UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10 - Q

ý[X]          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended SeptemberJune 30, 20172019

OR

☐◻          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to ___________

Commission File Number 0-51481


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 Lakeside5 Walnut Grove Drive, Suite 100,140, Horsham, Pennsylvania 19044
(Address of principal executive offices, including zip code)

(215) 619-3200
(Registrant's telephone number, including area code)

Securities registered under Section 12(b) of the Exchange Act:
Title of each classTrading
Symbol(s)		Name of each exchange on which registered
Common Stock, $0.001 par value per shareSSKNThe NASDAQ Stock Market LLC

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 ☐[X]

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 ☐[X]

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“large accelerated filer," "accelerated filer"“accelerated filer”, "smaller“smaller reporting company"company”, and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act.

 Large accelerated filer ☐◻ 
Accelerated filer ☐
◻		 
 Non-accelerated filer ☐[X] 
Smaller reporting company ý
[X]		 
 
Emerging growth company ☐
◻		   

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐◻  No ý[X]

The number of shares outstanding of the issuer's common stock as of November 10, 20178, 2019 was 4,076,08932,903,287 shares.
1


STRATA SKIN SCIENCES, INC.

TABLE OF CONTENTS

Part I. Financial Information:
PAGE
    
  
 
a.
31
    
 
b.
2
c.
 3

d.
4
    
 c.
e
5
    
 d.
f.
6
    
 e.
g.
7
    
 f.
Notes to Unaudited Condensed Consolidated Financial Statements
9
ITEM 2.  Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
2924
    
 3832
    
 3833
    
 
    
 3934
    
 3934
    
 3934
    
 3934
    
 3934
    
 3934
    
 4034
    
  4135
    
  E-31.1
2


PART I – Financial Information

ITEM 1.  Financial Statements

STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
      
 September 30, 2017  December 31, 2016  June 30, 2019  December 31, 2018 
ASSETS (unaudited)     (unaudited)    
Current assets:            
Cash and cash equivalents $3,127  $3,928  
$
15,941
  
$
16,487
 
Accounts receivable, net of allowance for doubtful accounts of $177 and $135, respectively  3,184   3,390 
Accounts receivable, net of allowance for doubtful accounts of $143 and $141, respectively 
3,476
  
3,393
 
Inventories  3,533   2,817  
3,607
  
2,794
 
Prepaid expenses and other current assets  209   617   
630
   
536
 
Total current assets  10,053   10,752  
23,654
  
23,210
 
              
Property and equipment, net  8,658   10,180  
4,789
  
5,301
 
Operating lease right-of-use assets, net 
1,485
  
-
 
Intangible assets, net  12,302   13,412  
8,860
  
9,765
 
Goodwill  8,803   8,803  
8,803
  
8,803
 
Other assets  48   46   
376
   
428
 
Total assets $39,864  $43,193  
$
47,967
  
$
47,507
 
              
LIABILITIES AND STOCKHOLDERS' EQUITY              
Current liabilities:              
Note payable $34  $339 
Current portion of long-term debt  1,936   1,714  
$
1,767
  
$
252
 
Accounts payable  1,907   1,853  
2,091
  
1,764
 
Other accrued liabilities  1,899   1,992  
4,748
  
4,500
 
Current portion of operating lease liabilities 
239
  
-
 
Deferred revenues  350   235   
2,292
   
2,099
 
Total current liabilities  6,126   6,133  
11,137
  
8,615
 
              
Long-term liabilities:              
Long-term debt, net  8,842   9,752  
5,699
  
7,145
 
Senior secured convertible debentures, net  -   12,028 
Warrant liability  28   105 
Deferred tax liability  539   359  
22
  
111
 
Long-term operating lease liabilities, net 
1,267
  
-
 
Other liabilities  412   97   
383
   
388
 
Total liabilities  15,947   28,474   
18,508
   
16,259
 
              
Commitment and contingencies        
Commitments and contingencies (see Note 15)      
              
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 
Series C Convertible Preferred Stock, $.10 par value, 10,000,000 shares authorized; 2,103 and 9,968 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively 
1
  
1
 
Common Stock, $.001 par value, 150,000,000 shares authorized; 32,903,287 and 29,943,086 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively 
33
  
30
 
Additional paid-in capital  251,594   225,289  
242,611
  
241,988
 
Accumulated deficit  (227,686)  (210,575)  
(213,186
)
  
(210,771
)
Accumulated other comprehensive income  2   2 
Total stockholders' equity  23,917   14,719   
29,459
   
31,248
 
Total liabilities and stockholders' equity $39,864  $43,193 
Total liabilities and stockholders’ equity
 
$
47,967
  
$
47,507
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

- 1 -

STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(unaudited)

  
For the Three Months Ended
June 30,
 
  2019  2018 
Revenues, net 
$
7,725
  
$
7,388
 
         
Cost of revenues  
2,815
   
3,549
 
         
Gross profit  
4,910
   
3,839
 
         
Operating expenses:        
Engineering and product development  
235
   
269
 
Selling and marketing  
2,958
   
2,378
 
General and administrative  
2,700
   
2,411
 
   
5,893
   
5,058
 
         
Loss from operations  
(983
)
  
(1,219
)
         
Other expense, net:        
Interest expense, net  
(145
)
  
(328
)
Change in fair value of warrant liability (see Note 1)  
-
   
(23
)
Other expenses, net  
-
   
(19
)
   
(145
)
  
(370
)
         
Loss before income taxes  
(1,128
)
  
(1,589
)
Income tax benefit (expense)  
46
   
(40
)
Net loss 
$
(1,082
)
 
$
(1,629
)
         
Loss attributable to common shares 
$
(1,007
)
 
$
(958
)
Loss attributable to Preferred Series C shares 
$
(75
)
 
$
(671
)
Loss per common share:        
Basic 
$
(0.03
)
 
$
(0.07
)
Diluted 
$
(0.03
)
 
$
(0.07
)
         
Shares used in computing loss per common share:
        
Basic  
31,359,104
   
13,734,384
 
Diluted  
31,359,104
   
13,734,384
 
 
Loss per Preferred Series C share basic and diluted
 
$
(11.94
)
 
$
(25.96
)
         
Shares used in computing loss per basic and diluted Preferred Series C Shares  
6,250
   
25,847
 




The accompanying notes are an integral part of these condensed consolidated financial statements.

3

- 2 -


STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF Operations and OPERATIONSCOMPREHENSIVE LOSS
(In thousands, except share and per share amounts)
(unaudited)


  
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)
  
For the Six Months Ended
June 30,
 
  2019  2018 
Revenues, net  $
15,208
   $
14,126
 
         
Cost of revenues  
5,689
   
6,893
 
         
Gross profit  
9,519
   
7,233
 
         
Operating expenses:        
Engineering and product development  
539
   
607
 
Selling and marketing  
6,024
   
5,249
 
General and administrative  
5,180
   
4,295
 
   
11,743
   
10,151
 
         
Loss from operations  
(2,224
)
  
(2,918
)
         
Other expense, net:        
Interest expense, net  
(280
)
  
(691
)
Change in fair value of warrant liability  
-
   
(22
)
Other income, net
  
-
   
1

   
(280
)
  
(712
)
Loss before income taxes  
(2,504
)
  
(3,630
)
Income tax benefit (expense)  
89
   
(80
)
Net loss 
$
(2,415
)
 
$
(3,710
)
         
Loss attributable to common shares 
$
(2,226
)
 
$
(1,638
)
Loss attributable to Preferred Series C shares 
$
(189
)
 
$
(2,072
)
Loss per common share:        
Basic 
$
(0.07
)
 
$
(0.18
)
Diluted 
$
(0.07
)
 
$
(0.18
)
         
Shares used in computing loss per common share:
        
Basic  
31,033,114
   
9,078,741
 
Diluted  
31,033,114
   
9,078,741
 
 
Loss per Preferred Series C share basic and diluted
 
$
(26.66
)
 
$
(67.07
)
         
Shares used in computing loss per basic and diluted Preferred Series C Shares  
7,093
   
30,897
 





The accompanying notes are an integral part of these condensed consolidated financial statements.

4

- 3 -




STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2018
(In thousands, except share amounts)
(unaudited)


  
Convertible
Preferred Stock – Series C
  Common Stock  Common Stock Issuable  Additional Paid-In  Accumulated    
  Shares  Amount  Shares  Amount  Shares  Amount  Capital  Deficit  Total 
BALANCE, January 1, 2018  36,182  $4   4,304,425  $4   -   -  $223,829  $(203,957) $19,880 
Cumulative accounting adjustment from adoption of new standard net of tax  -   -   -   -   --   -   -   (234)  (234)
Cumulative accounting adjustment from adoption of new standard net of  tax (see Note 1)                          2,614   (2,547)  67 
Stock-based compensation  -   -   -   -   -   -   19   -   19 
Conversion of convertible preferred stock into common stock  (202)  -   75,000   -   -   -       -     
Net loss  -   -   -   -   -   -   -   (2,081)  (2,081)
                                     
BALANCE, March 31, 2018  35,980  $4   4,379,425  $4   -   -  $226,462  $(208,819) $17,651 
                                     
Stock-based compensation  -   -   -   -   -   -   184   -   184 
Conversion of convertible preferred stock into common stock  (25,865)  (3)  9,615,332   10   -   -   (7)  -   - 
Sale of common stock, net of expenses of $2,336  -   -   15,740,741   16   -   -   14,648   -   14,664 
Common stock issuable  -   -           153,004   -       -     
Net loss  -   -   --   --   -   -   -   (1,629)  (1,629)
                                     
BALANCE, June 30, 2018  10,115  $1   29,735,498  $30   153,004   -  $241,287  $ (210,448) $30,870 


- 4 -


STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTSSTATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITYOperations and COMPREHENSIVE LOSS
FOR THE SIX MONTHS ENDED JUNE 30, 2019

(In thousands, except share and per share amounts)
(unaudited)


  
For the Nine Months Ended
September 30,
 
  2017  2016 
       
Revenues $23,454  $23,126 
         
Cost of revenues  9,182   9,631 
         
Gross profit  14,272   13,495 
         
Operating expenses:        
Engineering and product development  1,309   1,541 
Selling and marketing  8,914   10,073 
General and administrative  4,999   5,882 
   15,222   17,496 
         
Operating loss before other income (expense), net  (950)  (4,001)
         
Other income (expense), net:        
Interest expense, net  (4,264)  (3,571)
Change in fair value of warrant liability  77   5,316 
Other income, net  6   (1)
Loss on extinguishment of debentures  (11,799)  - 
   (15,980)  1,744 
         
Loss before income taxes  (16,930)  (2,257)
         
Income tax expense  181   191 
         
Net loss 
$ 
(17,111) 
$ 
(2,448)
         
Net loss per common share:        
Basic 
$ 
(5.94) 
$ 
(1.16)
Diluted 
$ 
(5.94) 
$ 
(3.55)
         
Shares used in computing net loss per common share:        
Basic  2,328,274   2,107,365 
Diluted  2,328,274   2,189,543 
         
Net loss per Preferred C share - basic and diluted
 
$ 
(2,208.96) $- 
         
Shares used in computing net loss per basic and diluted Preferred C share  1,483   - 
         
Other comprehensive income:        
Foreign currency translation adjustments  -  $1 
         
Comprehensive loss 
$ 
(17,111) 
$ 
(2,447)

  
Convertible
Preferred Stock – Series C
  Common Stock  Additional Paid-In  Accumulated    
  Shares  Amount  Shares  Amount  Capital  Deficit  Total 
BALANCE, January 1, 2019  9,968  $1   29,943,086  $30  $241,988  $(210,771) $31,248 
Stock-based compensation  -   -   -   -   323   -   323 
Conversion of convertible preferred stock into common stock  (3,090)  -   1,148,698   1   (1)  -   - 
Exercise of stock options  -   -   28,824   -   -   -   - 
Net loss  -   -   -   -   -   (1,333)  (1,333)
                             
BALANCE March 31, 2019  6,878  $1   31,120,608  $31  $242,310  $(212,104) $30,238 
                             
Conversion of convertible preferred stock into common stock  (4,775)  -   1,775,093   2   (2)  -   - 
Stock-based compensation  -   -   -   -   303   -   303 
Exercise of stock options  -   -   7,586   -   -   -   - 
Net loss  -   -   -   -   -   (1,082)  (1,082)
BALANCE, June 30, 2019  2,103  $1   32,903,287  $33  $242,611  $(213,186) $29,459 









The accompanying notes are an integral part of these condensed consolidated financial statements.
5

- 5 -



STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF CHANGES IN EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017CASH FLOWS
(In thousands, except share and per share amounts)
(Unaudited)
                      
                      
  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 

unaudited)

  
For the Six Months Ended
June 30,
 
  2019  2018 
Cash Flows From Operating Activities:      
Net loss 
$
(2,415
)
 
$
(3,710
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:        
Depreciation and amortization  
2,347
   
2,841
 
Amortization of right-of-use asset  
147
   
-
 
Provision for doubtful accounts  
2
   
(49
)
Loss on disposal of property and equipment and lasers placed in service  
22
   
411
 
Gain on cancellation of distributor rights agreement  
-
   
(11
)
Stock-based compensation  
626
   
203
 
Deferred taxes  
(89
)
  
80
 
Amortization of debt discount  
12
   
39
 
Amortization of deferred financing costs  
57
   
42
 
Change in fair value of warrant liability  
-
   
22

Changes in operating assets and liabilities:        
Accounts receivable  
(85
)
  
710
 
Inventories  
(813
)
  
596
 
Prepaid expenses and other assets  
(42
)
  
(296
)
Accounts payable  
327
   
(895
)
Other accrued liabilities  
248
   
(3
)
Other liabilities  
(5
)
  
255
 
Operating lease liabilities  
(126
)
  -
 
Deferred revenues  
193
   
(303
)
Net cash provided by (used in) operating activities  
406
   
(68
)
         
Cash Flows From Investing Activities:        
Lasers placed-in-service  
(947
)
  
(885
)
Purchases of property and equipment  
(5
)
  
(6
)
Payments on distributor rights liability  
-
   
(23
)
Net cash used in investing activities  
(952
)
  
(914
)
         
Cash Flows From Financing Activities:        
Proceeds from issuance of common stock, net  
-
   
14,664
 
Repayments of long-term debt      
(3,000
)
Payments on notes payable  
-
   
(306
)
Net cash provided by financing activities  
-
   
11,358
 
         
Net (decrease) increase in cash and cash equivalents  
(546
)
  
10,376
 
Cash and cash equivalents, beginning of period  
16,487
   
4,069
 
         
Cash and cash equivalents, end of period 
$
15,941
  
$
14,445
 
         
Supplemental information of cash and non-cash transactions:        
Cash paid for interest 
$
404
  
$
691
 
         
Lease liabilities arising from obtaining right-of-use assets 
$
1,632
   
-
 























The accompanying notes are an integral part of these condensed consolidated financial statements.
6



STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)- 6 -


  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)
         





The accompanying notes are an integral part of these condensed consolidated financial statements
7



STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)


  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  $- 








The accompanying notes are an integral part of these condensed consolidated financial statements
8

STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts and number of lasers)
(unaudited)
Note 1
The Company:
Background
STRATA Skin Sciences Inc. (and its subsidiary) ("STRATA" or "we" or the "Company"(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 excimer laser system 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 SeptemberJune 30, 2017,2019, there were 776764 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 March 1, 2017, the Company entered into an agreement to license the exclusive US distribution rights for the Ellipse family of products, Nordlys, from Ellipse USA ("Ellipse") through December 31, 2019. The agreement was to be renewed if certain minimum purchase requirements were achieved and an approximate $33 monthly license fee was paid, for a contractual total license fee of $1.1 million over the Initial Term. On October 26, 2017, by mutual agreement of the three parties involved in the transaction, the Company, Ellipse USA and the manufacturer Ellipse A/S, cancelled the agreement with Ellipse USA retroactively effective to August 9, 2017, and the Company entered into two new agreements. Under the new agreements the Company will have the exclusive US distribution rights for the Ellipse family of products, Nordlys, from Ellipse A/S, the Danish manufacturer, through August 9, 2020. If certain sales targets are met, the new agreement will automatically be extended for two additional years. Under the terms of the new agreements, the Company will be the exclusive US distributor of Ellipse lasers and will pay to Ellipse USA a monthly license fee of $10 through August 9, 2020, in addition to commissions for each system sold. The license fee amounts to approximately $355 over the Initial Term with a present value as of the effective date of the agreement of $286. As a result of the termination of the old agreement and the signing of the new agreements the Company reversed the intangible asset and corresponding liability recorded on March 1, 2017 (which resulted in a $40 gain) and recorded the distribution rights at the present value of the payments under the new agreements. See Note 4, Intangibles, net, for additional information.
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 SkinStylusSkinStylus® MicroSystem and associated parts under the name of STRATAPen.STRATAPEN. This three-year agreement allowshas minimum annual sales requirements for two one year extensions.renewal. The Company does not expect to meet the criteria for renewal.
Effective April 6, 2017, the Company completed a reverse stock split of its common stock at a ratio of 1-for-5 shares, and all data on common stock and equivalents are shown herein as reflective of this reverse stock split.
Liquidity
As of September 30, 2017, the Company had an accumulated deficit of $227,686 and had been incurring losses since inception as well as negative cash flows from operations until 2016. To date, the Company has dedicated most of its financial resources to research and development, sales and marketing, and general and administrative expenses.
Management believes that its cash and cash equivalents as of September 30, 2017 combined with the anticipated revenues from the sale of the Company's products will be sufficient to satisfy its working capital needs, capital asset purchases, outstanding commitments, payments of the long-term debt as they become due and other liquidity requirements associated with its existing operations through the next twelve months following the filing of this Form 10-Q.
9

STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts and number of lasers)

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 condensed 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 2019 and 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 condensed consolidated statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to state fairly present the consolidated balance sheets, consolidated statementsresults of operations, consolidated statements of cash flows and consolidated statements of stockholders' equity, for the periods presented in accordance with GAAP.interim periods. The condensed consolidated balance sheet at December 31, 2016,2018, has been derived from the audited consolidated financial statements at that date. Operating results and cash flows for the three and ninesix months ended SeptemberJune 30, 20172019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017,2019 or any other future period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with US GAAPaccounting principles generally accepted in the United States of America (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 ("20162018 (the “2018 Form 10-K"10-K”), and other forms filed with the SEC from time to time. Dollar amounts included herein are in thousands, except per share data.
Reclassification
Reclassifications
Certain reclassifications from the prior year presentation have been made to conform to the current year presentation. These reclassifications did not have a material impact on the Company's financial statements.Company’s equity, results of operations, or cash flows.

- 7 -
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts and number of lasers)
(unaudited)

Significant Accounting Policies
The significant accounting policies used in preparation of these condensed consolidated financial statements are disclosed in our 2016Annual Report on Form 10-K for the year ended December 31, 2018, and there have been no changes to the Company'sCompany’s significant accountingaccount policies during the three and ninesix months ended SeptemberJune 30, 2017.2019, except for the adoption of the new leasing standard as discussed under Accounting Pronouncements Recently Adopted 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 SeptemberJune 30, 2017,2019, the more significant estimates include (1) revenue recognition, in regardsregard to deferred revenues and the contract term and valuation allowances of accounts receivable, (2) the inputs used in the impairment analyses of intangible assets and goodwill, (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.instruments and warrants, (7) the inventory reserves (8) state sales and use tax accruals and (9) warranty claims.
10

STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts and number of lasers)

Fair Value Measurements
The Company measures and discloses fair value in accordance with Financial Accounting Standards Board ("FASB"(“FASB”) Accounting Standards Codification 820, Fair Value Measurements and Disclosures ("“ASC Topic 820"820”). ASC Topic 820 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants 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 factorsfactors.

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.
The Company's recurring fair value measurements at September 30, 2017 and December 31, 2016 are as follows:
  
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 
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 liabilitiesliability is estimated using option pricing models that are based on the fair value of the Company'sCompany’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 areliability is the only recurring Level 3 fair value measures.measure. 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 June 30, 2019 and December 31, 2018, the Company assessed its long-term debt (including the current portion) and determined that the fair value of total debt was $10,778approximated its book value as of September 30, 2017. As of December 31, 2016 the fair value of long-terminterest rate on the debt and convertible debentures was $20,082.approximates market rates.
11

- 8 -
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts and number of lasers)
(unaudited)

Several of the warrants outstanding as of September 30, 2017 and 2016December 31, 2018, 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 are classified as derivative liabilities. All such warrants expired in February and April 2019. In addition, other warrants as of September 30, 2016 contained full ratchet provisions that reduce the exercise price of thehad a “down round” provision. These warrants in the event of a transaction resulting in the issuance of equity below the current price of the warrants. Therefore these warrants are, or were classified as derivatives. These warrants have beenderivatives prior to the adoption of Accounting Standards Update (“ASU”) No. 2017-11 on October 1, 2018 under the modified retrospective method with a cumulative effect adjustment recorded as of January 1, 2018. The Company's warrant liablities were recorded at their fair value using a binomialthe Black Scholes option pricing model and willcontinue to be recorded at their respective fair value at each subsequent balance sheet date.date until such terms expired. See Note 8,9, 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 DateDecember 31, 2018
Increase in
Fair Value
June 30, 2019
October 31, 2013
$
-
$
-
$
-
$
-
$
-
$
-

Issuance Date January 1, 2018  
Increase in
Fair Value
  June 30, 2018 
October 31, 2013 
$
2
  
$
11
  
$
13
 
February 5, 2014  
1
   
11
   
12
 
  
$
3
  
$
22
  
$
25
 
Earnings Per Share
The Company calculates net income (loss)loss per common share and Preferred Series C share in accordance with ASC 260, Earnings per Share.Share. Under ASC 260, basic net income (loss)loss per common share and Preferred Series C share is calculated by dividing net incomeloss attributable to common shares and Preferred Series C shares by the weighted-average number of common shares and Preferred Series C shares outstanding during the reporting period and excludes dilution for potentially dilutive securities. Diluted earningsloss per common share ("EPS")and Preferred Series C share gives effect to dilutive options, warrants and other potential common shares outstanding during the period.
The Company's Series C Convertible Preferred SharesStock 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 Convertible 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 ninesix months ended SeptemberJune 30, 2017:
2019 and 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)
For the three and nine months ended September 30, 2017 and the three months ended September 30, 2016, diluted net loss per common share is equal to the basic net loss per common share 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.
For the nine months ended September 30, 2016 diluted earnings per common share is computed by the numerator effected by the gain on the change in fair value of the warrant liability and the denominator is increased to include the number of additional potential common shares from the warrants underlying the warrant liability.
  
Three Months Ended
June 30, 2019
  
Six Months Ended
June 30, 2019
 
  Common Stock  
Series C
Convertible Preferred Stock
  Common Stock  
Series C
Convertible Preferred Stock
 
             
Loss attributable to each class 
$
(1,007
)
 
$
(75
)
 
$
(2,226
)
 
$
(189
)
                 
Weighted average number of shares outstanding during the period
  
31,359,104
   
6,250
   
31,033,114
   
7,093
 
                 
Basic and Diluted loss per share 
$
(0.03
)
 
$
(11.94
)
 
$
(0.07
)
 
$
(26.66
)
12

- 9 -
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts and number of lasers)
(unaudited)

  
Three Months Ended
June 30, 2018
  
Six Months Ended
June 30, 2018
 
  Common Stock  
Series C
Convertible Preferred Stock
  Common Stock  
Series C
Convertible Preferred Stock
 
Loss attributable to each class
 
$
(958
)
 
$
(671
)
 
$
(1,638
)
 
$
(2,072
)
                 
Weighted average number of shares outstanding during the period
  
13,734,384
   
25,847
   
9,078,741
   
30,897
 
                 
Basic and Diluted loss per share 
$
(0.07
)
 
$
(25.96
)
 
$
(0.18
)
 
$
(67.07
)
Diluted
The Company considers Series C Convertible Preferred Stock to be participating securities in presentation of earnings per share.
For the three and six months ended June 30, 2019 and 2018, diluted loss per common share were calculated usingand Series C Convertible Preferred Stock share is equal to the following netbasic loss per common share and Series C Convertible Preferred Stock share, respectively, since all potentially dilutive securities are anti-dilutive.
The weighted average sharesof potential common stock equivalents outstanding forduring the ninethree and six months ended SeptemberJune 30, 2016:2019 and 2018 have been excluded from the loss per share calculation as their inclusion would have been anti-dilutive:
Nine Months Ended
September 30, 2016
Net loss$ (2,448)
Gain on the change in fair value of the warrant liability(5,316)
Diluted earnings$ (7,764)
Weighted average number of common and common equivalent shares outstanding:
Basic number of common shares outstanding2,107,365
Effect of warrants82,178
Diluted number of common and common stock equivalent shares outstanding2,189,543

 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019 2018
Common stock purchase warrants
 
2,034,882 2,396,721    2,133,489 2,401,646
Restricted stock units
 120,773 17,028       125,150 17,028
Common stock options
 
4,184,193
 3,037,796    4,252,682 1,962,933
Total
 
6,339,848 5,451,545    6,511,321 4,381,607
Accounting Pronouncements Recently Adopted
In February 2016 the FASB issued ASU 2016-02, “Leases” (Topic 842) (“ASU 2016-02”), which will require lessees to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current US GAAP, the recognition, measurement and presentation of expenses and cash flows arising from a lease primarily will depend on its classification as a finance or operating lease. However, unlike current US GAAP, which requires only capital leases to be recognized on the balance sheet, the new guidance will require both types of leases to be recognized on the balance sheet. The ASU is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. In August 2018 the FASB issued ASU No. 2018-11, “Leases (Topic 842: Targeted Improvements”) which permits adoption of the guidance in ASU 2016-02 using either a modified retrospective transition, requiring application at the beginning of the earliest comparative period presented or a transition method whereby companies could continue to apply existing lease guidance during the comparative periods and apply the new lease requirements through a cumulative-effect adjustment in the period of adoption rather than in the earliest period presented without adjusting historical financial statements.
The Company used the modified retrospective transition approach to ASU No. 2018-11 and applied the new lease requirements through a cumulative-effect adjustment in the period of adoption. The new standard provides a number of optional practical expedients in transition. We elected the package of practical expedients, which permits us not to reassess, under the new standard, our prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements;
13

- 10 -
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts and number of lasers)
(unaudited)

The weighted average of potential common stock equivalents outstanding during the three and nine months ended September 30, 2017 and 2016 consist of common stock equivalents of common stock purchase warrants, senior secured convertible debentures, convertible preferred stock 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
Adoption of New Accounting Standards
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidancelatter not being applicable to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current guidance, there are three elements of business: inputs, processes, and outputs. While an integrated set of assets and activities (collectively, a "set") that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs, for example, by integrating the acquired set with their own inputs and processes. The new guidance provides a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. For public business entities, the guidance is effective prospectively for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, but can be adopted early. The Company has adopted this ASU effective January 1, 2017 and has applied the rules with its sub-distribution license with Ellipse and concluded that this transaction did not meet the definition of a business. As such, it has been accounted for as an asset acquisition. See Note 4, Intangibles, net.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718), to simplify various aspects of theus. This accounting and presentation of share-based payments, including the income tax effects of awards and forfeiture assumptions. Under the new guidance, all excess tax benefits and tax deficiencies are recorded to income tax expense in the income statement. The new guidance also changes the classification of excess tax benefits in the cash flow statement and impacts the diluted earnings per share calculation. Additionally, the new guidance permits to elect to account for forfeitures as they occur. The Company has made this election upon the adoption of this standard. The guidance became effective for interim and annual periods beginning after December 15, 2016, and early adoption was permitted. The adoption of this ASUstandard did not have a significantmaterial impact on our debt covenants. The Company has completed an evaluation of ASU 2016-02, including a review of our leases and other contracts for potential embedded leasing arrangements and has recognized approximately $848 in right-of-use assets and lease liabilities in the balance sheet as of January 1, 2019.  There was no impact on the condensed consolidated financial statements.Company’s revenue recognition under ASC 842.
In November 2015, the FASB issued ASU 2015-17, Income Taxes, Balance Sheet Classification of Deferred Taxes topic of the Codification. This standard requires all deferred tax assets and liabilities to be classified as non-current on the balance sheet instead of separating deferred taxes into current and non-current amounts. In addition, valuation allowance allocations between current and non-current deferred tax assets are no longer required because those allowances also will be classified as non-current. This standard is effective for public companies for annual periods beginning after December 15, 2016. The Company's deferred tax assets are provided with a full valuation allowance as of December 31, 2016 and 2015, except the deferred tax liability related to goodwill amortization. As such, the adoption of this ASU did not have a significant impact on the condensed consolidated financial statements.
14

STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts and number of lasers)

In July 2015, 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. Prior to the issuance of ASU 2015-11, inventory was measured at the lower of cost or market (where market was defined as replacement cost, with 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 2017 for the Company). The adoption of this ASU did not have a significant impact on the Company's consolidated financial statements.
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-controlling Interests with a Scope Exception."” For public business entities the amendments in Part 1I 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. IfThe Company previously adopted this ASU on October 1, 2018, and recorded an entity early adoptsadjustment for the amendments inadoption of a new accounting pronouncement of $67 as an interim period, any adjustments should be reflectedadjustment to warrant liability, $2,547 as an adjustment to accumulated deficit and $2,614 as an adjustment to additional paid-in-capital as of the beginning of the fiscal year in the year of adoption on January 1, 2018.
The impact from adopting ASU 2017-11 on the Company’s unaudited condensed balance sheets and consolidated statements of operations as of and for the following periods is as follows:
  
For the Three Months Ended
June 30, 2018
 
  
Balances prior to
Adoption of
ASU 2017-11
  
Balances after the
Adoption of
ASU 2017-11
  
Effect of Adoption
Higher/(Lower)
 
Statement of Operations
         
Change in fair value of warrant liability loss
 
$
(263
)
 
$
(23
)
 
$
(240
)
Balance Sheet
            
Fair value of warrant liability
 
$
289
  
$
25  
$
(264
)

  
For the Six Months Ended
June 30, 2018
 
  
Balances prior to
Adoption of
ASU 2017-11
  
Balances after the
Adoption of
ASU 2017-11
  
Effect of Adoption
Higher/(Lower)
 
Statement of Operations
         
Change in fair value of warrant liability loss
 
$
(222
)
 
$
(22
)
 
$
(200
)
Balance Sheet
            
Fair value of warrant liability
 
$
289
  
$
25  
$
(264
)

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, including interim periods within that includes that interim period.year. The amendments in Part 2adoption of ASU 2017-11 do not require any transition guidance because those amendments doNo. 2018-07 on January 1, 2019, did not have an accounting effect. The Company is currently evaluating the impact of this guidancea material effect on the Company'sCompany’s condensed consolidated financial statements.

- 11 -
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts and number of lasers)
(unaudited)

Recent Accounting Pronouncements Not Yet Adopted
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'sunit’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 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. As the Company has not identified a goodwill impairment loss, currently this guidance does not have an impact on the Company’s condensed consolidated financial statements, but could have an impact in the event of a good-will impairment.
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 the 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 impact of adoption of this guidanceASU and determined that it will have no significant impact on the Company'sits condensed consolidated financial statements.
In February 2016,
Note 2
Equity Financing and Liquidity
Equity Financing
On March 30, 2018, the FASB issued ASU 2016-02, Leases, This statement requires lesseesCompany entered into multiple agreements in order to present right-of-use assets and lease liabilities onobtain $17,000 of equity financing (the “Financing”) from the balance sheet. The standard is effective for public companies for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. 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.
•
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 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 is currently evaluatingincurred $2,336 of costs related to the effectequity financing during the guidance will have on its financial condition and results of operations.year ended December 31, 2018.
15

- 12 -
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts and number of lasers)
(unaudited)

In May 2014,
Liquidity
The FASB issued ASU 2014-09, RevenueCompany has experienced recurring operating losses and annually prior to 2017 negative cash flow from Contracts with Customers (Topic 606). ASU 2014-09 outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 also requires entities to disclose sufficient information, both quantitative and qualitative, to enable users 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 one of the following two methods: 1. retrospectively to each prior reporting period presented with a possibility to elect certain practical expedients, or, 2. using the modified retrospective method with 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 accounting for the revenues from recurring procedures based upon the determination of whenoperations. Historically, the Company has transferred controlbeen 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. Management believes that the Company’s cash and cash equivalents, combined with the anticipated revenues from the sale of the services. The potential impact of that change could increase or decreaseCompany’s products, will be sufficient to satisfy our revenues in any given periodworking capital needs, capital asset purchases, outstanding commitments and will depend, among others, onother liquidity requirements associated with our existing operations through the estimated unused treatments asnext 12 months following the issuance of the end of any reporting period. We are still evaluating the ASU for its potential impact on ourcondensed consolidated financial statements. We currently planIn the Company’s debt modification with MidCap in the prior year, MidCap reduced the restrictive covenants. However, if the Company fails to adoptmeet the ASU usingmonthly revenue covenants per the "modified retrospective" approach, which requiresMidCap loan agreement, the cumulative effect of initially applying the guidance toCompany may be recognized as an adjustment to our accumulated deficit asdeclared in breach of the January 1, 2018 adoption date.credit facility agreement and MidCap will have the option to call the loan balance.
Note 2
Inventories:
  
September 30, 2017
  December 31, 2016 
  (unaudited)    
Raw materials and work in progress $2,448  $2,440 
Finished goods  1,085   377 
Total inventories $3,533  $2,817 
Work-in-process is immaterial, given the Company's typically short manufacturing cycle, and therefore is disclosed in conjunction with raw materials.
Note 3
PropertyRevenue:
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 Equipment, net:
  September 30, 2017  December 31, 2016 
  (unaudited)    
Lasers placed-in-service $18,018  $16,712 
Equipment, computer hardware and software  468   160 
Furniture and fixtures  118   111 
Leasehold improvements  31   25 
   18,635   17,008 
Accumulated depreciation and amortization  (9,977)  (6,828)
Property and equipment, net $8,658  $10,180 
Depreciationgenerally 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 related amortization expense was $3,292charges the physician a fixed fee for a specified period of time not to exceed an agreed upon number of treatments; if that number is exceeded additional fees will have to be paid.
For the purposes of US GAAP only, these two types of arrangements are treated under the guidance of ASC 842, Leases. While these are not contractually operating leases, the Company sells the physician access codes in order to operate the treatment equipment, these are similar to operating leases for accounting purposes since in these arrangements the Company provides the customers limited rights to use the treatment equipment and $3,482the treatment equipment resides in the physician’s office while the Company may exercise the right to remove the equipment upon notice, while the physician controls the utility and output of such equipment during the term of the arrangement as it pertains to the use of access codes to treat the patients. The terms of the arrangements are generally 36 months with automatic one-year renewals and include a termination clause that can be affected at any time by either party with 60 day notice. Amounts paid are generally non-refundable. For the first type of arrangement, sales of access codes are considered variable lease payments and are recognized as revenue over the estimated usage period of the agreed upon number of treatments. For the second type of arrangement, customers purchase access codes and revenue is recognized ratably on a straight line basis as the lasers are being used over the term period specified in the agreement. Variable lease payments that will be paid only if the customer exceeds the agreed upon number of treatments are recognized only when such treatments are being exceeded and used. Pre-paid amounts are recorded in deferred revenue and recognized as revenue over the lease term in the patterns described above. Under both methods, pricing is fixed with the customer.
With respect to lease and non-lease components, the Company adopted the practical expedient to account for the nine months ended September 30, 2017arrangement as a single lease component.
In the Dermatology Procedures Equipment segment the Company sells its products internationally through a distributor, and 2016, respectively.domestically directly to a physician. For the product sales, the Company recognizes revenues when control of the promised products is transferred to the Company's customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those products (the transaction price). Control transfers to the customer at a point in time. To indicate the transfer of control, the Company must have a present right to payment and legal title must have passed to the customer. The Company ships most of its products FOB shipping point, and as such, the Company primarily transfers control and records revenue upon shipment. From time to time the Company will grant certain customers, for example governmental customers, FOB destination terms, and the transfer of control for revenue recognition occurs upon receipt. The Company has elected to recognize the cost of freight and shipping activities as fulfillment costs. Amounts billed to customers for shipping and handling are included as part of the transaction price and recognized as revenue when control of the underlying goods are transferred to the customer. The related shipping and freight charges incurred by the Company are included in cost of revenues.
16

- 13 -
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts and number of lasers)
(unaudited)

Note 4
Intangibles, net:
Set forth below
Remaining performance obligations related to ASC 606 represent the aggregate transaction price allocated to performance obligations with an original contract term greater than one year, which are fully or partially unsatisfied at the end of the period. Remaining performance obligations include the potential obligation to perform under extended warranties but excludes any equipment accounted for as leases. As of June 30, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $414, and the Company expects to recognize $200 of the remaining performance obligations within one year and the remainder over one to three years. Contract assets primarily relate to the Company’s rights to consideration for work completed in relation to its services performed but not billed at the reporting date. The contract assets are transferred to receivables when the rights become unconditional. Currently, the Company does not have any contract assets which have not transferred to a receivable. Contract liabilities primarily relate to extended warranties where 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 detailed listingcontract liability until services are provided to the customer. The $200 of definite-lived intangible assets:
  September 30, 2017  December 31, 2016 
  (unaudited)    
Core technology $5,700  $5,974 
Product technology  2,000   2,000 
Customer relationships  6,900   6,900 
Tradenames  1,500   1,500 
Distribution rights  286   - 
   16,386   16,374 
Accumulated amortization  (4,084)  (2,962)
Patents and licensed technologies, net $12,302  $13,412 
Related amortization expense was $1,519short-term contract liabilities is presented as deferred revenues and $1,362 for the nine months ended September$214 of long-term contract liabilities is presented within Other Liabilities on the June 30, 2017 and 2016, respectively. During2019 Condensed Consolidated Balance Sheet. For the three and ninesix months ended SeptemberJune 30, 2017,2019, the Company wrote off core technologyrecognized $36 and $75, respectively, as revenue from amounts classified as contract liabilities (i.e. deferred revenues) as of $274December 31, 2018.
With respect to contract acquisition costs, the Company applied the practical expedient and accumulated amortizationexpenses these costs immediately.
The Company records co-pay reimbursements made to patients receiving laser treatments as a reduction of $251 relatedrevenue. For the three and six months ended June 30, 2019 and 2018, the Company recorded such reimbursements in the amounts of $177 and $332, and $174 and $300, respectively.
The following tables present the Company’s revenue disaggregated by geographical region for the three and six months ended June 30, 2019 and 2018, respectively. Domestic refers to revenue from customers based in the United States, and substantially all foreign revenue is derived from dermatology procedures equipment sales to the discontinuance of the MELAfind product. The value written off of $23 was recordedCompany’s international master distributor for physicians based primarily in cost of revenues.Asia.
Estimated amortization expense for amortizable patents and licensed technologies assets for the future periods is as follows:
Remaining 2017 $476 
2018  1,905 
2019  1,905 
2020  1,670 
2021  1,410 
Thereafter  4,936 
Total $12,302 
  Three Months Ended June 30, 2019 
  
Dermatology
Recurring
Procedures
  
Dermatology
Procedures
Equipment
  
TOTAL
 
Domestic
 
$
5,839
  
$
378
  
$
6,217
 
Foreign
  
-
   
1,508
   
1,508
 
Total
 
$
5,839
  
$
1,886
  
$
7,725
 
As discussed in Note 1, effective January 1, 2017 the Company follows the guidance in ASU 2017-01, which provides a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the new guidance, companies are required to utilize an initial screening test to determine whether substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set is not a business. The Company has determined that its transaction with Ellipse in the first quarter of 2017 is considered to be an acquisition of a single asset, therefore, the acquisition is not considered to be an acquisition of a business. The distribution rights asset had been assigned a value of $900 which was comprised of the present value of the license fee payments. Effective August 2017 the transaction was terminated and a new agreement was negotiated among the parties. See Note 1 for further details regarding these agreements. As a result of the termination of the old agreement and the signing of the new agreements the Company reversed the intangible asset and corresponding liability 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 sales and marketing expense.
  Six Months Ended June 30, 2019 
  
Dermatology
Recurring
Procedures
  
Dermatology
Procedures
Equipment
  
TOTAL
 
Domestic
 
$
11,151
  
$
702
  
$
11,853
 
Foreign
  
-
   
3,355
   
3,355
 
Total
 
$
11,151
  
$
4,057
  
$
15,208
 

  Three Months Ended June 30, 2018 
  
Dermatology
Recurring
Procedures
  
Dermatology
Procedures
Equipment
  
TOTAL
 
Domestic
 
$
5,022
  
$
313
  
$
5,335
 
Foreign
  
-
   
2,053
   
2,053
 
Total
 
$
5,022
  
$
2,366
  
$
7,388
 

17

- 14 -
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts and number of lasers)
(unaudited)

  Six Months Ended June 30, 2018 
  
Dermatology
Recurring
Procedures
  
Dermatology
Procedures
Equipment
  
TOTAL
 
Domestic
 
$
9,792
  
$
970
  
$
10,762
 
Foreign
  
-
   
3,364
   
3,364
 
Total
 
$
9,792
  
$
4,334
  
$
14,126
 
Note 4
Inventories:
Inventories consist of:
  June 30, 2019  December 31, 2018 
Raw materials and work in progress 
$
3,200
  
$
2,442
 
Finished goods  
407
   
352
 
Total inventories 
$
3,607
  
$
2,794
 
Work-in-process is immaterial, given the Company’s typically short manufacturing cycle, and therefore is disclosed in conjunction with raw materials.
Note 5
Other Accrued Liabilities:Property and Equipment, net:
  
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 
Property and equipment consist of:
  June 30, 2019  December 31, 2018 
Lasers placed-in-service 
$
19,241
  
$
18,515
 
Equipment, computer hardware and software  
147
   
168
 
Furniture and fixtures  
124
   
124
 
Leasehold improvements  
26
   
26
 
   
19,538
   
18,833
 
Accumulated depreciation and amortization
  
(14,749
)
  
(13,532
)
Property and equipment, net
 
$
4,789
  
$
5,301
 

Depreciation and related amortization expense was $691 and $926 for the three months ended June 30, 2019 and 2018, respectively; and $1,442 and $1,912 for the six months ended June 30, 2019 and 2018, respectively.
Note 6
Convertible Debentures:Intangible Assets, net:
In the following table
Set forth below is a summarydetailed listing of the Company's convertible debentures.
  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 
The total outstanding convertible debentures was exchanged for convertible Preferred C stock on September 20, 2017, thus there was no remaining outstanding balancedefinite-lived intangible assets as of SeptemberJune 30, 2017.2019:
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 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 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.
  Balance  Accumulated Amortization  Intangible assets, net 
Core technology
 
$
5,700
  
$
(2,280
)
 
$
3,420
 
Product technology
  
2,000
   
(1,600
)
  
400
 
Customer relationships
  
6,900
   
(2,760
)
  
4,140
 
Tradenames
  
1,500
   
(600
)
  
900
 
  
$
16,100
  
$
(7,240
)
 
$
8,860
 
18

- 15 -
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts and number of lasers)
(unaudited)

On July 21, 2014, the Company entered into a definitive Securities Purchase Agreement (the "Purchase Agreement") with institutional investors (the "Investors") providing
Related amortization expense was $452 and $452 for the issuance of Senior Secured Convertible Debenturesthree months ended June 30, 2019 and 2018, respectively; and $905 and $929 for the six months ended June 30, 2019 and 2018, respectively.
Definite-lived intangible assets are tested for impairment when events or changes in circumstances indicate that 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 (See Note 8, Warrants) 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).
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 Debenturesasset group may not be recoverable. The Company recognizes an impairment loss when and to the extent that the recoverable amount of $4,647. The initial debt discount onan asset group is less than its carrying value. There were no impairment charges for the July 2014 Debentures totaled $10,353three and was being amortized using the effective interest method over the five year life of the July 2014 Debentures.six months ended June 30, 2019.
During the ninethree months ended SeptemberMarch 31, 2018, the Company wrote off distribution rights of $286 and accumulated amortization of $60 related to the discontinuance of the Nordlys product line. The net value written off of $226 was recorded in selling and marketing expense. In the three months ended June 30, 2017,2018, the investors converted debentures amounting to $262 into 70,000 sharesCompany wrote off distributor liabilities of common stock$237 as a result of the termination of the agreement on May 31, 2018 and the net value written off of $11 was recorded in selling and marketing expense for the six months ended June 2015 note. The debt discount and deferred financing cost adjustment resulting from the conversions increased interest30, 2018.
Estimated amortization expense by $197 for the nine months ended September 30, 2017.above amortizable intangible assets for future periods is as follows:
As a condition
Remaining 2019
 
$
905
 
2020
  
1,610
 
2021
  
1,410
 
2022
  
1,410
 
2023
  
1,410
 
Thereafter
  
2,115
 
Total 
$
8,860
 
Note 7
Other Accrued Liabilities:
Other accrued liabilities consist of:
  June 30, 2019  December 31, 2018 
       
Accrued warranty, current 
$
194
  
$
156
 
Accrued compensation, including commissions and vacation  
945
   
1,275
 
Accrued state sales, use and other taxes  
2,908
   
2,719
 
Accrued professional fees and other accrued liabilities  
701
   
350
 
Total other accrued liabilities 
$
4,748
  
$
4,500
 

Accrued State Sales and Use Tax
In the ordinary course of business, the Company is, from time to time, subject to audits performed by state taxing authorities. These actions and proceedings are generally based on the position that the arrangements entered into by the Company are subject to sales and use tax rather than exempt from tax under applicable law. The Company uses estimates when accruing its sales and use tax liability. All of the new note facility (See Note 7, Long-term Debt)Company’s tax positions are subject to audit. One state has assessed the DebenturesCompany an amount of $801 for the period from bothMarch 2014 through August 2017. The Company has declined an informal offer to settle at a substantially lower amount and is currently in that jurisdiction’s administrative process of appeal. A second jurisdiction is also conducting an audit and has not made an assessment. If there is a determination that the 2014Company’s recurring revenue model is not exempt from sales taxes and 2015 financings were amended. is not a prescription medicine or the Company does not have other defenses where the Company does not prevail, the Company may be subject to sales taxes in those particular states for previous years and in the future, plus potential interest and penalties for failure to pay such taxes.
The Debentures holders' first priority lien was subordinatedCompany believes its state sales and use tax accruals have properly recognized that if the Company’s arrangements with its customers are deemed to be subject to sales tax in a particular state are more likely than not, the new term note facility. Additionally, as a conditionbasis for measurement of the term note facility, the maturity date of both Debentures was extended to June 30, 2021sales 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 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 principle was exchanged for 40,482 shares of Series C Preferred Stock. Inuse tax would be 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 recognized405, Liabilities as a loss on extinguishmenttransaction tax. If and when the Company is successful in defending itself in settling the sales tax obligation for a lesser amount, the reversal of debentures.this liability is to be recorded in the period settlement is reached. However, the precise scope, timing and time period at issue, as well as the final outcome of any audit and actual settlement remains uncertain.
Other than the limitations on conversions to keep each such holders 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.
19- 16 -

STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts and number of lasers)
(unaudited)

The Company records state sales tax collected and remitted for its customers on equipment sales on a net basis, excluded from revenue. The Company’s sales tax expense that is not presently being collected and remitted for the recurring revenue business are recorded in general and administrative expenses on the statement of operations.

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 and other liabilities on the condensed consolidated balance sheet. The activity in the warranty accrual during the three and six months ended June 30, 2019 and 2018, is summarized as follows
  
Three Months Ended,
June 30,
  
Six Months Ended
June 30,
 
  2019  2018  2019  2018 
Accrual at beginning of period 
$
272
  
$
195
  
$
238
  
$
178
 
Additions charged to warranty expense  
75
   
75
   
143
   
138
 
Expiring warranties/claimed satisfied  
(56
)
  
(35
)
  
(90
)
  
(81
)
Total  
291
   
235
   
291
   
235
 
Less: current portion  
(194
)
  
(149
)
  
(194
)
  
(149
)
Total long-term accrued warranty costs 
$
97
  
$
86
  
$
97
  
$
86
 
Note 78
Long-term Debt:
  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 
The following summarizes the Company’s long-term debt:
  June 30, 2019  December 31, 2018 
Term note, net of debt discount of $98 and $110 respectively; and deferred financing cost of $7 and $64, respectively 
$
7,466
  
$
7,397
 
Less: current portion  
(1,767
)
  
(252
)
Total long-term debt 
$
5,699
  
$
7,145
 

Term-Note Credit Facility
On December 30, 2015, the Company entered into a $12,000 credit facility pursuant to a Credit and Security Agreement (the "Agreement""Credit Agreement") and related financing documents with MidCap Financial Trust ("MidCap") and the lenders listed therein. Under the Credit Agreement, the credit facility may be drawn down in two tranches, the first of which was drawn for $10,500 on December 30, 2015. The proceeds of this first tranche were used to repay $10,000 principal amount of short-term senior secured promissory notes, plus associated interest, loan fees and expenses. The second tranche was drawn for $1,500 on January 29, 2016. The maturity date of the credit facility is December 1, 2020. The Company's obligations under the credit facility are secured by a first priority lien on all of the Company's assets. This credit facility includeshad an interest rate of one month LIBOR plus 8.25% and included both financial and non-financial covenants, including a minimum net revenue covenant, beginning in January 2016. The Company is in compliance with these covenants as of September 30, 2017.covenant. On November 10, 2017, the minimum net revenue covenant was amended prospectively.prospectively and there was an increase to the exit fee. Additionally, on November 10, 2017, the Company entered into an amendment to modify the principal payments including a period of six months where there isare 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 of September 30, 2017 the net balance of long-term debt is $8,842.
The following table summarizes the future payments that the Company expects to make for the long-term debt for the future periods:
Remaining in 2017 $572 
2018  2,387 
2019  4,092 
2020  4,092 
  $11,143 
     

20

- 17 -
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts and number of lasers)
(unaudited)

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 US 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.
On May 29, 2018, the Company entered into a Fourth Amendment to Credit Agreement, pursuant to which the Company repaid $3,000 in principal of the existing $10,571 credit facility established with MidCap in 2015. The terms of the Credit Agreement were amended to impose less restrictive covenants, lower prepayment fees for the Company and extended the maturity date to May 2022. This 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 payments beginning December 2019 are $252 plus interest per month. On April 30, July 15, August 26 and October 15, 2019, the Company received waivers from MidCap as administrative agent for the lenders who are party to the Agreement, wherein the lenders waived the Company’s compliance with the obligation to deliver audited financial statements within 120 days of year-end pursuant to the Credit Agreement. The waivers were effective through November 7, 2019. The Company delivered the audited financial statements on or about October 29, 2019 and is currently in compliance with this covenant.
The following table summarizes the future payments that the Company is obligated to make for the long-term debt for the future periods:
  
For the year ending
December 31,
 
Remaining in 2019 
$
252
 
2020  
3,028
 
2021  
3,028
 
2022  
1,263
 
  
$
7,571
 
Note 89
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. Warrants with "downround" provisions did not exist as of or duringDuring the ninethree and six months ended SeptemberJune 30, 2017 or2019, warrants to purchase 137,143 and 265,947 shares of common stock each with an exercise price of $3.75 per share were accounted for as derivatives.  These warrants expired on February 5, 2019 and April 30, 2019, respectively. These derivatives had deminimus fair values as of December 31, 2016.
The Company recognizes these liabilities at the2018. There was no change in fair value on each reporting date. The Company computedof these derivatives for the valuethree and six months ended June 30, 2019.
Outstanding common stock warrants at June 30, 2019 consist of the warrants using the binomial method. A summary of quantitative information with respect to the valuation methodology and significant unobservable inputs used for the Company's warrant liabilities that are categorized within Level 3 of the fair value hierarchy as of September 30, 2017 and December 31, 2016 is as follows:
  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 
Recurring Level 3 Activity and Reconciliationfollowing:
The tables below provide a reconciliation of the beginning and ending balances for the liability measured at fair value using significant unobservable inputs (Level 3). The table reflects gains and losses for the nine month periods ended September 30, 2017 and 2016, for all financial liabilities categorized as Level 3 as of September 30, 2017 and September 30, 2016, respectively.
Fair Value Measurements Using Significant Unobservable Inputs (Level 3):
 
 
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 

Issue Date Expiration Date Total Warrants  Exercise Price 
July 24, 2014 July 24, 2019  
1,239,769
  
$
3.75 - $ 12.25
 
June 22, 2015 June 22, 2020  
600,000
  
$
3.75
 
December 30, 2015 December 30, 2020  
130,089
  
$
5.65
 
January 29, 2016 January 29, 2021  
19,812
  
$
5.30
 
     
1,989,670
     
21

- 18 -
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In 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 
Number of Warrants Subject to Remeasurement:
Issuance Date
September 30, 2017
10/31/2013137,143
2/5/2014265,947
Total403,090
Note 9
Stockholders' Equity:
Common Stock and Warrants
Outstanding common stock warrants consist at September 30, 2017 of the following:
Issue Date
Expiration Date
 Total Warrants  Exercise Price 
        
4/26/20134/26/2018  13,865  $55.90 
10/31/20134/30/2019  137,143  $3.75 
2/5/20142/5/2019  265,947  $3.75 
7/24/20147/24/2019  1,239,769  $3.75 - $ 12.25 
6/22/20156/22/2020  600,000  $3.75 
12/30/201512/30/2020  130,089  $5.65 
1/29/20161/29/2021  19,812  $5.30 
    2,406,625     
Note 10
Stock-based compensation:Compensation:
At September
As of June 30, 2017,2019, the Company had 855,389 options to purchase 4,033,038 shares of common stock outstanding with a weighted-average exercise price of $4.93 and a weighted average remaining contractual life$1.78. As of 8.5 years. 401,077June 30, 2019, options to purchase 1,640,421 shares are vested and exercisable. During the six months ended June 30, 2019, 86,250 in options were exercised at a weighted-average exercise price of $1.74 which resulted in the issuance of 36,410 shares of common stock. There are 1,385,011 options available for issuance as of June 30, 2019.
In connection with the closing of the Financing, there were changes to the board of directors and the Company issued equity grants to new members as well as equity grants to all members as compensation. In total, in 2018 the Company granted 140,097 restricted stock units to the board members at a fair value of $2.07. Restricted stock units of 19,324 issued to the Chairman were cancelled in January 2019. The restricted stock units vest quarterly over twelve months. 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 ninesix months ended SeptemberJune 30, 20172019, was $63$303 and $136, respectively. For$626, respectively; and for the three and ninesix months ended SeptemberJune 30, 2016 stock-based compensation2018, was $116$184 and $401,$203, respectively. As of SeptemberJune 30, 20172019, there was $211$1,884 in unrecognized compensation expense, which will be recognized over a weighted average period of 2.751.05 years.
22

STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts and number of lasers)

Note 11
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.
Income tax expensebenefit of $38$46 and $181$89 and for the three and ninesix months ended SeptemberJune 30, 20172019, and $64an expense of $40 and $191$80 for the three and ninesix months ended SeptemberJune 30, 2016,2018, 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. The February 2014, July 2014, June 2015 and May 2018 equity raises by the Company, will limit the annual use of these net operating loss carryforwards. Although the Company has not performed a Section 382 study, any limitation of its pre-change net operating loss carryforwards that would result in a reduction of its deferred tax liability that is not usedasset would also have an equal and offsetting adjustment to offset deferred tax assets forthe valuation allowance considerations.allowance.
Note 12
Business Segments and Geographic Data:Segments:
The Company has organized its business into threetwo operating segments to better alignpresent its organization based upon the Company'sCompany’s management structure, products and services offered, markets served and types of customers, as follows: The Dermatology Recurring Procedures segment derives its revenues from the usage of its equipment by dermatologists to perform XTRAC procedures performed by dermatologists.procedures. The Dermatology Procedures Equipment segment generates revenues from the sale of equipment, such as lasers and lamp products. The Dermatology Imaging segment generated revenues from the sale and usage of imaging devices. The Company has announced that it will no longer support the imaging devices effective September 30, 2017 thus there will be minimal continuing revenues for this segment. Management reviews financial information presented on an operating segment basis for the purposes of making certain operating decisions and assessing financial performance.
Unallocated operating expenses include costs that are not specific to a particular segment but are general to the group; included are expenses incurred for administrative and accounting staff, general liability and other insurance, professional fees and other similar corporate expenses. Interest expense and other 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:
23

- 19 -
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts and number of lasers)
(unaudited)

The following tables reflect results of operations from our business segments for the periods indicated below:
Three Months Ended SeptemberJune 30, 2017 (unaudited)2019

 
Dermatology
Recurring
Procedures
  
Dermatology
Procedures
Equipment
  
Dermatology
Imaging
  
TOTAL
  
Dermatology
Recurring
Procedures
  
Dermatology
Procedures
Equipment
  
TOTAL
 
Revenues $5,720  $1,751  $9  $7,480  
$
5,839
  
$
1,886
  
$
7,725
 
Costs of revenues  2,084   967   225   3,276   
1,733
   
1,082
   
2,815
 
Gross profit  3,636   784   (216)  4,204   
4,106
   
804
   
4,910
 
Gross profit %  63.6%  44.8%  (2400.0%)  56.2% 70.3% 42.6% 63.6%
                         
Allocated operating expenses:                         
Engineering and product development  348   63   -   411  
198
  
37
  
235
 
Selling and marketing expenses  2,238   449   -   2,687 
Selling and marketing 
2,771
  
187
  
2,958
 
                         
Unallocated operating expenses  -   -   -   1,678   
-
   
-
   
2,700
 
  2,586   512   -   4,776   
2,969
   
224
   
5,893
 
Income (loss) from operations  1,050   272   (216)  (572) 
1,137
  
580
  
(983
)
                         
Interest expense, net  -   -   -   (1,343)  
-
   
-
   
(145
)
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) 
$
1,137
  
$
580
  
$
(1,128
)
                


Six Months Ended June 30, 2019

Three Months Ended September 30, 2016 (unaudited)

 
Dermatology
Recurring
Procedures
  
Dermatology
Procedures
Equipment
  
Dermatology
Imaging
  
TOTAL
  
Dermatology
Recurring
Procedures
  
Dermatology
Procedures
Equipment
  
TOTAL
 
Revenues $6,205  $1,550  $12  $7,767  
$
11,151
  
$
4,057
  
$
15,208
 
Costs of revenues  2,162   877   31   3,070   
3,526
   
2,163
   
5,689
 
Gross profit  4,043   673   ( 19)  4,697   
7,625
   
1,894
   
9,519
 
Gross profit %  65.2%  43.4%  (158.3%)  60.5% 68.4% 46.7% 62.6%
                         
Allocated operating expenses:                         
Engineering and product development  343   31   8   382  
440
  
99
  
539
 
Selling and marketing expenses  2,767   57   16   2,840 
Selling and marketing 
5,539
  
485
  
6,024
 
                         
Unallocated operating expenses  -   -   -   1,880   
-
   
-
   
5,180
 
  3,110   88   24   5,102   
5,979
   
584
   
11,743
 
Income (loss) from operations  933   585   (43)  (405) 
1,646
  
1,310
  
(2,224
)
                         
         
Interest expense, net  -   -   -   (1,175)  
-
   
-
   
(280
)
Change in fair value of warrant liability  -   -   -   132 
Other income (expense), net  -   -   -   3 
                         
Income (loss) before income taxes $933  $585  
$ 
(43) 
$ 
(1,445) 
$
1,646
  
$
1,310
  
$
(2,504
)

24

- 20 -
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts and number of lasers)
(unaudited)

Nine
Three Months Ended SeptemberJune 30, 2017 (unaudited)2018

 
Dermatology
Recurring
Procedures
  
Dermatology
Procedures
Equipment
  
Dermatology
Imaging
  
TOTAL
  
Dermatology
Recurring
Procedures
  
Dermatology
Procedures
Equipment
  
TOTAL
 
Revenues $17,653  $5,784  $17  $23,454  
$
5,022
  
$
2,366
  
$
7,388
 
Costs of revenues  5,969   2,988   225   9,182   
1,919
   
1,630
   
3,549
 
Gross profit  11,684   2,796   ( 208)  14,272   
3,103
   
736
   
3,839
 
Gross profit %  66.2%  48.3%  (1223.5%)  60.9% 61.8% 31.1% 52.0%
                         
Allocated operating expenses:                         
Engineering and product development  1,104   204   1   1,309  
210
  
59
  
269
 
Selling and marketing expenses  7,747   1,167   -   8,914 
Selling and marketing 
2,168
  
210
  
2,378
 
                         
Unallocated operating expenses  -   -   -   4,999   
-
   
-
   
2,411
 
  8,851   1,371   1   15,222   
2,378
   
269
   
5,058
 
Income (loss) from operations  2,833   1,425   (209)  (950) 
725
  
467
  
(1,219
)
                         
Interest expense, net  -   -   -   (4,264) 
-
  
-
  
(328
)
Change in fair value of warrant liability  -   -   -   77 
Extinguishment of debt  -   -   -   (11,799)
Other income (expense), net  -   -   -   6 
                
Change in fair value of warranty liability
 
-
  
-
  
(23
)
Other expense, net
  
-
   
-
   
(19
)
Income (loss) before income taxes $2,833  $1,425  
$ 
(209) 
$ 
(16,930) 
$
725
  
$
467
  
$
(1,589
)
                


Six Months Ended June 30, 2018

  
Dermatology
Recurring
Procedures
  
Dermatology
Procedures
Equipment
  
TOTAL
 
Revenues
 
$
9,792
  
$
4,334
  
$
14,126
 
Costs of revenues
  
3,908
   
2,985
   
6,893
 
Gross profit  
5,884
   
1,349
   
7,233
 
Gross profit %  60.1%  31.1%  51.2%
             
Allocated operating expenses:
            
Engineering and product development  
484
   
123
   
607
 
Selling and marketing  
4,384
   
865
   
5,249
 
             
Unallocated operating expenses
  
-
   
-
   
4,295
 
   
4,868
   
988
   
10,151
 
Income (loss) from operations
  
1,016
   
361
   
(2,918
)
             
Interest expense, net
  
-
   
-
   
(691
)
             
Change in fair value of warrant liability
  
-
   
-
   
(22
)
             
Other income, net
  
-
   
-
   
1

             
Income (loss) before income taxes
 
$
1,016
  
$
361
  
$
(3,630
)
Nine Months Ended September 30, 2016 (unaudited)

  
Dermatology
Recurring
Procedures
  
Dermatology
Procedures
Equipment
  
Dermatology
Imaging
  
TOTAL
 
Revenues $17,826  $5,174  $126  $23,126 
Costs of revenues  6,723   2,641   267   9,631 
Gross profit  11,103   2,533   ( 141)  13,495 
Gross profit %  62.3%  49.0%  (111.9%)  58.4%
                 
Allocated operating expenses:                
Engineering and product development  977   147   417   1,541 
Selling and marketing expenses  9,626   261   186   10,073 
                 
Unallocated operating expenses  -   -   -   5,882 
   10,603   408   603   17,496 
Income (loss) from operations  500   2,125   (744)  (4,001)
                 
Interest expense, net  -   -   -   (3,571)
Change in fair value of warrant liability  -   -   -   5,316 
Other income (expense), net  -   -   -   (1)
                 
Income (loss) before income taxes $500  $2,125  
$ 
(744) 
$ 
(2,257)

25- 21 -

STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts and number of lasers)
(unaudited)

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 
Long-lived assets were 100% located in domestic markets as of September 30, 2017 and December 31, 2016.
Note 13
Significant Customer Concentration:
For the three and six months ended SeptemberJune 30, 2017,2019, revenues from sales to the Company'sCompany’s international master distributor (GlobalMed Technologies) were $1,148,$1,367 and $3,357, or 15.3%18% and 22%, of total revenues for such period. For the nine months ended September 30, 2017, revenues from sales to the Company's international master distributor were $3,861, or 16.5%,respectively, of total revenues for such period. At SeptemberJune 30, 2017,2019, the accounts receivable balance from GlobalMed Technologies was $418,$882, or 13.1%,25% of total net accounts receivable.
For the three and six months ended SeptemberJune 30, 2016,2018, revenues from sales to the Company'sCompany’s international master distributor (GlobalMed Technologies) were $1,457,$1,955 and $3,266, or 18.8%26% and 23%, respectively, of total revenues for such period. For the nine months ended September 30, 2016, revenues from sales to the Company's international master distributor were $4,604, or 19.9%, of total revenues for such period.
No other customer represented more than 10% of total company revenues for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016.2018. No other customer represented more than 10% of total accounts receivable as of SeptemberJune 30, 2017.2019.
Note 14
Related Parties:
On June 22, 2015,March 30, 2018, in connection with the Financing, the Company entered into athe securities purchase agreementagreements, each for approximately $1,000, with our then current shareholders, Broadfin and Sabby. Upon closing of the Purchasers, including certain funds managed byFinancing, each of 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 millionreceived 925,926 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 ofour common stock at an initial conversiona price per share of $3.75$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. 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 See Note 62 for additionalmore information on the termsFinancing.

During the first quarter of 2018, the Company had an agreement with a relative of a former Board member for advertising and incurred $13 and no longer uses this service.
Note 15
Commitments:
Leases
The Company recognizes right-of-use assets (“ROU Assets”) and operating lease liabilities (“Lease Liabilities”) when it obtains the right to control an asset under a leasing arrangement with an initial term greater than twelve months. The Company adopted the short-term accounting election for leases with a duration of less than one year. The Company leases its facilities and certain IT and office equipment under non-cancellable operating leases. All of the Debentures. On September 30, 2015,Company's leasing arrangements are classified as operating leases with remaining lease terms ranging from 1 to 6 years, and one facility lease has a renewal option for two years. Renewal options have been excluded from the determination of the lease term as they are not reasonably certain of exercise. The Company entered into an addendum with FR National Life, LLC for the Carlsbad facility has been included in the determination of the lease term as the Company repriced outstanding Warrants heldexecuted the extension. The extension was for five years and was executed on May 1, 2019. The ROU assets and lease liabilities increased by certain investors to reduce$784. Included in cash flows provided by operations for the exercise price to $3.75 per share.six months ended June 30, 2019, there was amortization of right-of-use assets of $147.
Operating lease costs were $116 and $227 for the three and six months ended June 30, 2019. Cash paid for amounts included in the measurement of operating lease liabilities was $110 and $204 for the three and six months ended June 30, 2019. As of June 30, 2019, the incremental borrowing rate was 9.76% and the weighted average remaining lease term was 4.5 years. The following table summarizes the Company’s operating lease maturities as of June 30, 2019:
26

- 22 -
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts and number of lasers)
(unaudited)

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 principle 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.
Other than the limitations on conversions to keep each such holders 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 that 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 shares of common stock at a conversion price equal to $2.69 for a total of approximately 15,049,000 common stock.
On November 4, 2015, the Company entered into consulting agreements with two of its directors, Jeffrey F. O'Donnell, Sr. and Samuel E. Navarro, the terms of which are the same. Under the terms of their respective agreements, each director agrees to provide strategic support, advice and guidance to the Company and its management team in connection with the integration and operation of the expanded business, investor relations and internal and external business development activities. The consultant will make himself available to the Company's President and Chief Executive Officer and the management team on request at mutually convenient times and will report to the Board of Directors quarterly and otherwise when requested by the Board. The agreements had been extended through June 30, 2017. The directors were each to be paid an up-front fee of $40 for advice and services rendered prior to the date of the agreement, including advice related to the acquisition of the XTRAC and VTRAC assets and the structuring of the financing for that acquisition, a retainer of $10 per month, commencing November 10, 2015 and continuing on the tenth day of each month through the expiration of their respective agreements, and reimbursement of pre-approved, out-of-pocket expenses. The term of the agreement with Mr. O'Donnell has been further extended through December 31, 2017. Mr. Navarro's agreement expired per its terms on June 30, 2017 and no extensions or renewals of the agreement were entered into.
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 to 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 discussions with Olympic Media, a company founded by Ryan Coyne, the son of James Coyne, to create and execute a focused tactical plan to leverage new and existing digital assets across social and digital platforms to drive psoriasis and vitiligo sufferers to the Company's website and call center for conversion to new patient appointments. As of the date hereof, no agreement has been reached with Olympic Media and no services have been provided by Olympic Media.
27

STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts and number of lasers)

Note 15
Commitments and
For the year ending December 31, Amount 
Remaining 2019 
$
167
 
2020  
436
 
2021  
456
 
2022  
371
 
2023  
242
 
Thereafter  
177
 
Total remaining lease payments  
1,849
 
Less: imputed interest  
(343
)
Total lease liabilities 
$
1,506
 
Contingencies:
LeasesIn the ordinary course of business, the Company is routinely defendants in or parties to pending and threatened legal actions and proceedings, including actions brought on behalf of various classes of claimants. These actions and proceedings are generally based on alleged violations of employment, contract and other laws. In some of these actions and proceedings, claims for substantial monetary damages are asserted against the Company. In the ordinary course of business, the Company is also subject to regulatory and governmental examinations, information gathering requests, inquiries, investigations, and threatened legal actions and proceedings. In connection with formal and informal inquiries by federal, state, local and foreign agencies, the Company receives numerous requests, subpoenas and orders for documents, testimony and information in connection with various aspects of its activities.
The Company has entered into various non-cancelable operating lease agreements for real property and three minor operating leases for personal property. These arrangements expire at various dates through 2019. As of September 30, 2017, aggregate annual minimum payments due under the Company's lease obligations are as follows:
Year,
   
2017 (remaining three months) $113 
2018  429 
2019  160 
Total $702 

Note 16
Subsequent Events:events:
During October 2017, investors converted Series C Preferred Stock amounting
Expiration of Warrants
In July 2019, 1,239,769 warrants with an exercise prices ranging from $3.75 to $4,299 into 1,598,346 shares of common stock.$12.25 expired.

28


- 23 -


ITEM 2.Management's  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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.10-Q (this “Report”). This discussion contains forward-looking statements that involve risks and uncertainties. These forward-looking statements include, but are not limited to, statements about the plans, objectives, expectations and intentions of STRATA Skin Sciences, Inc., a Delaware corporation (referred to in this Report as "we," "us," "our," "STRATA," "STRATA“we,” “us,” “our,” “STRATA,” “STRATA Skin Sciences"Sciences” or "registrant"“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"“Risk Factors” included elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2016.2018. 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“Cautionary Note Regarding Forward-Looking Statements"Statements” that appears at the end of this discussion. These statements, like all statements in this report,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.share and prices per treatment.
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 isultraviolet light excimer laser system utilized to treat psoriasis, vitiligo and other skin diseases. The XTRAC deviceexcimer laser system received FDA clearance from the United States Food and Drug Administration in 2000 and has since become a widely recognized treatment among dermatologists. The system delivers targeted 308um ultraviolet light to affected areas of skin, leading to psoriasis clearing and vitiligo repigmentation, following a series of treatments. As of SeptemberJune 30, 2017,2019, there were 776764 XTRAC systems placed in dermatologists'dermatologists’ offices in the United States under our dermatology recurring revenueprocedure model, upan increase from 760746 at the end of September 30, 2016.December 31, 2018. Under the dermatology recurring revenueprocedure model, the XTRAC system is placed in a physician's office and revenue is recognizedfees are charged on a per procedure basis.basis or a fee is charged on a periodic basis not to exceed an agreed upon number of procedures. The XTRAC system'ssystem’s use for psoriasis is covered by nearly all major insurance companies, including Medicare. The VTRAC Excimer Lamp system, offered internationally in addition to the XTRAC, provides targeted therapeutic efficacy demonstrated by excimer technology with the simplicity of design and reliability of a lamp system. ThereWe believe there are approximately 7.5 million people in the United States and up to 125 million people worldwide suffering from psoriasis, and 1% to 2% of the world'sworld’s population suffers from vitiligo. In 2016,2018, over 351,000275,000 XTRAC laser treatments were performed on approximately 22,00017,000 patients in the United States.
In March 2017 we informed all of the users of the MelaFind System that all service efforts for the device would end on September 30, 2017, we have now fully discontinued our efforts to develop and commercialize MelaFind. This activity is included in the Dermatology Imaging segment. MelaFind is a non-invasive, point-of-care (i.e., in the doctor's office) instrument designed to aid in the dermatologists' decision to biopsy pigmented skin lesions, particularly melanoma. We have been unsuccessful in commercializing the MelaFind product in a way that would bring financial benefit to our shareholders. In March 2017, we sent a notice to the 90 owners of MelaFind devices informing them that, effective September 30, 2017, we no longer had the resources to continue to support the device and that our inventory of spare parts was being offered for sale to them on a first-come, first-serve basis.
29



Effective March 1, 2017, we entered into an agreement to license the exclusive US distribution rights for the Ellipse family of products, Nordlys, from Ellipse USA ("Ellipse") through December 31, 2019. The agreement was to be renewed if certain minimum purchase requirements were achieved and an approximate $33 monthly license fee was paid, for a contractual total license fee of $1.1 million over the Initial Term. On October 26, 2017, by mutual agreement of the three parties involved in the transaction, the Company, Ellipse USA and the manufacturer Ellipse A/S, cancelled the agreement with Ellipse USA retroactively effective to August 9, 2017, and we entered into two new agreements. Under the new agreements we will have the exclusive US distribution rights for the Ellipse family of products, Nordlys, from Ellipse A/S, the Danish manufacturer, through August 9, 2020. If certain sales targets are met, the new agreement will automatically be extended for two additional years. Under the terms of the new agreements, we will be the exclusive distributor of Ellipse lasers and will pay to Ellipse USA a monthly license fee of $10 through August 9, 2020, in addition to commissions for each system sold. The license fee amounts to approximately $355 over the Initial Term with a present value as of the effective date of the agreement of $286. As a result of the termination of the old agreement and the signing of the new agreements we reversed the intangible asset and corresponding liability recorded on March 1, 2017 (which resulted in a $40 gain) and recorded the distribution rights at the present value of the payments under the new agreements.
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 allowshas minimum annual sales requirements for two one year extensions.renewal. The Company does not expect to meet the criteria for renewal.
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. Sales for the three and six months ended June 30, 2019 and 2018 were $121 and $59; and $165 and $277, respectively.

- 24 -



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"(“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.
 •
Nordlys System. Nordlys has 16 indications cleared by FDA and has the ability to use a multitude of light based technologies all in on compact platform–SWT (Selective Waveband Technology: the latest evolution and advancement of Intense Pulsed Light), Nd:YAG and the FRAX 1550 non-ablative fractionated technology.
•
STRATAPEN™STRATAPEN®. STRATAPEN uses the patent-pending Biolock cartridge. The Biolock needle depth can be adjusted during the course of the procedure to accommodate different treatment areas and can easily maneuver around facial contours and delicate features, such as the eyes, nose and mouth.
Recent Developments
2018 Equity Financing
On May 29, 2018, we completed the sale and issuance (the “Financing”) of 15,740,741 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 “Stock Purchase Agreements”).
We incurred $2,336 of costs related to the Financing. These costs included $500 to Accelmed for legal fees, consulting, and due diligence costs related to the stock purchase agreement. In addition, we incurred placement agent fees in the amount of $1,359, among other costs directly related to the financing.
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 Stock 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 Stock Purchase Agreements but the Company has determined they are not probable, contractually obligated or estimable at this time.
Carlsbad Lease
On May 1, 2019, we entered into the Fifth Amendment to Standard Industrial/Commercial Multi-Tenant Lease with FR National Life, LLC (“FR National”) to extend the Company’s current lease for a total of 16,989 square feet at 2375 and 2365 Camino Vida Roble, Carlsbad California 92011. The term of this amendment commences on October 1, 2019 and expires on September 30, 2024.

- 25 -



Korean Distribution Agreement
In the third quarter of 2019, we signed a direct distribution agreement with our Korean distributor for a combination of direct capital sales and recurring revenues for the country of South Korea. This agreement is expected to increase recurring revenues over time, but will have an initial impact of reducing sales of dermatology procedures equipment in the near term as the contract is to apply the same recurring revenue model we have in the United States.
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 Financial Trust (“MidCap”) in 2015. The terms of the credit facility have been amended to impose less restrictive covenants, lower prepayment fees for the Company and extend the maturity to May 2022. 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 payments beginning December 2019 are $252 plus interest per month. On April 30, July 15, August 26 and October 15, 2019, the Company received waivers from Midcap as administrative agent for the lenders who are party to the Agreement, wherein the lenders waived the Company’s compliance with the obligation to deliver audited financial statements within 120 days of year-end pursuant to the Credit Agreement. The waivers were effective through November 7, 2019. The Company delivered the audited financial statements on or about October 29, 2019, and is currently in compliance with this covenant.
Critical Accounting Policies and Estimates
There have been no changes to our critical accounting policies in the three and six months ended June 30, 2019, except for the adoption of the new lease 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, 2018, of our Annual Report on Form 10-K as filed with the SEC on October 29, 2019.
Results of Operations
Sales and Marketing
As of SeptemberJune 30, 2017,2019, our sales and marketing personnel consisted of 5459 full-time positions, inclusive of a vice president of sales, direct sales organization as well as an in-house call center staffed with patient advocates and a reimbursement group that provides necessary insurance information to our physician partners and their patients.
Reverse Stock Split
On April 6, 2017, we completed the reverse split of its common stock in the ratio 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, among other benefits. As a result of the stock split, we now have 2,183,243 shares of common stock outstanding, taking into account the rounding up of fractional shares.
30



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. 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, as filed with the SEC with our Annual Report on Form 10-K filed on March 13, 2017.
Results of Operations (The following financial data, in this narrative, are expressed in thousands, except for the earnings per share.)
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,
 
  2017  2016  2017  2016 
Dermatology Recurring Procedures $5,720  $6,205  $17,653  $17,826 
Dermatology Procedures Equipment  1,751   1,550   5,784   5,174 
Dermatology Imaging  9   12   17   126 
                 
Total Revenues $7,480  $7,767  $23,454  $23,126 
     
For the Three Months Ended
June 30,
  
For the Six Months Ended
June 30
 
  2019  2018  2019  2018 
Dermatology Recurring Procedures 
$
5,839
  
$
5,022
  
$
11,151
  
$
9,792
 
Dermatology Procedures Equipment  
1,886
   
2,366
   
4,057
   
4,334
 
                 
Total Revenues 
$
7,725
  
$
7,388
  
$
15,208
  
$
14,126
 


- 26 -



Dermatology Recurring Procedures
Recognized recurring treatment revenue for the three months ended SeptemberJune 30, 20172019, was $5,720,$5,839, which approximates 82,000we estimate is approximately 84,000 treatments, with prices between $65 to $95 per treatment compared to recognized recurring treatment revenue for the three months ended SeptemberJune 30, 20162018, of $6,205,$5,022, which approximates 89,000we estimate is approximately 72,000 treatments, with prices between $65 to $95 per treatment.
Recognized treatment revenue for the ninesix months ended SeptemberJune 30, 20172019, was $17,653,$11,151, which approximates 252,000we estimate is approximately 159,000 treatments with prices between $65 toand $95 per treatment compared to the recognized treatment revenue for the ninesix months ended SeptemberJune 30, 20162018, of $17,826,$9,792, which approximates 244,000140,000 treatments with prices between $65 toand $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 haveour strategy is to continue to execute a direct to patientdirect-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 we believe are afflicted with these diseases. During the three months ended September 30, 2017, we beganWe expect to build a larger digital media presence while reducing our expenditures in both television and radio. During this quarter we had no directcontinue to patient media which resulted in a decline in revenues, but we are ramping up new digital marketing strategiesincrease spending in the fourth quarterdirect-to-patient programs to stimulate patient referralsdrive 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.
We defer substantially all sales of treatment codes ordered by and delivered to
Revenues from Dermatology Recurring Procedures are recognized as revenue over the customer within the last two weeksestimated usage period of the period in determiningagreed upon number of treatments, as the amounttreatments are being used. As of procedures performed by our physician-customers. Management believes this approach closely approximates the actual amount of unused treatments that existed at the end of a period. For the three months ended SeptemberJune 30, 20172019 and 2016,2018, we deferred net revenues of $200$2,040 and $213,$1,726, respectively, under this approach.which will be recognized as revenue over the remaining usage period.
31

In the third quarter of 2019, we signed a direct distribution agreement with our Korean distributor for a combination of direct capital sales and recurring revenues for the country of South Korea. This agreement is expected to increase recurring revenues over time, but will have an initial impact of reducing sales of dermatology procedures equipment in the near term as the contract is to apply the same recurring revenue model we have in the United States.


Dermatology Procedures Equipment
For the three months ended SeptemberJune 30, 20172019, dermatology equipment revenues were $1,751.$1,886. Internationally, we sold 1622 (21 XTRAC and 1 VTRAC). Domestically, we sold 2 XTRAC systems forduring the three months ended SeptemberJune 30, 2017, (52019.
For the three months ended June 30, 2018, dermatology equipment revenues were $2,366. Internationally, we sold 25 systems (24 XTRAC and 111 VTRAC). Domestically, we sold six3 XTRAC systems for the three months ended SeptemberJune 30, 2017. 2018.
For the threesix months ended SeptemberJune 30, 20162019, dermatology equipment revenues were $1,550.$4,057. Internationally, we sold 1945 systems for(43 XTRAC and 2 VTRAC). Domestically, we sold 4 XTRAC systems during the threesix months ended SeptemberJune 30, 2016, (9 XTRAC and 10 VTRAC).2019.
For the ninesix months ended SeptemberJune 30, 20172018, dermatology equipment revenues were $5,784.$4,334. Internationally, we sold 4644 systems for the nine months ended September 30, 2017, (31(37 XTRAC and 197 VTRAC). Domestically, we sold 178 XTRAC systems forduring the ninesix months ended SeptemberJune 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 XTRAC and 26 VTRAC)2018.
.
Additionally, included in the three and nine months ended September 30, 2017 was $118 and $509 respectively in revenues for one and three Nordlys units and accessories, respectively. There were no such revenues in the comparable prior year periods.
Dermatology Imaging
For the three months ended September 30, 2017 and 2016, imaging revenues were $9 and $12, respectively. For the nine months ended September 30, 2017 and 2016, imaging revenues were $17 and $126, respectively. We have discontinued our efforts to develop the MelaFind System and
have discontinued our efforts to develop and commercialize it. - 27 -We no longer have the resources to continue to support the device. In announcing our discontinuation of support for the device we offered MelaFind users the opportunity to purchase our inventory of spare parts. Imaging revenues for the current period include those sales.



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,
 
  2017  2016  2017  2016 
Dermatology Recurring Procedures $2,084  $2,326  $5,969  $6,723 
Dermatology Procedures Equipment  967   607   2,988   2,641 
Dermatology Imaging  -   109   225   267 
                 
Total Cost of Revenues $3,276  $3,042  $9,182  $9,631 
  
For the Three Months Ended
June 30,
  
For the Six Months Ended
June 30,
 
  2019  2018  2019  2018 
Dermatology Recurring Procedures 
$
1,733
  
$
1,919
  
$
3,526
  
$
3,908
 
Dermatology Procedures Equipment  
1,082
   
1,630
   
2,163
   
2,985
 
                 
Total Cost of Revenues 
$
2,815
  
$
3,549
  
$
5,689
  
$
6,893
 

Gross Profit Analysis
Gross profit decreased to $4,204 for the three months ended September 30, 2017 from $4,697 during the same period in 2016. As a percentage of revenues, the gross margin was 56.2% for the three months ended September 30, 2017 and 60.5% during the same period in 2016. Gross profit increased to $14,272 for the nine months ended September 30, 2017 from $13,495 during the same period in 2016. As a percentage of revenues, the gross margin was 60.9% for the nine months ended September 30, 2017 and 58.4% during the same period in 2016.
32



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
June 30,
  
For the Six Months Ended
June 30,
 
  2019  2018  2019  2018 
Revenues
 
$
7,725
  
$
7,388
  
$
15,208
  
$
14,126
 
Percent increase  
4.6
%
      
7.7
%
    
Cost of revenues  
2,815
   
3,549
   
5,689
   
6,893
 
Percent decrease  
(20.7
%)
      
(17.5
%)
    
Gross profit 
$
4,910
  
$
3,839
  
$
9,519
  
$
7,233
 
Gross profit  percentage  
63.6
%
  
52.0
%
  
62.6
%
  
51.2
%
Gross profit increased to $4,910 for the three months ended June 30, 2019 from $3,839 during the same period in 2018. As a percent of revenue, the gross margin was 63.6% for the three months ended June 30, 2019, as compared to 52.0% for the same period in 2018. Gross profit increased to $9,519 for the six months ended June 30, 2019, from $7,233 during the same period in 2018. As a percent of revenue the gross margin was 62.6% for the six months ended June 30, 2019, as compared to 51.2% for the same period in 2018. This is the result of higher revenue in the recurring revenue segment as well as lower depreciation on lasers placed in service and also higher sales of Nordlys product in 2018 which have a lower gross profit.


Dermatology Recurring Procedures
 
For the Three Months Ended
September 30,
  
For the Nine Months Ended
September 30,
  
For the Three Months Ended
June 30,
  
For the Six Months Ended
June 30,
 
 2017  2016  2017  2016  2019  2018  2019  2018 
Revenues $5,720  $6,205  $17,653  $17,826  
$
5,839
  
$
5,022
  
$
11,151
  
$
9,792
 
Percent decrease  (7.8%)      (1.0%)    
Percent increase 
16.3
%
    
13.9
%
   
Cost of revenues  2,084   2,162   5,969   6,723  
1,733
  
1,919
  
3,526
  
3,908
 
Percent decrease  (3.6%)      (11.2%)      
(9.7
%)
      
(9.8
%)
    
Gross profit $3,636  $4,043   11,684  $11,103  
$
4,106
  
$
3,103
  
$
7,625
  
$
5,884
 
Gross margin percentage  63.6%  65.2%  66.2%  62.3%
Gross profit percentage 
70.3
%
 
61.8
%
 
68.4
%
 
60.1
%
The primary reasonreasons for the changeincrease in gross profit for the three and six months ended SeptemberJune 30, 2017,2019, is the result of higher number of treatments sold in the same periods of 2019 as compared to the same periodcomparable periods 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 strategies2018 and lower depreciation expense on lasers placed in the fourth quarter to stimulate patient referrals and related revenues. The primary reason for the change in gross profit for the nine months ended September 30, 2017, compared to the same period in 2016, was due to technical improvements in the product which reduced gas consumption and service repairs for the nine months ended September 30, 2017.field. Incremental treatments delivered on existing equipment incur negligible incremental costs, so increases and/orand decreases in thosethe volume treatments have ana favorable impact on the gross margin.margins percentages.

Dermatology Procedures Equipment
 
For the Three Months Ended
September 30,
  
For the Nine Months Ended
September 30,
 
  2017  2016  2017  2016 
Revenues $1,751  $1,550  $5,784  $5,174 
Percent increase  13.0%      11.8%    
Cost of revenues  967   877   2,988   2,641 
Percent increase  10.3%      13.1%    
Gross profit $784  $673  $2,796  $2,533 
Gross margin percentage  44.8%  43.4%  48.3%  49.0%
- 28 -



Dermatology Procedures Equipment 
For the Three Months Ended
June 30,
  
For the Six Months Ended
June 30,
 
  2019  2018  2019  2018 
Revenues
 
$
1,886
  
$
2,366
  
$
4,057
  
$
4,334
 
Percent decrease  
(20.3
%)
      
(6.4
%)
    
Cost of revenues  
1,082
   
1,630
   
2,163
   
2,985
 
Percent decrease  
(33.6
%)
      
(27.5
%)
    
Gross profit  
804
  
$
736
  
$
1,894
  
$
1,349
 
Gross profit  percentage  
42.6
%
  
31.1
%
  
46.7
%
  
31.1
%
The primary reason for the change in gross profitmargin percent for the three and ninesix months ended SeptemberJune 30, 2017,2019, for dermatology procedures equipment, compared to the same periodsperiod in 2016,2018, was higher sales of the Nordlys product mix. The gross margin change is affected by the mix of products sold as XTRAC systems haveline in 2018 which carry a lower gross margin than parts. Additionally, domestic XTRAC system salesprofit and Nordlys system sales have a greater gross margin than international sales.
33



Dermatology Imaging
The primary reason for the changelower selling prices in gross profit for the three and nine months ended September 30, 2017,2018 as compared to the same periods in 2016, was the fact that we have discontinued our efforts to develop the MelaFind System and 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 product2019.
Engineering and Product Development
Engineering and product development expenses for the three months ended SeptemberJune 30, 2017 increased2019, decreased to $410$235 from $382$269 for the three months ended SeptemberJune 30, 2016.2018. Engineering and product development expensescosts for the ninesix months ended SeptemberJune 30, 20172019, decreased to $1,308$539 from $1,541$607 for the ninesix months ended SeptemberJune 30, 2016.2018. The decreases weredecrease was primarily due to havingemployee severance costs incurred during the six months ended the ongoingJune 30, 2018, associated with discontinuing research and development efforts for the MelaFind technology on product enhancements during the nine months ended September 30, 2016.efforts.
Selling and Marketing Expenses
For the three months ended SeptemberJune 30, 2017,2019, selling and marketing expenses decreasedwere $2,958 as compared to $2,687 from $2,840$2,378 for the three months ended SeptemberJune 30, 2016.2018. Sales and marketing expenses were higher primarily due to our decision to increase direct to consumer advertising and trade show and meeting spending in 2019 over the comparable period in 2018. Also included in 2018 was a write-off of distributor rights liabilities of $237. For the ninesix months ended SeptemberJune 30, 2017,2019, selling and marketing expenses decreasedincreased to $8,914$6,024 from $10,073$5,249 for the nine months ended September 30, 2016. The decreases were relatedsame period in 2018 as a result of our decision to increase direct to consumer advertising and trade show and meeting spending in 2019 over the planned reduction of expensecomparable period in TV and radio media as we transition over to more of an internet and social media campaign.2018.
General and Administrative Expenses
For the three months ended SeptemberJune 30, 2017,2019, general and administrative expenses decreasedincreased to $1,678$2,700 from $1,880$2,411 for the three months ended SeptemberJune 30, 2016.2018. The increase in the three months ended June 30, 2019, is primarily due to the result of higher stock-based compensation, and additional accounting and legal costs associated with the Company’s restatement of its financial statements as disclosed in the Annual Report on Form 10-K. For the ninesix months ended SeptemberJune 30, 2017,2019, general and administrative expenses decreasedincreased to $4,999$5,180 from $5,882$4,295 for the nine months ended September 30, 2016. The decrease forsame period in 2018 primarily as a result of higher stock-based compensation, and an additional approximately $900 accounting and legal costs associated with the nine months ended September 30, 2017 was primarily due to:Company’s restatement of its financial statements as disclosed in the Annual Report on Form 10-K.
·           A decrease of approximately $535 for the nine months ended September 30, 2017, respectively, due to the closing of the Irvington, NY facility in May 2016.
·           A decrease $266 in stock compensation from the nine months ended September 30, 2017 from the same periods in 2016.
Interest Expense, Net
Interest expense for the three months ended SeptemberJune 30, 20172019, was $1,343$145 compared to $1,175$328 in the three months ended SeptemberJune 30, 2016. Interest2018. The decrease in interest expense for the nine monthsthree ended SeptemberJune 30, 2017 was $4,265 compared 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 expense2019, related to the termlower interest paid on the MidCap debt issued in December 2015. Additionally, approximately $197 of interest expense was recognized as a result of the conversion$3,000 pay down in May 2018. We also received interest income of $262 of debentures into common stock during$94 in 2019. For the ninesix months ended SeptemberJune 30, 2017. Additionally, approximately $203 of2019, interest expense was recognizedexpenses decreased to $280 from $691 for the same period in 2018 related to the lower interest paid on the MidCap debt as a result of the conversion$3,000 pay down in May 2018 and we received interest income of $248 of debentures into common stock during the nine months ended September 30, 2016.$192 in 2019.
Change in Fair Value of Warrant Liability
In accordance with FASB ASC 470, "“Debt – Debt with Conversion and Other Options"Options” ("“ASC Topic 470"470”) and FASB ASC 820, Fair Value Measurements and Disclosures ("“ASC Topic 820"820”), we measuredre-measured the fair value of our warrants that were recorded at their fair value and recognized as liabilities as of Septemberliabilities. For the three and six months ended June 30, 2017,2019, there was no gain or loss associated with warrants. For the three and recorded $81six months ended June 30, 2018, $23 and $77$22 was recognized in other expenses. All such warrants have expired in February and April 2019.


- 29 -



Income Taxes
The Company recognized income tax benefit of $46 and $89 for the three and ninesix months ended SeptemberJune 30, 2017, respectively. We measured the fair value2019, and an expense of these warrants as of September 30, 2016,$40 and recorded $132 and $5,316 in other income$80 for the three and ninesix months ended September 30, 2016, respectively.
34



Loss on extinguishment of debentures
Loss on extinguishment of debentures of $11,799 for the three and nine months ended September 30, 2017, represents the loss recognized as a result of the exchange of the 2.25% Senior Series A Secured Convertible Debentures due June 30, 2021 and the 4% Senior Secured Convertible Debentures due July 30, 2021 for 40,482 shares of Series C Convertible Preferred Stock. For more information, see Note 6 to the accompanying consolidated financial statements.
Income Taxes
Income tax expense for the three months ended September 30, 20172018, was $38 compared to $64 for the three months ended September, 30 2016. Income tax expense for the nine months ended September 30, 2017 was $180 compared to $191 for the nine months ended September, 2016. The expense is comprised primarily of the change in deferred tax liability related to goodwill. Goodwill is an amortizing asset according to tax regulations. This generates a deferred tax liability that is not used to offset deferred tax assets for valuation allowance considerations.
Net Loss
The factors described above resulted in net loss of $13,061 during the three months ended September 30, 2017, as compared to net loss of $1,509 during the three months ended September 30, 2016. The factors described above resulted in net loss of $17,110 during the nine months ended September 30, 2017, as compared to net loss of $2,448 during the nine months ended September 30, 2016.
Non-GAAP adjusted EBITDA
As a result of our acquisition of the XTRAC and VTRAC products, we
We have determined to supplement our condensed consolidated financial statements, prepared in accordance with GAAP,accounting principles generally accepted in the United States of America (“US GAAP”), presented elsewhere within this report, we will providewith certain non-GAAP measures of financial performance. These non-GAAP measures include non-GAAP adjusted EBITDA.EBITDA, “Earnings Before Interest, Taxes, Depreciation, and Amortization.”
This non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for Net Earnings (Loss) determined in accordance with US GAAP, and should not be considered in isolation or as a substitute for analysis of the Company's results as reported under US 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, US GAAP measures. These non-GAAP measures are provided to enhance readers'readers’ overall understanding of our current financial performance and to provide further information for comparative purposes. This supplemental presentation should not be construed as an inference that the Company's future results will be unaffected by similar adjustments to Net Earnings (Loss) determined in accordance with US GAAP.
35



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 US 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
June 30,
  
For the Six Months Ended
June 30,
 
  2019  2018  2019  2018 
             
Net Loss 
$
(1,082
)
 
$
(1,629
)
 
$
(2,415
)
 
$
(3,710
)
                 
Adjustments:                
Depreciation/amortization*  
1,197
   
1,378
   
2,494
   
2,841
 
Income taxes  
(46
)
  
40
   
(89
)
  
80
 
Interest expense, net  
145
   
328
   
280
   
691
 
                 
Non-GAAP EBITDA  
214
   
117

  
270
   
(98
)
                 
Stock compensation  
303
   
184
   
626
   
203
 
Change in fair value of warrants  
-
   
23
   
-
   
22
 
Loss and disposal of property and equipment  
-
   
280
   
-
   
280
 
Loss (gain) on cancelation of distribution rights agreement  
-
   
237
   
-
   
(11
)
                 
Non-GAAP adjusted EBITDA 
$
517
  
$
367
  
$
896
  
$
396
 
* Includes depreciation onof lasers placed-in-service of $1,078$787 and $1,040$906 for the three months ended SeptemberJune 30, 20172019 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 
             
* Includes depreciation on lasers placed-in-service of $3,2292018, respectively; and $3,329$1,425 and $1,865 for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively.
36

- 30 -



Liquidity and Capital Resources
As of SeptemberJune 30, 20172019, we had $3,927$12,517 of working capital compared to $4,619$14,595 as of December 31, 2016.2018. The change in working capital was primarily the result in the increase in the current portion of long-term debt. Cash and cash equivalents were $3,127$15,941 as of SeptemberJune 30, 2017,2019, as compared to $3,928$16,487 as of December 31, 2016.2018.
In June 2015, we raised additional gross proceeds of approximately $42,500 through the issuance of $32,500 of 2.25% senior secured convertible debentures due June 2020, $10,000 of Senior secured notes and warrants to purchase common stock. The debentures were convertible at any time into an aggregate of approximately 8.7 million shares of our common stock at a price of $3.75 per share. Our obligations under the debentures were secured by a subordinated first priority lien on all of our assets.
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 eliminateexisting $10.6 million credit facility established with MidCap in 2015. Per 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 principle was exchanged for 40,482 shares of Series C Preferred Stock.
Other than the limitations on conversions to keep each such holders beneficial ownership below 9.99%,Amendment the terms of the Series C Convertible Preferred Stock generally bestowcredit facility have been amended to impose less restrictive covenants and lower prepayment fees for the same rightsCompany. The agreement modified the principal payments including a period of 18 months where there are no principal payments due. On April 30, July 15, August 26 and October 15, 2019, the Company received waivers from Midcap as administrative agent for the lenders who are party to each holder as such holder would receive if they are common stock shareholder and are not redeemable by the holders, except thatAgreement, wherein the Series C Convertible Preferred Stock shares have no voting rights. Each sharelenders waived the Company’s compliance with the obligation to deliver audited financial statements within 120 days of Series C Convertible Preferred Stock has a stated value of $1,000year-end pursuant to the Credit Agreement. The waivers were effective through November 7, 2019. The Company delivered the audited financial statements on or about October 29, 2019, and is convertiblecurrently in compliance with this covenant.
On March 30, 2018, we entered into shares of common stock at a conversion price equalStock Purchase Agreement. On May 23, 2018, the stockholders approved the financing and we received $14,664 net proceeds after expenses for legal, due diligence and banking fees from the financing. See Note 2 to $2.69the condensed consolidated financial statements for a total of approximately 15,099,000 shares of common stock.additional detail.
Since inception, we
We have experienced recurring operating losses and, until 2016,prior to 2017, negative cash flowsflow 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, 2017and cash equivalents, combined with the anticipated revenues from the rental or sale of our products and the investment described above, will be sufficient to satisfy our working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with our existing operations through the next twelve12 months following the filing of this Form 10-Q.Report. In our debt modification with MidCap in the prior year, 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.
Net cash and cash equivalents provided by operating activities was $2,246$406 for the ninesix months ended SeptemberJune 30, 20172019, compared to cash used inby operating activities of $1,084$68 for the ninesix months ended SeptemberJune 30, 2016.2018. The increase in operating cash flows is primarily attributed to overall reduction ofprovided by operating expenses of approximately $2,723 duringactivities for the ninesix months ended SeptemberJune 30, 2017 compared to2019, was the nine months ended September 30, 2016.result of a lower net loss of $1,295 partially offset by non-cash adjustments.
Net cash and cash equivalents used in investing activities was $1,886$952 for the ninesix months ended SeptemberJune 30, 20172019, compared to cash used in investing activities of $467$914 for the ninethree months ended SeptemberJune 30, 2016. The primary reason2018.
There were no cash flows from financing activities for the change was the increased investment in lasers placed in service during the 2017 period.
Net cash and cash equivalents used in financing activities was $1,161 for the ninesix months ended SeptemberJune 30, 20172019, compared to cash provided by financing activities of $1,201$11,358 for the ninethree months ended September30, 2016.June 30, 2018. In the nine months ended September 30, 2017,2018, we had repaymentsthe investment described above and paid down $3,000 on the termMidCap debt of $857. Inand $306 repayment on the nine months ended September 30, 2016, we drew down $1,500 on a long-term debt facility.notes payable.
37



Commitments and Contingencies
There were no items, except as described above, that significantly impacted our commitmentsOn May 1, 2019, we entered into the Fifth Amendment to Standard Industrial/Commercial Multi-Tenant Lease with FR National Life, LLC (“FR National”) to extend the Company’s current lease for a total of 16,989 square feet at 2375 and contingencies as discussed in the notes to our 2016 annual financial statements included in our Annual Report2365 Camino Vida Roble, Carlsbad California 92011. The term of this amendment commences on Form 10-K.October 1, 2019 and expires on September 30, 2024.
Off-Balance Sheet Arrangements
At SeptemberJune 30, 2017,2019, we had no off-balance sheet arrangements.

- 31 -



Cautionary Note Regarding Forward-Looking Statements
This Quarterly
Certain statements in this Report on Form 10-Q containsare "forward-looking statements." These forward-looking statements include, but are not limited to, statements about the plans, objectives, expectations and intentions of STRATA Skin Sciences, Inc., a Delaware corporation (referred to in this Report as “we,” “us,” “our”, “registrant” or “the Company”), and other statements contained in this Report that are not historical facts. The Private Securities Litigation Reform Act of 1995 (the “Reform Act”) provides a safe harbor for forward-looking statements made by or on behalf of the Company. Forward-looking statements in this Report or hereafter included in other publicly available documents filed with the Securities and Exchange Commission, or the Commission, reports to our stockholders and other publicly available statements issued or released by us involve known and unknown risks, uncertainties and other factors which could cause our actual results, performance (financial or operating) or achievements to differ from the future results, performance (financial or operating) or achievements expressed or implied by such forward-looking statements. Such future results are based upon management's best estimates based upon current conditions and the most recent results of operations. When used in this Report, the words "will, " "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" or the negative of such terms and similar expressions identify statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934 as amended, whichand that are subjectintended to come within the "safe harbor" createdsafe harbor protection provided by those sections. Forward-looking statements are based on our management's beliefs andinvolve risks, 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 beliefuncertainties. There are important factors that the cash flow generated by these businesses will be sufficient to finance our operations, involve known and unknown risks, uncertainties and other factors which maycould cause our actual results performance, time frames or achievements to bediffer materially different from any future results, performance, time frames or achievementsthose expressed or implied by thethese forward-looking statements. We discuss many of these risks, uncertaintiesstatements, including our plans, objectives, expectations and intentions and other factors in ourdiscussed under "Item 1A Risk Factors" of the 2018 Annual Report on Form 10-K10-K. These forward-looking statements include, but are not limited to, statements about:
•forecasts of future business performance, consumer trends and macro-economic conditions;
•descriptions of market and/or competitive conditions;
•descriptions of plans or objectives of management for future operations, products or services;
•our estimates regarding the sufficiency of our cash resources, expenses, capital requirements and needs for additional financing and our ability to obtain additional financing;
•our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;
•our ability to obtain and maintain regulatory approvals of our products;
•anticipated results of existing or future litigation; and
•descriptions or assumptions underlying or related to any of the above items.
In light of these assumptions, risks and uncertainties, the year ended December 31, 2016,results and events discussed in the forward-looking statements contained in this Quarterly Report on Form 10-Q in greater detail under Item 1A. "Risk Factors." Given these risks, uncertainties and other factors, you shouldmight not occur. Investors are cautioned not to place undue reliance on these forward-looking statements. Also, thesethe forward-looking statements, represent our estimates and assumptionswhich speak only as of the date of this filing. You should read this Quarterly Report, even if subsequently made available by us on Form 10-Q completelyour website or otherwise. We are not under any obligation, 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 noexpressly disclaim any obligation, to update theseor alter any forward-looking statements, publicly,whether as a result of new information, future events or otherwise. You should not regards these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. All subsequent forward-looking statements attributable to us or to updateany person acting on our behalf are expressly qualified in their entirety by the reasons actual results could differ materially from those anticipatedcautionary statements contained or referred to in these forward-looking statements, even if new information becomes available in the future.this section.
ITEM 3.  Quantitative and Qualitative Disclosure about Market Risk
Our exposure to market risk is confined to our cash, cash equivalents, and short-term investments. 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.
Not applicable.

- 32 -



ITEM 4.  Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures, (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")“Exchange Act”), as of June 30, 2017.2019. Based on that evaluation, management hasthe Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were not effective atdue to the reasonable assurance levelmaterial weaknesses described below.
38

The design and operating effectiveness of our controls were inadequate to ensure that complex accounting matters are properly accounted for and reviewed in a timely manner which resulted in the following identified control deficiencies. These material weaknesses caused the restatements of our financial statements for our first, second and third quarters of 2018 and 2017 and for the year ended December 31, 2017. These errors are a result of the following control deficiencies:

Control Environment and Risk Assessment 

The Company did not have an effective control environment with the structure necessary for effective internal controls over financial reporting. Further, the Company did not have an effective risk assessment to identify and assess risks associated with changes to the Company’s structure and the impact on internal controls. The Company did not have appropriately qualified personnel to meet the Company’s control objectives and with an appropriate level of US GAAP knowledge and experience to properly review and evaluate the work performed by other Company personnel, outside experts and consultants related to complex accounting matters.
Control Activities 
The Company did not have control activities that were designed and operating effectively, including management review controls, controls related to monitoring and assessing the work of consultants, and controls to verify the completeness and adequacy of information.
Monitoring Activities  
The Company did not maintain effective monitoring controls related to the financial reporting process. The Company did not effectively monitor the controls associated with the use of outside experts and consultants. The failure to properly monitor impacted the timing, accuracy, and completion of the work related to significant accounting matters.
Our Chief Executive Officer and our Chief Financial Officer continue to review our controls relating to complex accounting matters.
Notwithstanding the identified material weaknesses, the Company believes the condensed consolidated financial statement in this Quarterly Report on Form 10-Q fairly represent in all material respects our financial condition and results of operations for the periods presented in accordance with US GAAP.
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.

- 33 -



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.reporting

PART II - Other Information
ITEM 1.  Legal Proceedings
From time to time in the ordinary course of our business, we may be involved ina party to certain other legal actions and claims,proceedings, incidental to the normal course of our business. These may include controversies relating to contract claims and employment related matters, some of which claims may be material, in which case, we will make separate disclosure as required.
ITEM 1A.  Risk Factors
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, 20162018, and filed with the SEC on March 13, 2017.October 29, 2019. There have been no material changes to these risks during the three and ninesix months ended SeptemberJune 30, 2017.2019.
ITEM 2.  Unregistered salesSales of equity securitiesEquity Securities and useUse of proceedsProceeds
None.
None
ITEM 3.  Defaults upon senior securities.Upon Senior Securities.
None.
ITEM 4.  Mine Safety Disclosures
None.
ITEM 5.  Other Information
None.
39



ITEM 6.  Exhibits
3.1 
Fifth Amended and Restated Certificate of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 contained in our Registration Statement on Form S-3 (File No. 333-167113), as filed on May 26, 2010).
3.2 
Fourth Amended and Restated Bylaws of the Company (Incorporated by reference to Exhibit 3.2 contained in our Form 8-K current report as filed on January 8, 2016).
3.3 
Certificate of Amendment to Fifth Amended and Restated Certificate of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 contained in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013 filed on August 7, 2013).
3.4 
Certificate of Amendment to Fifth Amended and Restated Certificate of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 contained in our Current Report on Form 8-K, filed on July 10, 2014).
3.5 
Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (Incorporated by reference to Exhibit 3.1 contained in our Current Report on Form 8-K, filed on February 3, 2014).
3.6 
Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock (Incorporated by reference to Exhibit 3.1 contained in our Current Report on Form 8-K, filed on July 23, 2014).

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3.7 
Certificate of Amendment to Fifth Amended and Restated Certificate of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 contained in our Current Report on Form 8-K, as filed on September 30, 2015).
3.8 
Certificate of Amendment to Fifth Amended and Restated Certificate of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 contained in our Current Report on Form 8-K, as filed on January 8, 2016).
3.9 
Certificate of Designations of Series C Convertible Preferred Stock (Incorporated by reference to Exhibit 3.1 contained in our Current Report on Form 8-K, as filed on September 25, 2017).
10.5110.1 
SecondFifth Amendment to CreditStandard Industrial/Commercial Multi-Tenant Lease L between FR National Life, LLC and Security Agreement dated asStrata Skin Sciences, Inc. for office and manufacturing space at 2375 and 2365 Camino Vida Roble Carlsbad, California 92011 (incorporated by reference to Exhibit 10.1 of November 10, 2017 among MidCap Financial Trust, as administrative agent, the Lenders as listedour Current Report on the signature pages thereto and the Company. (Filed here within)Form 8-K filed on May 6, 2019).
10.52
Amended and Restated Fee Letter Agreement dated as of November 10, 2017, by and between MidCap Financial Trust as Agent and the Company. (Filed here within).

31.1   
Rule 13a-14(a) Certificate of Chief Executive Officer
31.2   
Rule 13a-14(a) Certificate of Chief Financial Officer
32.1* 
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document
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"“filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.








40






SIGNATURES

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, 2017By:/s/ Francis J. McCaney
Name  Francis J. McCaney
Title    President and Chief Executive Officer
 
Date   November 14, 20172019
By:
/s/ Christina L. AllgeierDolev Rafaeli                                            
Name  Christina L. AllgeierDolev Rafaeli
Title    President & Chief Executive Officer

Date   November 14, 2019
By:
/s/ Matthew C. Hill                                        
Name  Matthew C. Hill
Title    Chief Financial Officer



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