018 | 13,865 | $ | 55.90 | ||||||||||||||
| 10/31/2013 | 4/30/2019 | 137,143 | $ | 3.75 | ||||||||||||||
| 2/5/2014 | 2/5/2019 | 265,947 | $ | 3.75 | ||||||||||||||
| 10/31/2013* | 4/30/2019 | 137,143 | $ | 3.75 | ||||||||||||||
| 2/5/2014* | 2/5/2019 | 265,947 | $ | 3.75 | ||||||||||||||
| 7/24/2014 | 7/24/2019 | 1,239,769 | $ | 3.75 - $ 12.25 | 7/24/2019 | 1,239,769 | $ | 3.75 - $ 12.25 | ||||||||||
| 6/22/2015 | 6/22/2020 | 600,000 | $ | 3.75 | 6/22/2020 | 600,000 | $ | 3.75 | ||||||||||
| 12/30/2015 | 12/30/2020 | 130,089 | $ | 5.65 | 12/30/2020 | 130,089 | $ | 5.65 | ||||||||||
| 1/29/2016 | 1/29/2021 | 19,812 | $ | 5.30 | 1/29/2021 | 19,812 | $ | 5.30 | ||||||||||
| 2,406,625 | 2,392,760 | |||||||||||||||||
*These warrants are classified as liabilities.
Note 1011
Stock-based compensation:Compensation:
At September 30, 2017,2018, the Company had 855,389 options to purchase 4,342,765 shares of common stock outstanding with a weighted-average exercise price of $4.93 and a weighted average remaining contractual life$2.02. As of 8.5 years. 401,077September 30, 2018, options to purchase 785,461 shares are vested and exercisable.
On March 30, 2018, the Company issued options to purchase 1,557,628 shares of common stock to its then Interim Chief Executive Officer with a strike price of $1.12 per share. The options vest over three years and expire ten years from the date of grant. The aggregate fair value of the options granted was $950.
On May 23, 2018, the Company issued options to purchase 1,413,249 shares of common stock to its Chief Executive Officer with a strike price of $1.66 per share. The options vest over three years and expire ten years from the date of grant. The aggregate fair value of the options granted was $1,237.
There were additional grants made to management during the quarter ended June 30, 2018 totaling 800,000 at strike prices ranging from $1.66 to $1.93. The options vest over three years and expire ten years from the date of grant. The aggregate fair value of the options granted was $801.
In connection with the closing of the Financing, there were changes to the board of directors and the Company issued initial grants to new members as well as grants to all members as compensation. In total, the Company granted 140,097 restricted stock units to the board members at a strike price of $2.07. The restricted stock units vest quarterly over twelve months and expire ten years from the date of grant. The aggregate fair value of the restricted stock units granted was $290.
Stock-based compensation expense, primarilywhich is included in general and administration,administrative expense, for the three and nine months ended September 30, 20172018 was $63$367 and $136,$570, respectively. For the three and nine months ended September 30, 20162017 stock-based compensation was $116$63 and $401,$136, respectively. As of September 30, 20172018, there was $211$2,854 in unrecognized compensation expense, which will be recognized over a weighted average period of 2.751.37 years.
September 30, 2018.
Note 1112
Income taxes:Taxes:
The Company accounts for income taxes using the asset and liability method for deferred income taxes. The provision for income taxes includes federal, state and local income taxes currently payable and deferred taxes resulting from temporary differences between the financial statement and tax bases of assets and liabilities. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.
STRATA SKIN SCIENCES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts and number of lasers)
(unaudited)
Income tax benefit of $80 for the three months ended September 30, 2018 and an expense of $38 and $181 for the three and nine months ended September 30, 2017, and $64 and $191 for the three and nine months ended September 30, 2016,respectively, was comprised primarily of the change in deferred tax liability related to goodwill. Goodwill is an amortizing asset according to tax regulations. This generates
The Company has experienced certain ownership changes, which under the provisions of Section 382 of the Internal Revenue Code of 1986, as amended, result in annual limitations on the Company's ability to utilize its net operating losses in the future. Although the Company has not performed a Section 382 study, any limitation of its pre-change net operating loss carryforwards that would result in a reduction of its deferred tax liability that is not usedasset would also have an equal and offsetting adjustment to offset deferred tax assets forthe valuation allowance considerations.allowance.
Note 1213
Business Segments and Geographic Data:Segments:
Unallocated operating expenses include costs that are not specific to a particular segment but are general to the group; included are expenses incurred for administrative and accounting staff, general liability and other insurance, professional fees and other similar corporate expenses. Interest expense and other financing income (expense), net isare also not allocated to the operating segments.
The following tables reflect results of operations from our business segments for the periods indicated below:
Three Months Ended September 30, 2018
Dermatology Recurring Procedures | Dermatology Procedures Equipment | TOTAL | ||||||||||
| Revenues | $ | 5,556 | $ | 2,336 | $ | 7,892 | ||||||
| Costs of revenues | 1,757 | 1,292 | 3,049 | |||||||||
| Gross profit | 3,799 | 1,044 | 4,843 | |||||||||
| Gross profit % | 68.4 | % | 44.7 | % | 61.4 | % | ||||||
| Allocated operating expenses: | ||||||||||||
| Engineering and product development | 178 | 46 | 224 | |||||||||
| Selling and marketing | 2,276 | 211 | 2,487 | |||||||||
| Unallocated operating expenses | - | - | 2,184 | |||||||||
| 2,454 | 257 | 4,895 | ||||||||||
| Income (loss) from operations | 1,345 | 787 | (52 | ) | ||||||||
| Interest expense, net | - | - | (239 | ) | ||||||||
| Change in fair value of warranty liability | - | - | (79 | ) | ||||||||
| Income (loss) before income taxes | $ | 1,345 | $ | 787 | $ | (370 | ) | |||||
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Inin thousands, except share and per share amounts and number of lasers)
(unaudited)
Three Months Ended September 30, 2017
Dermatology Recurring Procedures | Dermatology Procedures Equipment | Dermatology Imaging | TOTAL | |||||||||||||
| Revenues | $ | 5,525 | $ | 1,751 | $ | 9 | $ | 7,285 | ||||||||
| Costs of revenues | 2,084 | 967 | 225 | 3,276 | ||||||||||||
| Gross profit | 3,441 | 784 | (216 | ) | 4,009 | |||||||||||
| Gross profit % | 62.3 | % | 44.8 | % | (2400.0 | %) | 55.0 | % | ||||||||
| Allocated operating expenses: | ||||||||||||||||
| Engineering and product development | 348 | 63 | - | 411 | ||||||||||||
| Selling and marketing expenses | 2,043 | 449 | - | 2,492 | ||||||||||||
| Unallocated operating expenses | - | - | - | 1,678 | ||||||||||||
| 2,391 | 512 | - | 4,581 | |||||||||||||
| Income (loss) from operations | 1,050 | 272 | (216 | ) | (572 | ) | ||||||||||
| Interest expense, net | - | - | - | (1,343 | ) | |||||||||||
| Change in fair value of warrant liability | - | - | - | 81 | ||||||||||||
| Loss on extinguishment of debt | - | - | - | (11,799 | ) | |||||||||||
| Income (loss) before income taxes | $ | 1,050 | $ | 272 | $ | (216 | ) | $ | (13,633 | ) | ||||||
The following tables reflect results of operations from our business segments for the periods indicated below:
Dermatology Recurring Procedures | Dermatology Procedures Equipment | Dermatology Imaging | TOTAL | |||||||||||||
| Revenues | $ | 5,720 | $ | 1,751 | $ | 9 | $ | 7,480 | ||||||||
| Costs of revenues | 2,084 | 967 | 225 | 3,276 | ||||||||||||
| Gross profit | 3,636 | 784 | (216 | ) | 4,204 | |||||||||||
| Gross profit % | 63.6 | % | 44.8 | % | (2400.0 | %) | 56.2 | % | ||||||||
| Allocated operating expenses: | ||||||||||||||||
| Engineering and product development | 348 | 63 | - | 411 | ||||||||||||
| Selling and marketing expenses | 2,238 | 449 | - | 2,687 | ||||||||||||
| Unallocated operating expenses | - | - | - | 1,678 | ||||||||||||
| 2,586 | 512 | - | 4,776 | |||||||||||||
| Income (loss) from operations | 1,050 | 272 | (216 | ) | (572 | ) | ||||||||||
| Interest expense, net | - | - | - | (1,343 | ) | |||||||||||
| Change in fair value of warrant liability | - | - | - | 81 | ||||||||||||
| Loss on extinguishment of debt | - | - | - | (11,799 | ) | |||||||||||
| Income (loss) before income taxes | $ | 1,050 | $ | 272 | $ | (216 | ) | $ | (13,633 | ) | ||||||
Dermatology Recurring Procedures | Dermatology Procedures Equipment | Dermatology Imaging | TOTAL | Dermatology Recurring Procedures | Dermatology Procedures Equipment | TOTAL | ||||||||||||||||||||||
| Revenues | $ | 6,205 | $ | 1,550 | $ | 12 | $ | 7,767 | $ | 15,221 | $ | 6,671 | $ | 21,892 | ||||||||||||||
| Costs of revenues | 2,162 | 877 | 31 | 3,070 | 5,587 | 4,255 | 9,842 | |||||||||||||||||||||
| Gross profit | 4,043 | 673 | ( 19 | ) | 4,697 | 9,634 | 2,416 | 12,050 | ||||||||||||||||||||
| Gross profit % | 65.2 | % | 43.4 | % | (158.3 | %) | 60.5 | % | 63.3 | % | 36.2 | % | 55.0 | % | ||||||||||||||
| Allocated operating expenses: | ||||||||||||||||||||||||||||
| Engineering and product development | 343 | 31 | 8 | 382 | 663 | 168 | 831 | |||||||||||||||||||||
| Selling and marketing expenses | 2,767 | 57 | 16 | 2,840 | ||||||||||||||||||||||||
| Selling and marketing | 6,663 | 1,074 | 7,737 | |||||||||||||||||||||||||
| Unallocated operating expenses | - | - | - | 1,880 | - | - | 6,319 | |||||||||||||||||||||
| 3,110 | 88 | 24 | 5,102 | 7,326 | 1,242 | 14,887 | ||||||||||||||||||||||
| Income (loss) from operations | 933 | 585 | (43 | ) | (405 | ) | 2,308 | 1,174 | (2,837 | ) | ||||||||||||||||||
| Interest expense, net | - | - | - | (1,175 | ) | - | - | (930 | ) | |||||||||||||||||||
| Change in fair value of warrant liability | - | - | - | 132 | - | - | (101 | ) | ||||||||||||||||||||
| Other income (expense), net | - | - | - | 3 | ||||||||||||||||||||||||
| Income (loss) before income taxes | $ | 933 | $ | 585 | $ | (43 | ) | $ | (1,445 | ) | $ | 2,308 | $ | 1,174 | $ | (3,868 | ) | |||||||||||
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Inin thousands, except share and per share amounts and number of lasers)
(unaudited)
Dermatology Recurring Procedures | Dermatology Procedures Equipment | Dermatology Imaging | TOTAL | |||||||||||||
| Revenues | $ | 17,653 | $ | 5,784 | $ | 17 | $ | 23,454 | ||||||||
| Costs of revenues | 5,969 | 2,988 | 225 | 9,182 | ||||||||||||
| Gross profit | 11,684 | 2,796 | ( 208 | ) | 14,272 | |||||||||||
| Gross profit % | 66.2 | % | 48.3 | % | (1223.5 | %) | 60.9 | % | ||||||||
| Allocated operating expenses: | ||||||||||||||||
| Engineering and product development | 1,104 | 204 | 1 | 1,309 | ||||||||||||
| Selling and marketing expenses | 7,747 | 1,167 | - | 8,914 | ||||||||||||
| Unallocated operating expenses | - | - | - | 4,999 | ||||||||||||
| 8,851 | 1,371 | 1 | 15,222 | |||||||||||||
| Income (loss) from operations | 2,833 | 1,425 | (209 | ) | (950 | ) | ||||||||||
| Interest expense, net | - | - | - | (4,264 | ) | |||||||||||
| Change in fair value of warrant liability | - | - | - | 77 | ||||||||||||
| Extinguishment of debt | - | - | - | (11,799 | ) | |||||||||||
| Other income (expense), net | - | - | - | 6 | ||||||||||||
| Income (loss) before income taxes | $ | 2,833 | $ | 1,425 | $ | (209 | ) | $ | (16,930 | ) | ||||||
Nine Months Ended September 30, 2016 (unaudited)2017
Dermatology Recurring Procedures | Dermatology Procedures Equipment | Dermatology Imaging | TOTAL | Dermatology Recurring Procedures | Dermatology Procedures Equipment | Dermatology Imaging | TOTAL | |||||||||||||||||||||||||
| Revenues | $ | 17,826 | $ | 5,174 | $ | 126 | $ | 23,126 | $ | 17,051 | $ | 5,784 | $ | 17 | $ | 22,852 | ||||||||||||||||
| Costs of revenues | 6,723 | 2,641 | 267 | 9,631 | 5,969 | 2,988 | 225 | 9,182 | ||||||||||||||||||||||||
| Gross profit | 11,103 | 2,533 | ( 141 | ) | 13,495 | 11,082 | 2,796 | ( 208 | ) | 13,670 | ||||||||||||||||||||||
| Gross profit % | 62.3 | % | 49.0 | % | (111.9 | %) | 58.4 | % | 65.0 | % | 48.3 | % | (1,223.5 | %) | 59.8 | % | ||||||||||||||||
| Allocated operating expenses: | ||||||||||||||||||||||||||||||||
| Engineering and product development | 977 | 147 | 417 | 1,541 | 1,104 | 204 | 1 | 1,309 | ||||||||||||||||||||||||
| Selling and marketing expenses | 9,626 | 261 | 186 | 10,073 | 7,145 | 1,167 | - | 8,312 | ||||||||||||||||||||||||
| Unallocated operating expenses | - | - | - | 5,882 | - | - | - | 4,999 | ||||||||||||||||||||||||
| 10,603 | 408 | 603 | 17,496 | 8,249 | 1,371 | 1 | 14,620 | |||||||||||||||||||||||||
| Income (loss) from operations | 500 | 2,125 | (744 | ) | (4,001 | ) | 2,833 | 1,425 | (209 | ) | (950 | ) | ||||||||||||||||||||
| Interest expense, net | - | - | - | (3,571 | ) | - | - | - | (4,264 | ) | ||||||||||||||||||||||
| Change in fair value of warrant liability | - | - | - | 5,316 | - | - | - | 77 | ||||||||||||||||||||||||
| Loss on extinguishment of debt | - | - | - | (11,799 | ) | |||||||||||||||||||||||||||
| Other income (expense), net | - | - | - | (1 | ) | - | - | - | 6 | |||||||||||||||||||||||
| Income (loss) before income taxes | $ | 500 | $ | 2,125 | $ | (744 | ) | $ | (2,257 | ) | $ | 2,833 | $ | 1,425 | $ | (209 | ) | $ | (16,930 | ) | ||||||||||||
Note 14
For the three and nine months ended September 30, 2017, and 2016 there were no material net revenues attributable to any individual foreign country. Net revenues by geographic area were, as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Domestic | $ | 6,337 | $ | 6,287 | $ | 19,612 | $ | 18,444 | ||||||||
| Foreign | 1,143 | 1,480 | 3,842 | 4,682 | ||||||||||||
| $ | 7,480 | $ | 7,767 | $ | 23,454 | $ | 23,126 | |||||||||
No other customer represented more than 10% of total company revenues for the three and nine months ended September 30, 20172018 and 2016.2017. No other customer represented more than 10% of total accounts receivable as of September 30, 2018 and 2017.
Note 1415
Related Parties:
On March 30, 2018, in connection with the Financing, the Company entered into the Broadfin SPA and the Sabby SPA, each for approximately $1,000 with our then current shareholders, Broadfin and Sabby. Upon closing of the Financing, each of Sabby and Broadfin received 925,926 shares of our common stock at a price per share of $1.08. In addition, the Company also entered into a Subscription Agreement with Dr. Dolev Rafaeli, our Chief Executive Officer and Director for $1,000 to purchase 925,926 shares of our common stock at $1.08 per share. See Note 2 for more information on the Financing.
STRATA SKIN SCIENCES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts and number of lasers)
(unaudited)
On June 22, 2015, the Company entered into a securities purchase agreement with the Purchasers, including certain funds managed by Sabby Management, LLC and Broadfin Capital LLC (existing Company shareholders), in connection with a private placement. The Purchasers were issued Warrants to purchase an aggregate of 0.6 million shares of common stock, having an exercise price of $3.75 per share. We also issued $32.5 million aggregate principal amount of Debentures that, subject to certain ownership limitations and stockholder approval conditions, were convertible into 8,666,668 shares of common stock at an initial conversion price of $3.75 per share. The Debentures were bearing interest at the rate of 2.25% per year, and, unless previously converted, were to mature on the five-year anniversary of the date of issuance. Refer to Note 69 for additional information on the terms ofinterest expense relating to the Debentures. On September 30, 2015, the Company repriced outstanding Warrants held by certain investors to reduce the exercise price to $3.75 per share.
On June 6, 2017, the Company entered into a Securities Exchange Agreement (the "Agreement") with the holders of its 2.25% Senior Series A Secured Convertible Debentures due June 30, 2021 and 4% Senior Secured Convertible Debentures due July 30, 2021, pursuant to which the holders have agreed to exchange all of such outstanding debentures into shares of newly created Series C Convertible Preferred Stock. The elimination of the senior secured debt will also eliminate the Company's obligation to pay approximately $4,000 of interest payments over the next four years. The stockholders approved the exchange at the stockholders' meeting held on September 14, 2017. The closing of the exchange was effective on September 20, 2017 and $40,465 of principleprincipal was exchanged for 40,482 shares of Series C Preferred Stock. In accordance with ASC Topic 470, Debt, the aforementioned exchange was treated as an extinguishment of debt. As there was no intrinsic value for the conversion feature on the date of extinguishment, none of the proceeds were allocated to the extinguishment of the beneficial conversion feature. As such, the difference between the fair value of the convertible preferred stock issued (determined based on the market value of the underlying common stock) and the net carrying value of the convertible debentures (adjusted for unamortized premium discount), of $11,799 was recognized as a loss on extinguishment of debentures.
During the current quarter, Modevity LLC ("Modevity"), the developer of the ARALOC Secure Content Distribution Platform, a software system for sharing proprietary and / or confidential content files over the internet and allowing its users to collaborate securely from any mobile or desktop device, has provided certain consulting services to2018, the Company advising on the development of our digital media and marketing initiatives, including providing assistance in our first limited test of targeted advertising using Facebook. Our Board member, James Coyne, has been the Chief Executive Officer of Modevity since helping to found the company in April 2004. To date, Modevity has provided this assistance without charge to the Company. Should the Company continue to utilize Modevity's services, we expect to be charged at market rates for such assistance. Independent of these services provided by Modevity, the Company has received a proposal from and is in discussionshad an agreement with Olympic Media, a company founded by Ryan Coyne, the son of James Coyne, a former Board Member for direct to createconsumer advertising. The Company incurred $13 of expense, over a nine month period, and executeno longer uses the service.
Note 16
Commitments:
On September 28, 2018, the Company entered into a focused tactical planSublease Agreement (the "Sublease") with the Luigi Bormioli Corporation ("Bormioli") to leverage new and existing digital assets across social and digital platforms to drive psoriasis and vitiligo sufferers tosublease approximately 8,513 square feet of space of an office building located at 5 Walnut Grove Drive, Horsham, PA 19044 for the Company's website and call centernew headquarters location. The Company's current lease for conversion to new patient appointments. Asits headquarters expires on November 30, 2018. Bormioli is the prime tenant of the date hereof, nopremises in a prime lease agreement has been reached with Olympic MediaRVOP, LLC. The Sublease term commences on November 15, 2018 and no services have been providedexpires on January 31, 2023, with the Company having the option of extending the term for one additional term of two years. The Sublease contains certain protections for the Company in the event of a default by Olympic Media.Bormioli under the prime lease.
The Company has entered into various non-cancelable operating lease agreements for real property and threeseveral minor operating leases for personal property. Thesethese arrangements expire at various dates through 2019. As ofJanuary 2023. Rent expense was $110 and $332 for the three and nine months ended September 30, 2018, respectively, and $111 and $338 for the three and nine months ended September 30, 2017, aggregaterespectively. The future annual minimum payments due under the Company's lease obligationsthese leases are as follows:
Year, | ||||
| 2017 (remaining three months) | $ | 113 | ||
| 2018 | 429 | |||
| 2019 | 160 | |||
| Total | $ | 702 | ||
| Year Ending December 31, | |||
| 2018 | 92 | ||
| 2019 | 352 | ||
| 2020 | 213 | ||
| 2021 | 220 | ||
| 2022 | 227 | ||
| Thereafter | 17 | ||
The following discussion of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and notes to condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. These forward-looking statements include, but are not limited to, statements about the plans, objectives, expectations and intentions of STRATA Skin Sciences, Inc., a Delaware corporation (referred to in this Report as "we," "us," "our," "STRATA," "STRATA Skin Sciences" or "registrant") and other statements contained in this Report that are not historical facts. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that characterize our business. In particular, we encourage you to review the risks and uncertainties described in Item 1A "Risk Factors" included elsewhere in this report, in our Annual Report on Form 10-K for the year ended December 31, 2016.2017. These risks and uncertainties could cause actual results to differ materially from those projected in forward-looking statements contained in this report or implied by past results and trends. Forward-looking statements are statements that attempt to forecast or anticipate future developments in our business, financial condition or results of operations and statements — see "Cautionary Note Regarding Forward-Looking Statements" that appears at the end of this discussion. These statements, like all statements in this report, speak only as of their date (unless another date is indicated), and we undertake no obligation to update or revise these statements in light of future developments.
The following financial data, in this narrative, are expressed in thousands, except for the earnings per share.
Introduction, Outlook and Overview of Business Operations
STRATA Skin Sciences Inc. ("STRATA" or "we" or the "Company") is a medical technology company focused onin Dermatology and Plastic Surgery dedicated to developing, commercializing and marketing innovative products for the therapeutic and aesthetic dermatology market. STRATA salestreatment of dermatologic conditions. Its products include the following products: XTRAC®XTRAC® excimer laser and VTRAC® excimerVTRAC® lamp systems utilized in the treatment of psoriasis, vitiligo and various other skin conditions; and the STRATAPEN™ MicroSystems, a micropigmentation device; and Nordlys, a multi-technology aesthetic laser deviceSTRATAPEN® MicroSystem, marketed specifically for treating vascular and pigmented lesions.the intended use of micropigmentation.
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 September 30, 2017,2018, there were 776746 XTRAC systems placed in dermatologists' offices in the United States under our dermatology recurring revenueprocedure model, updown from 760776 at the end of September 30, 2016.2017. 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's use for psoriasis is covered by nearly all major insurance companies, including Medicare. The VTRAC Excimer Lamp system, offered internationally in addition to the XTRAC, provides targeted therapeutic efficacy demonstrated by excimer technology with the simplicity of design and reliability of a lamp system. There are approximately 7.5 million people in the United States and up to 125 million people worldwide suffering from psoriasis, and 1% to 2% of the world's population suffers from vitiligo. In 2016,2017, over 351,000335,000 XTRAC laser treatments were performed on approximately 22,00021,000 patients in the United States.
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.STRATAPEN. This three-year agreement allows for two one yearone-year extensions.
During 2017, the Company entered into an agreement to license the Nordlys product line from Ellipse A/S. In 2018, following the financing, the Company determined we would no longer market the line and the agreement was terminated. For 2017 quarterly sales of the Nordlys product line were $0, $391, $118, $639 for the first through fourth quarters of 2017, respectively. For 2018 quarterly sales were $218, $59 and $57 for the first through third quarters of 2018, respectively.
Key Technology
| • | XTRAC® Excimer Laser. XTRAC received FDA clearance in 2000 and has since become a widely recognized treatment among dermatologists for psoriasis and other skin diseases. The XTRAC System delivers ultra-narrowband ultraviolet B ("UVB") light to affected areas of skin. Following a series of treatments typically performed twice weekly, psoriasis remission can be achieved, and vitiligo patches can be re-pigmented. XTRAC is endorsed by the National Psoriasis Foundation, and its use for psoriasis is covered by nearly all major insurance companies, including Medicare. We estimate that more than half of all major insurance companies now offer reimbursement for vitiligo as well, a figure that is increasing. | |
| • | In the third quarter of 2018, we announced the FDA granted clearance for our Multi Micro Dose (MMD) tip for our XTRAC excimer laser. The MMD Tip accessory is indicated for use in conjunction with the XTRAC laser system to filter the Narrow Band UVB ("NB-UVB") light at delivery in order to calculate and individualize the maximum non-blistering dose for a particular patient. | |
| • | In the third quarter of 2018, we announced the launch of our S3, the next generation XTRAC. The S3 is smaller, faster and has a smart user interface. | |
| • | 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. | |
| • | ||
Equity Financing
On April 6, 2017,March 30, 2018, we entered into multiple agreements in order to obtain $17,000 of equity financing from the following sources:
On May 29, 2018, we completed the reverse splitsale and issuance (the "Financing") of its15,740,741 shares of the Company's common stock, subject to customary post-closing adjustments, to Accelmed Growth Partners L.P. ("Accelmed"), Broadfin Capital ("Broadfin"), Sabby Management ("Sabby"), Gohan Investments, Ltd. and Dr. Dolev Rafaeli, our President and Chief Executive Officer, for gross proceeds of $17.0 million at a per share price of $1.08. The various stock purchase agreements were entered into on March 30, 2018 (collectively, the "Agreements").
We incurred $2,336 of costs related to the Financing during the nine months ended September 30, 2018, which have been offset against the proceeds in the ratioaccompanying financial statement. These costs included $500 to Accelmed for legal fees, consulting, due diligence and administrative costs related to the stock purchase agreement. In addition, we incurred placement agent fees in the amount of 1-for-5. Our common stock began trading at the market opening on April 7, 2017 on a split-adjusted basis. The reverse split is intended to enable us to increase our marketability to institutional investors and to maintain our listing on the Nasdaq Global Market,$1,359, among other benefits. As a resultcosts directly related to the financing.
In further consideration of entering into their respective stock purchase agreements, Sabby and Broadfin have each entered into separate agreements restricting their abilities to sell their holdings (the "Leak-Out Agreements"). Under the terms of each of the stock split, we now have 2,183,243respective Leak-Out Agreements, the stockholder has agreed that from the later of (a) the date that the approval by the shareholders of the transactions is deemed effective and (b) the closing of the transactions contemplated pursuant to the SPA, the stockholder shall not sell dispose or otherwise transfer, directly or indirectly, (including, without limitation, any sales, short sales, swaps or any derivative transactions that would be equivalent to any sales or short positions) any shares of common stock outstanding, taking into accountof the rounding upCompany held by the stockholder on the date hereof or issuable to the stockholder upon conversion of fractional shares.
shares of the Company's Series C Preferred Stock held by the stockholder on the date hereof, (a) if prior to April 1, 2019, at a price per share of the Company's common stock less than $1.296, subject to adjustment for reverse and forward stock splits and the like, or (b) thereafter, at a price per share reflecting less than the price set forth on the schedule in the Leak-Out Agreements subject to adjustment for reverse and forward stock splits and the like, unless,(1) in the case of either clauses (a) or (b), otherwise approved by the Company's Board of Directors, (2) in the case of clause (b), under a shelf prospectus or such other controlled offering as may be agreed to by the Principal Stockholders (as defined in the Stock Purchase Agreement) or (3) in the case of either clauses (a) or (b), in a sale pursuant to which any other stockholder(s) of the Company are offered the same terms of sale, including in a merger, consolidation, transfer or conversion involving the Company or any of its subsidiaries.
In addition, Sabby and Broadfin delivered to us a voting undertaking obligating Sabby and Broadfin to increase their respective "blocker" to 9.99% prior to the record date for the meeting of the shareholders.
On May 23, 2018, we held a special meeting of stockholders where the stockholders approved, pursuant to Nasdaq Listing Rules 5635(b) and (d), the issuance of an aggregate of 15,740,741 shares of the Company's common stock pursuant to refinancing, plus all additional shares that may be issued pursuant to the Retained Risk Provisions, as defined in the agreements
The investors in the Financing may receive additional shares, in the event of certain contingencies, as described in the Stock Purchase Agreements. At the closing, the Company determined certain contingencies had been met and in July 2018, the Company issued 153,004 shares associated with those contingencies. Since the share amounts were known at the close of the financing the Company included these shares in Common Stock Issuable as of September 30, 2018. There are additional contingencies included in the SPA's but the Company has determined they are not probable or estimable at this time.
In connection with the Agreements, we entered into a Registration Rights Agreement (the "Registration Rights Agreement") with the Investors to prepare and file with the SEC a registration statement covering the shares of common stock issued in the Financing. The Company filed a registration statement on Form S-3, which became effective on September 24, 2018.
MidCap Credit Facility
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 in 2015. The terms of the credit facility have been amended to impose less restrictive covenants and lower prepayment and exit fees for the Company. The Amendment modified the principal payments payable under the Credit Agreement including a period of 18 months where there are no principal payments due. The interest rate on the credit facility is one-month LIBOR plus 7.25%. Principal payments begin December 2019. Principal and interest payments beginning December 2019 are $252. The Company was in compliance with the covenant as of September 30, 2018.
Critical Accounting Policies and Estimates
There have been no changes to our critical accounting policies in the three and nine months ended September 30, 2017.2018 except for the adoption of the new revenue recognition standard as discussed under Adoption of New Accounting Standards within Note 1 to the condensed consolidated financial statements. Critical accounting policies and the significant estimates made in accordance with such policies are regularly discussed with our Audit Committee. Those policies are discussed under "Critical Accounting Policies" in our "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7, as well as in our consolidated financial statements and the footnotes thereto for the fiscal year ended December 31, 2016,2017, as filed with the SEC with our Annual Report on Form 10-K filed on March 13, 2017.April 2, 2018.
Results of Operations (The following financial data, in this narrative, are expressed in thousands, except for prices per treatment and the earnings per share.)
Sales and Marketing
As of September 30, 2018, our sales and marketing personnel consisted of 50 full-time positions, inclusive of 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.
Revenues
The following table presents revenues from our three segments for the periods indicated below:
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
| Dermatology Recurring Procedures | $ | 5,720 | $ | 6,205 | $ | 17,653 | $ | 17,826 | $ | 5,556 | $ | 5,525 | $ | 15,221 | $ | 17,051 | ||||||||||||||||
| Dermatology Procedures Equipment | 1,751 | 1,550 | 5,784 | 5,174 | 2,336 | 1,751 | 6,671 | 5,784 | ||||||||||||||||||||||||
| Dermatology Imaging | 9 | 12 | 17 | 126 | - | 9 | - | 17 | ||||||||||||||||||||||||
| Total Revenues | $ | 7,480 | $ | 7,767 | $ | 23,454 | $ | 23,126 | $ | 7,892 | $ | 7,285 | $ | 21,892 | $ | 22,852 | ||||||||||||||||
Dermatology Recurring Procedures
Recognized recurring treatment revenue for the three months ended September 30, 20172018 was $5,720,$5,556, which approximates 82,000we estimate is approximately 70,000 treatments, with prices between $65 to $95 per treatment compared to recognized recurring treatment revenue for the three months ended September 30, 20162017 of $6,205,$5,525, which approximates 89,000we estimate is approximately 69,000 treatments, with prices between $65 to $95 per treatment. Recognized treatment revenue for the nine months ended September 30, 20172018 was $17,653,$15,221, which approximates 252,000190,000 treatments, with prices between $65 to $95 per treatment compared to recognized treatment revenue for the nine months ended September 30, 20162017 of $17,826,$17,051, which approximates 244,000213,000 treatments, with prices between $65 to $95 per treatment.
Increases in procedures are dependent upon building market acceptance through marketing programs with our physician partners and their patients to show that the XTRAC procedures will be of clinical benefit and will be generally reimbursed by insurers. We believe that several factors have limitedhad a negative 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 have initiated a direct to patient program for XTRAC advertising in the United States, targeted attargeting psoriasis and vitiligo patients through a variety of media including television and radioradio; and through our use of social media such as FaceBook.Facebook and Twitter. We monitor the results of our advertising expenditures in this area to reach the more than 10 million patients in the United States afflicted with these diseases. DuringIn the last three months ended September 30,quarters of 2017 and the first quarter of 2018, in an effort to conserve cash, we began to build a larger digital media presence while reducing our expenditures in both television and radio. During this quarter we had noreduced the amount spent on the direct to patient mediaprograms. This caused a decrease in the patient traffic to our dermatologist partner clinics, which, resulted in turn, caused a decline in revenues, butrecurring patient revenues. With the equity financing completed in May 2018, we are ramping up new digital marketing strategiesexpect to continue to increase spending in the fourth quarterdirect to stimulate patient referralsprograms to drive patients to our partner clinics to increase recurring revenue. The increase in these programs precedes the recurring revenue as there is a lag between advertising and related revenues.patients receiving treatment which we estimated to be three to nine months.
Dermatology Procedures Equipment
For the three months ended September 30, 20172018, dermatology equipment revenues were $1,751.$2,336. Internationally, we sold 1634 systems for the three months ended September 30, 2017, (52018, (18 XTRAC and 1116 VTRAC). Domestically, we sold six4 XTRAC systems for the three months ended September 30, 2017.2018. For the three months ended September 30, 20162017 dermatology equipment revenues were $1,550.$1,751. Internationally, we sold 19 systems for the three months ended September 30, 2016,2017 (9 XTRAC and 10 VTRAC). During the quarter and nine months ended September 30, 2018 customers in Asia purchased a higher number of machines, primarily in anticipation of tariffs. Future quarterly revenue may be impacted by higher than historical purchases.
For the nine months ended September 30, 2018, dermatology equipment revenues were $6,671. Internationally, we sold 78 systems for the nine months ended September 30, 2018, (55 XTRAC and 23 VTRAC). Domestically, we sold 12 XTRAC systems for the nine months ended September 30, 2018. For the nine months ended September 30, 2017 dermatology equipment revenues were $5,784. Internationally, we sold 4650 systems for the nine months ended September 30, 2017, (31 XTRAC and 19 VTRAC). Domestically, we sold 17 XTRAC systems
The comparability of the periods presented are impacted by the sales of the terminated Nordlys product line. Our overall sales for the three months ended September 30, 2018 and 2017, excluding Nordlys, were $7,835 and $7,165, respectively and $21,558 and $22,343 for the nine months ended September 30, 2017. For the nine months ended September 30, 2016 dermatology equipment revenues were $5,174. Internationally, we sold 65 systems for the nine months ended September 30, 2016, (39 XTRAC2018 and 26 VTRAC).
Cost of Revenues
The following table illustrates cost of revenues from our threetwo business segments for the periods listed below:
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
| Dermatology Recurring Procedures | $ | 2,084 | $ | 2,326 | $ | 5,969 | $ | 6,723 | $ | 1,757 | $ | 2,084 | $ | 5,587 | $ | 5,969 | ||||||||||||||||
| Dermatology Procedures Equipment | 967 | 607 | 2,988 | 2,641 | 1,292 | 967 | 4,255 | 2,988 | ||||||||||||||||||||||||
| Dermatology Imaging | - | 109 | 225 | 267 | - | 225 | - | 225 | ||||||||||||||||||||||||
| Total Cost of Revenues | $ | 3,276 | $ | 3,042 | $ | 9,182 | $ | 9,631 | $ | 3,049 | $ | 3,276 | $ | 9,842 | $ | 9,182 | ||||||||||||||||
Gross Profit Analysis
The following tables analyze changes in our gross margin, by segment, for the periods presented below:
Company Profit Analysis | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenues | $ | 7,480 | $ | 7,767 | $ | 23,453 | $ | 23,126 | ||||||||
| Percent (decrease) increase | (3.7 | %) | 1.4 | % | ||||||||||||
| Cost of revenues | 3,276 | 3,070 | 9,182 | 9,631 | ||||||||||||
| Percent increase (decrease) | 6.7 | % | (4.7 | %) | ||||||||||||
| Gross profit | $ | 4,204 | $ | 4,697 | $ | 14,271 | $ | 13,495 | ||||||||
| Gross margin percentage | 56.2 | % | 60.5 | % | 60.9 | % | 58.4 | % | ||||||||
| Company Profit Analysis | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Revenues | $ | 7,892 | $ | 7,285 | $ | 21,892 | $ | 22,852 | ||||||||
| Percent increase (decrease) | 8.3 | % | (4.2 | %) | ||||||||||||
| Cost of revenues | 3,049 | 3,276 | 9,842 | 9,182 | ||||||||||||
| Percent (decrease) increase | (6.9 | %) | 7.2 | % | ||||||||||||
| Gross profit | $ | 4,843 | $ | 4,009 | $ | 12,050 | $ | 13,670 | ||||||||
| Gross margin percentage | 61.4 | % | 55.0 | % | 55.0 | % | 59.8 | % | ||||||||
Gross profit increased to $4,843 for the three months ended September 30, 2018 from $4,009 during the same period in 2017. As a percent of revenue, the gross margin was 61.4% for the three months ended September 30, 2018 as compared to 55.0% for the same period in 2017. Gross profit decreased to $12,050 for the nine months ended September 30, 2018 as compared to $13,670 for the same period in 2017. As a percent of revenue, the gross margin was 55.0 % as compared to 59.8% for the same period in 2017.
Dermatology Recurring Procedures | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenues | $ | 5,720 | $ | 6,205 | $ | 17,653 | $ | 17,826 | ||||||||
| Percent decrease | (7.8 | %) | (1.0 | %) | ||||||||||||
| Cost of revenues | 2,084 | 2,162 | 5,969 | 6,723 | ||||||||||||
| Percent decrease | (3.6 | %) | (11.2 | %) | ||||||||||||
| Gross profit | $ | 3,636 | $ | 4,043 | 11,684 | $ | 11,103 | |||||||||
| Gross margin percentage | 63.6 | % | 65.2 | % | 66.2 | % | 62.3 | % | ||||||||
| Dermatology Recurring Procedures | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Revenues | $ | 5,556 | $ | 5,525 | $ | 15,221 | $ | 17,051 | ||||||||
| Percent increase (decrease) | 0.5 | % | (10.7 | %) | ||||||||||||
| Cost of revenues | 1,757 | 2,084 | 5,587 | 5,969 | ||||||||||||
| Percent decrease | (15.6 | %) | (6.40 | %) | ||||||||||||
| Gross profit | $ | 3,799 | $ | 3,441 | $ | 9,634 | $ | 11,082 | ||||||||
| Gross margin percentage | 68.4 | % | 62.3 | % | 63.3 | % | 65.0 | % | ||||||||
The primary reason for the changeincrease in gross profit for the three months ended September 30, 2017, compared to2018 is the same period in 2016, was due to a decline in media presence, which resulted in a decline in treatments, but we are ramping up new digital marketing strategiesresult of lower depreciation expense on lasers placed in the fourth quarter to stimulate patient referrals and related revenues.field after reaching their full depreciated value. The primary reason for the changedecrease in gross profit for the nine months ended September 30, 2017, compared to the same period in 2016, was2018 is due to technical improvementsa lower number of treatments in the product which reduced gas consumption and service repairs for the nine months ended September 30, 2017.as a result of lower advertising spend in the previous year. Incremental treatments delivered on existing equipment incur negligible incremental costs, so increases and/orand decreases in those treatments have an impact on the gross margin.margins.
Dermatology Procedures Equipment | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
| Revenues | $ | 1,751 | $ | 1,550 | $ | 5,784 | $ | 5,174 | $ | 2,336 | $ | 1,751 | $ | 6,671 | $ | 5,784 | ||||||||||||||||
| Percent increase | 13.0 | % | 11.8 | % | 33.4 | % | 15.3 | % | ||||||||||||||||||||||||
| Cost of revenues | 967 | 877 | 2,988 | 2,641 | 1,292 | 967 | 4,255 | 2,988 | ||||||||||||||||||||||||
| Percent increase | 10.3 | % | 13.1 | % | 33.6 | % | 42.4 | % | ||||||||||||||||||||||||
| Gross profit | $ | 784 | $ | 673 | $ | 2,796 | $ | 2,533 | $ | 1,044 | $ | 784 | $ | 2,415 | $ | 2,796 | ||||||||||||||||
| Gross margin percentage | 44.8 | % | 43.4 | % | 48.3 | % | 49.0 | % | 44.7 | % | 44.8 | % | 36.2 | % | 48.3 | % | ||||||||||||||||
The primary reason for the change in gross profit for the three and nine months ended September 30, 2017,2018 for dermatology procedures equipment, compared to the same period in 2017, was the write off of the Nordlys inventory and fixed assets as we will no longer be selling this product line. Therefore, the Company wrote the assets down to their net realizable value. In addition, the geographic mix unfavorably impacted the margins as we sold less in domestic sales in the third quarter of 2018 as compared to the same period in 2017. Generally, the average selling prices are higher domestically than internationally.
The comparability of the periods in 2016, was product mix. The gross margin change is affectedpresented are impacted by the mixmargins of products sold as XTRAC systems have a lower gross margin than parts. Additionally, domestic XTRAC system sales andthe terminated Nordlys system sales have a greater gross margin than international sales.
Dermatology Imaging
In 2017 compared to the same periods in 2016, was the fact that we havehad discontinued our efforts to develop the MelaFind System and have discontinued are in the process of discontinuing our efforts to develop and commercialize it. We no longer have the resources to continue to support the device and our inventory of spare parts is being offered for sale to customers on a first-come, first-serve basis. For the three months ended September 30, 2017, we recorded a $216 reserve for obsolescence related to the inventory for the MelaFind product
Engineering and Product Development
Engineering and product development expenses for the three months ended September 30, 2017 increased2018 decreased to $410$224 from $382$411 for the three months ended September 30, 2016.2017. The decrease was primarily due to employee severance costs incurred during the three months ended September 30, 2017 associated with discontinuing research and development efforts for dermatology imaging devices. Engineering and product development expenses for the nine months ended September 30, 20172018 decreased to $1,308$831 from $1,541$1,309 for the nine months ended September 30, 2016.2017. The decreases were duedecrease relates to having ended the ongoinglower compensation and project costs in 2018, associated with discontinuing research and development efforts for the MelaFind technology on product enhancements during the nine months ended September 30, 2016.dermatology imaging devices.
Selling and Marketing Expenses
For the three months ended September 30, 2017,2018, selling and marketing expenses decreasedwere $2,487 as compared to $2,687 from $2,840$2,492 for the three months ended September 30, 2016.2017. Sales and marketing expenses were flat for the comparable quarter, however, there was a decrease in compensation, travel and amortization of distributor rights as a result of the decision to discontinue selling the Nordlys product line in 2017 partially offset by higher commissions. For the nine months ended September 30, 2017,2018 selling and marketing expenses decreased to $8,914$7,737 from $10,073$8,312 for the nine months ended September 30, 2016.2017. The decreases weredecrease was primarily related to the planned reduction ofin expense in TVtelevision and radio media as we transition over to a campaign focused more of anon internet and social media campaign.media. The Company expects to carefully manage increase to the direct to consumer advertising in the coming quarters.
General and Administrative Expenses
For the three months ended September 30, 2017,2018, general and administrative expenses decreasedincreased to $1,678$2,184 from $1,880$1,678 for the three months ended September 30, 2016.2017. The increase in the three months ended September 30, 2018 is primarily the result of higher stock-based compensation, other compensation, legal expense, partially offset by lower investor relations costs. For the nine months ended September 30, 2017,2018 general and administrative expenses decreasedincreased to $4,999$6,319 from $5,882$4,999 for the nine months ended September 30, 2016.2017. The decreaseincrease for the nine months ended September 30, 2017 was primarily due to:associated with an increase in severance of approximately $400 associated with the former Chief Executive Officer who became our interim Chief Financial Officer before his departure, additional stock-based compensation of $434, additional franchise and sales taxes for certain states, insurances and consulting and legal costs.
Interest Expense, Net
Interest expense for the three months ended September 30, 20172018 was $1,343$239 compared to $1,175$1,343 in the three months ended September 30, 2016.2017. Interest expense for the nine months ended September 30, 2017 was $4,265 compared2018 decreased to $3,571 in the nine months ended September 30, 2016. Interest expense during all periods relate to the 4% senior convertible debentures issued in July 2014 and the 2.25% senior convertible debentures issued on June 22, 2015, which include amortization of the related debt discount and deferred financing fees, which are amortized using the effective interest method. The periods also include interest expense related to the term debt issued in December 2015. Additionally, approximately $197 of interest expense was recognized as a result of the conversion of $262 of debentures into common stock during$930 from $4,264 for the nine months ended September 30, 2017. Additionally, approximately $203 ofThe decrease in interest expense was recognized as a result offor the conversion of $248 of debentures into common stock during thethree and nine months ended September 30, 2016.2018 related to the convertible debentures that were converted into Series C Preferred Stock in September 2017 and are no longer outstanding.
In accordance with FASB ASC 470, "Debt – Debt with Conversion and Other Options" ("ASC Topic 470") and FASB ASC 820, Fair Value Measurements and Disclosures ("ASC Topic 820"), we measuredre-measured the fair value of our warrants that were recorded at their fair value and recognized as liabilities as of September 30, 2017,2018, of $79 and recorded $81 and $77$101 in other incomeexpense for the three and nine months ended September 30, 2018.
Income Taxes
Income tax benefit of $80 for the three months ended September 30, 2018 and an expense of $38 and $181 for the three and nine months ended September 30, 2017, respectively. We measured the fair value of these warrants as of September 30, 2016, and recorded $132 and $5,316 in other income for the three and nine months ended September 30, 2016, respectively.
Non-GAAP adjusted 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 GAAP, and should not be considered in isolation or as a substitute for analysis of the Company's results as reported under 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, GAAP measures. These non-GAAP measures are provided to enhance readers' overall understanding of our current financial performance and to provide further information for comparative purposes.
This supplemental presentation should not be construed as an inference that the Company's future results will be unaffected by similar adjustments to Net Earnings (Loss) determined in accordance with 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 report is as follows:
For the Three Months Ended September 30, | ||||||||||||
| 2017 | 2016 | Change | ||||||||||
| Net loss | $ | (13,671 | ) | $ | (1,509 | ) | $ | (12,162 | ) | |||
| Adjustments: | ||||||||||||
| Income taxes | 38 | 64 | (26 | ) | ||||||||
| Depreciation and amortization * | 1,602 | 1,521 | 81 | |||||||||
| Interest expense, net | 564 | 537 | 27 | |||||||||
| Non-cash interest expense | 779 | 638 | 141 | |||||||||
| Non-GAAP EBITDA | (10,688 | ) | 1,251 | (11,939 | ) | |||||||
| Stock-based compensation expense | 63 | 116 | (53 | ) | ||||||||
| Change in fair value of warrants | (81 | ) | (132 | ) | 51 | |||||||
| Loss on extinguishment of debentures | 11,799 | - | 11,799 | |||||||||
| Non-GAAP adjusted EBITDA | $ | 1,093 | $ | 1,235 | $ | (142 | ) | |||||
Reconciliation of reported net loss to non-GAAP adjusted EBITDA
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Net Loss | $ | (290 | ) | $ | (13,671 | ) | $ | (3,868 | ) | $ | (17,111 | ) | ||||
| Adjustments: | ||||||||||||||||
| Depreciation/amortization* | 1,253 | 1,602 | 3,993 | 4,811 | ||||||||||||
| Income taxes | (80 | ) | 38 | - | 181 | |||||||||||
| Interest expense | 239 | 1,343 | 930 | 4,264 | ||||||||||||
| Non-GAAP EBITDA | 1,122 | (10,688 | ) | 1,055 | (7,855 | ) | ||||||||||
| Stock compensation | 366 | 63 | 570 | 136 | ||||||||||||
| Change in fair value of warrants | 79 | (81 | ) | 101 | (77 | ) | ||||||||||
| Write-off of Nordlys inventory & assets | - | - | 280 | - | ||||||||||||
| Loss on extinguishment of debt | - | 11,799 | - | 11,799 | ||||||||||||
| Impairment of distributors rights agreement | - | - | (11 | ) | - | |||||||||||
| Non-GAAP adjusted EBITDA | $ | 1,567 | $ | 1,093 | $ | 1,995 | $ | 4,003 | ||||||||
* Includes depreciation onof lasers placed-in-service of $1,078$838 and $1,040$2,694 for the three months ended September 30, 2017 and 2016, respectively.
For the Nine Months Ended September 30, | ||||||||||||
| 2017 | 2016 | Change | ||||||||||
| Net loss | $ | (17,111 | ) | $ | (2,448 | ) | $ | (14,663 | ) | |||
| Adjustments: | ||||||||||||
| Income taxes | 181 | 191 | (10 | ) | ||||||||
| Depreciation and amortization * | 4,811 | 4,844 | (33 | ) | ||||||||
| Interest expense, net | 1,752 | 1,604 | 148 | |||||||||
| Non-cash interest expense | 2,512 | 1,967 | 545 | |||||||||
| Non-GAAP EBITDA | (7,855 | ) | 6,158 | (14,013 | ) | |||||||
| Stock-based compensation expense | 136 | 401 | (265 | ) | ||||||||
| Change in fair value of warrants | (77 | ) | (5,316 | ) | 5,239 | |||||||
| Loss on extinguishment of debt | 11,799 | - | 11,799 | |||||||||
| Non-GAAP adjusted EBITDA | $ | 4,003 | $ | 1,243 | $ | 2,760 | ||||||
$1,078 and $3,229 for the three and nine months ended September 30, 2017.
Liquidity and Capital Resources
As of September 30, 20172018, we had $3,927$16,983 of working capital compared to $4,619$3,080 as of December 31, 2016.2017. Cash and cash equivalents were $3,127$15,888 as of September 30, 2017,2018, as compared to $3,928$4,069 as of December 31, 2016.
On December 30, 2015, the Companywe entered into a $12,000 credit facility pursuant to a Credit and Security Agreement (the "Agreement") and related financing documents with MidCap Financial Trust ("MidCap") and the lenders listed therein. The Company'sOur obligations under the credit facility are secured by a first priority lien on all of the Company'sour assets. Other financing documents included subordination agreements and other amendments with the Company's existing debenture holders from its 2014 and 2015 financings.
On June 6, 2017, the CompanyMay 29, 2018, we entered into a Securities ExchangeFourth Amendment to Credit and Security Agreement (the "Agreement") with the holders of its 2.25% Senior Series A Secured Convertible Debentures due June 30, 2021 and 4% Senior Secured Convertible Debentures due July 30, 2021,MidCap, pursuant to which the holders have agreed to exchange all of such outstanding debentures into shares of newly created Series C Convertible Preferred Stock. The eliminationCompany repaid $3.0 million in principal of the senior secured debt will also eliminate the Company's obligation to pay approximately $4,000 of interest payments over the next four years.existing $10.6 million credit facility established with MidCap in 2015. The stockholders approved the exchange at the stockholders' meeting held on September 14, 2017. The closing of the exchange was effective on September 20, 2017 and $40,465 of principle was exchanged for 40,482 shares of Series C Preferred Stock.
On March 30, 2018 we entered into a Stock generally bestowPurchase Agreement (the "Accelmed SPA") with Accelmed Growth Partners ("Accelmed") investing $13 million into the same rights to each holder as such holder would receive if they are common stock shareholder and are not redeemable by the holders, except that the Series C Convertible Preferred Stock shares have no voting rights. Each share of Series C Convertible Preferred Stock has a stated value of $1,000 and is convertible intoCompany in exchange for 12,037,037 shares of our common stock. In connection with the proposed Accelmed investment, we entered into two separate stock at a conversion price equal to $2.69purchase agreements on March 30, 2018 for a totalapproximately $1 million with our current shareholders, Broadfin Capital ("Broadfin") and Sabby Management ("Sabby"). Upon closing of approximately 15,099,000these transactions, each of Sabby and Broadfin received 925,926 shares of our common stock. Two separate subscription agreements were also executed on March 30, 2018 for $1 million each to purchase 925,926 shares of our common stock. On May 23, 2018 the shareholders approved the transaction and we received $14,664 net proceeds after expenses for legal, due diligence and banking fees. See Note 2 for additional detail.
Net cash and cash equivalents provided by operating activities was $1,795 for the nine months ended September 30, 2018 compared to cash provided by operating activities of $2,246 for the nine months ended September 30, 2017 compared to2017. The cash used inflows provided by operating activities of $1,084 for the nine months ended September 30, 2016. The2018 were unfavorably impacted by a decrease in accounts payable from a carryover of payables from 2017, an increase in operatingdeferred revenue and an increase in prepaid insurance partially offset by a higher cash flows iscollections in the third quarter as a result of higher sales to customers in Asia, primarily attributed to overall reductionin anticipation of operating expenses of approximately $2,723 during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016.tariffs. Future quarterly revenue and associated collections may be impacted by higher than historical purchases.
Net cash and cash equivalents used in investing activities was $1,283 for the nine months ended September 30, 2018 compared to cash used in investing activities of $1,886 for the nine months ended September 30, 2017 compared to2017. The primary reason for the decrease in cash used in investing activities of $467in 2018 as compared to 2017 was due to more lasers placed in service during 2017 and larger property and equipment purchases in the nine months ended September 30, 2017.
Net cash and cash equivalents provided by financing activities was $11,307 for the nine months ended September 30, 2016. The primary reason for the change was the increased investment in lasers placed in service during the 2017 period.
Commitments and Contingencies
On September 28, 2018, the Company entered into a Sublease Agreement (the "Sublease") with the Luigi Bormioli Corporation ("Bormioli") to cash provided by financing activitiessublease approximately 8,513 square feet of $1,201space of an office building located at 5 Walnut Grove Drive, Horsham, PA 19044 for the nine months ended September30, 2016. InCompany's new headquarters location. The Company's current lease for its headquarters expires on November 30, 2018. Bormioli is the nine months endedprime tenant of the premises in a prime lease agreement with RVOP, LLC. The Sublease term commences on November 15, 2018 and expires on January 31, 2023, with the Company having the option of extending the term for one additional term of two years. The Sublease contains certain protections for the Company in the event of a default by Bormioli under the prime lease.
The Sublease also contains customary terms and conditions for a real property sublease as well as default provisions allowing Bormioli to terminate the Sublease in the event of an unremedied breach by the Company.
Off-Balance Sheet Arrangements
At September 30, 2017,2018, we had repayments on the term debt of $857. In the nine months ended September 30, 2016, we drew down $1,500 on a long-term debt facility.no off-balance sheet arrangements.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the "safe harbor" created by those sections. Forward-looking statements are based on our management's beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "could," "would," "expect," "plan," "anticipate," "believe," "estimate," "project," "predict," "intend," "potential" and similar expressions intended to identify forward-looking statements. These statements, including statements relating to our anticipated revenue streams, and our belief that the cash flow generated by these businesses will be sufficient to finance our operations, develop social media and marketing campaigns, and the Company's ability to build a leading franchise in dermatology and aesthetics involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in our Annual Report on Form 10-K for the year ended December 31, 2016,2017, and in this Quarterly Report on Form 10-Q in greater detail under Item 1A. "Risk Factors." Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by our cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
Our exposure to market risk is confined to our cash and cash equivalents, and short-term investments.equivalents. We invest in high-quality financial instruments, primarily money market funds, with the average effective duration of the portfolio within one year which we believe are subject to limited credit risk. We currently do not hedge interest rate exposure. Due to the short-term nature of our investments, we do not believe that we have any material exposure to interest rate risk arising from our investments. We are exposed to credit risks in the event of default by the financial institutions or issuers of investments in excess of FDIC insured limits. We perform periodic evaluations of the relative credit standing of these financial institutions and limit the amount of credit exposure with any institution.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures, (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")), as of JuneSeptember 30, 2017.2018. Based on that evaluation, management has concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level described below.
Limitations on the Effectiveness of Controls.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within an organization have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were effective to provide reasonable assurance that the objectives of our disclosure control system were met.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting in our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
From time to time in the ordinary course of our business, we may be involved in certain other legal actions and claims, 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 not aware of any legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.
A description of the risks associated with our business, financial conditions and results of operations is set forth in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 20162017 and filed with the SEC on March 13, 2017.April 2, 2018. There have been no material changes to these risks during the three and nine months ended September 30, 2017.2018.
ITEM 2. Unregistered salesSales of equity securitiesEquity Securities and useUse of proceedsProceeds
None.
None.
None.
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| 32.1* | ||
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Schema | |
| 101.CAL | XBRL Taxonomy Calculation Linkbase | |
| 101.DEF | XBRL Taxonomy Definition Linkbase | |
| 101.LAB | XBRL Taxonomy Label Linkbase | |
| 101.PRE | XBRL Taxonomy Presentation Linkbase |
| * | The certifications attached as Exhibit 32.1 accompany this Quarterly Report on Form 10-Q pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed "filed" by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. |
Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
STRATA SKIN SCIENCES, INC. | |||
| Date November 14, | By: | /s/ | |
| Name | |||
| Title President |
| Date November 14, | By: | /s/ | |
| Name | |||
| Title Chief Financial Officer |
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