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


FORM 10 - Q10-Q


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


For the quarterly period ended SeptemberJune 30, 20172023


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

graphic

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'sRegistrant’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 share
SSKN
The 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 ☐


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý☒  No ☐


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large“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 ☐☒ 
Smaller reporting company ý
☒		 
 
Emerging growth company ☐
   


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


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


The number of shares outstanding of the issuer'sissuer’s common stock as of November 10, 2017August 7, 2023 was 4,076,08934,913,886 shares.
1


STRATA SKIN SCIENCES, INC.


TABLE OF CONTENTS


Part I. Financial Information:PAGE
    
 
ITEM 1.  Financial Statements:Statements:
 
 a.
Condensed Consolidated Balance Sheets as of September June 30, 20172023 (unaudited) and December 31, 20162022
31
    
 b.
Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended September Three Months Ended June 30, 20172023 and 20162022 (unaudited)
42
    
 c.
Condensed Consolidated Statements of Operations and Comprehensive Loss for the nine months ended September Six Months Ended June 30, 20172023 and 20162022 (unaudited)
53
    
 d.
Condensed Consolidated StatementStatements of Changes in Stockholders’ Equity for the nine months ended September Six Months Ended June 30, 20172023 and 2022 (unaudited)
64
    
 e.
Condensed Consolidated Statements of Cash Flows for the nine months ended September Six Months Ended June 30, 20172023 and 20162022 (unaudited)
75
    
 f.
Notes to Unaudited Condensed Consolidated Financial Statements
96
    
 
ITEM 2.Management's  Management’s Discussion and Analysis of Financial Condition and Results of Operations
2923
    
 
ITEM 3.Quantitative and Qualitative Disclosure about Market Risk
3831
    
 
ITEM 4.Controls and Procedures
3831
    
Part II. Other Information:
 
    
 
ITEM 1.Legal Proceedings
3932
    
 
ITEM 1A.  1A.  Risk Factors
3932
    
 
ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds
3933
    
 
ITEM 3.Defaults Upon Senior Securities
3933
    
 
ITEM 4.Mine Safety Disclosures
3934
    
 
ITEM 5.Other Information
3934
    
 
ITEM 6.Exhibits
4034
    
  
Signatures
4135
    
  
Certifications
E-31.1
E-31.1
2

Table of Contents
PART I – Financial Information

ITEM 1.
ITEM 1.Financial Statements

STRATA SKIN SCIENCES, INC. AND SUBSIDIARYSkin Sciences, Inc. and Subsidiary
Condensed Consolidated CONDENSED CONSOLIDATED BALANCE SHEETSBalance Sheets
(Inin thousands, except share and per share amounts)
    
  September 30, 2017  December 31, 2016 
ASSETS (unaudited)    
Current assets:      
Cash and cash equivalents $3,127  $3,928 
Accounts receivable, net of allowance for doubtful accounts of $177 and $135, respectively  3,184   3,390 
Inventories  3,533   2,817 
Prepaid expenses and other current assets  209   617 
Total current assets  10,053   10,752 
         
Property and equipment, net  8,658   10,180 
Intangible assets, net  12,302   13,412 
Goodwill  8,803   8,803 
Other assets  48   46 
Total assets $39,864  $43,193 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
Current liabilities:        
          Note payable $34  $339 
   Current portion of long-term debt  1,936   1,714 
Accounts payable  1,907   1,853 
Other accrued liabilities  1,899   1,992 
Deferred revenues  350   235 
Total current liabilities  6,126   6,133 
         
Long-term liabilities:        
Long-term debt, net  8,842   9,752 
Senior secured convertible debentures, net  -   12,028 
Warrant liability  28   105 
Deferred tax liability  539   359 
Other liabilities  412   97 
Total liabilities  15,947   28,474 
         
Commitment and contingencies        
         
Stockholders' equity:        
Series B Convertible Preferred Stock, $.10 par value, 10,000,000 shares authorized; 2,928 and 6,000 shares issued and outstanding, as of September 30, 2017 and December 31, 2016, respectively  -   1 
Series C Convertible Preferred Stock, $.10 par value, 10,000,000 shares authorized; 40,482 and 0 shares issued and outstanding, as of September 30, 2017 and December 31, 2016,respectively  4   - 
Common Stock, $.001 par value, 150,000,000 shares authorized; 2,477,743 and 2,166,898 shares issued and outstanding, as of September 30, 2017 and December 31, 2016, respectively  3   2 
Additional paid-in capital  251,594   225,289 
Accumulated deficit  (227,686)  (210,575)
Accumulated other comprehensive income  2   2 
Total stockholders' equity  23,917   14,719 
Total liabilities and stockholders' equity $39,864  $43,193 


  June 30, 2023  December 31, 2022 
  (unaudited)    
Assets 
    
Current assets:      
Cash and cash equivalents 
$
9,034
  
$
5,434
 
Restricted cash
  1,361   1,361 
Accounts receivable, net of allowance for credit losses of $244 and $382 at June 30, 2023 and December 31, 2022, respectively
  
4,401
   
4,471
 
Inventories  
5,921
   
5,547
 
Prepaid expenses and other current assets  
528
   
691
 
Total current assets  
21,245
   
17,504
 
Property and equipment, net
  
8,319
   
7,498
 
Operating lease right-of-use assets
  
807
   
975
 
Intangible assets, net
  
15,959
   
17,394
 
Goodwill
  
8,803
   
8,803
 
Other assets  
71
   
98
 
Total assets 
$
55,204
  
$
52,272
 
         
Liabilities and Stockholders’ Equity        
Current liabilities:        
Accounts payable 
$
3,880
  
$
3,425
 
Accrued expenses and other current liabilities  
6,731
   
6,555
 
Deferred revenues  2,436
   2,778
 
Current portion of operating lease liabilities  
392
   
355
 
Current portion of contingent consideration
  
681
   
313
 
Total current liabilities  
14,120
   
13,426
 
Long-term debt, net
  
14,987
   
7,476
 
Deferred revenues and other liabilities
  596
   314
 
Deferred tax liability  
306
   
306
 
Operating lease liabilities, net of current portion
  
387
   
610
 
Contingent consideration, net of current portion
  
7,899
   
8,309
 
Total liabilities  
38,295
   
30,441
 
Commitments and contingencies (Note 14)      
Stockholders’ equity:        
Series C convertible preferred stock, $0.10 par value; 10,000,000 shares authorized; no shares issued and outstanding
  —
   —
 
Common stock, $0.001 par value; 150,000,000 shares authorized; 34,881,453 and 34,723,046 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively
  
35
   
35
 
Additional paid-in capital  
250,085
   
249,024
 
Accumulated deficit  
(233,211
)
  
(227,228
)
Total stockholders’ equity  
16,909
   
21,831
 
Total liabilities and stockholders’ equity 
$
55,204
  
$
52,272
 

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

3

1
Table of Contents
STRATA SKIN SCIENCES, INC. AND SUBSIDIARYSkin Sciences, Inc. and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF
Condensed Consolidated Statements of Operations and COMPREHENSIVE LOSS
(Inin thousands, except share and per share amounts)
(unaudited)


  Three Months Ended June 30, 
  2023
  2022
 
Revenues, net 
$
8,250
  
$
9,105
 
Cost of revenues  
3,932
   
4,112
 
Gross profit  
4,318
   
4,993
 
         
Operating expenses:        
Engineering and product development  
374
   
209
 
Selling and marketing  
3,416
   
4,146
 
General and administrative  
2,490
   
2,332
 
   
6,280
   
6,687
 
         
Loss from operations  
(1,962
)
  
(1,694
)
         
Other (expense) income:        
Loss on debt extinguishment
  (909)  — 
Interest expense
  
(298
)
  
(208
)
Interest income
  21   10 
   (1,186)  (198)
Net loss
 
$
(3,148
)
 
$
(1,892
)
         
Net loss per share of common stock, basic and diluted $(0.09) $(0.05)
Weighted average shares of common stock outstanding, basic and diluted
  34,881,453   34,723,046 

  
For the Three Months Ended
September 30,
 
  2017  2016 
       
Revenues $7,480  $7,767 
         
Cost of revenues  3,276   3,070 
         
Gross profit  4,204   4,697 
         
Operating expenses:        
Engineering and product development  411   382 
Selling and marketing  2,687   2,840 
General and administrative  1,678   1,880 
   4,776   5,102 
         
Operating loss before other income (expense), net  (572)  (405)
         
Other income (expense), net:        
Interest expense, net  (1,343)  (1,175)
Change in fair value of warrant liability  81   132 
Other income, net  -   3 
Loss on extinguishment of debentures  (11,799)  - 
   (13,061)  (1,040)
         
Loss before income taxes  (13,633)  (1,445)
         
Income tax expense  38   64 
         
Net loss 
$ 
(13,671) 
$ 
(1,509)
         
Net loss per common share - basic and diluted 
$ 
(3.32) 
$ 
(0.71)
         
Shares used in computing net loss per basic and diluted common share  2,477,743   2,135,952 
         
Net loss per Preferred C share - basic and diluted 
$ 
(1,235.43) $- 
         
Shares used in computing net loss per basic and diluted Preferred C share  4,400   - 
         
Other comprehensive loss:        
Foreign currency translation adjustments  -  
$ 
(1)
         
Comprehensive loss 
$ 
(13,671) 
$ 
(1,510)






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

4

2

Table of Contents

STRATA Skin Sciences, Inc. and Subsidiary
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF Condensed Consolidated Statements of Operations and COMPREHENSIVE LOSS
(Inin thousands, except share and per share amounts)
(unaudited)


  Six Months Ended June 30, 
  2023
  2022
 
Revenues, net 
$
15,817
  
$
16,146
 
Cost of revenues  
7,111
   
7,025
 
Gross profit  
8,706
   
9,121
 
         
Operating expenses:        
Engineering and product development  
689
   
372
 
Selling and marketing  
7,158
   7,762 
General and administrative  
5,407
   
4,984
 
   
13,254
   
13,118
 
         
Loss from operations  
(4,548
)
  
(3,997
)
         
Other (expense) income:        
Loss on debt extinguishment
  (909)  — 
Interest expense  (584)  (407)
Interest income  58   10 
   (1,435)  (397)
Net loss 
$
(5,983
)
 
$
(4,394
)
         
Net loss per share of common stock, basic and diluted
 $(0.17) $(0.13)
 Weighted average shares of common stock outstanding, basic and diluted  34,871,826
   34,701,267
 

  
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)


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

5

3

Table of Contents


STRATA SKIN SCIENCES, INC. AND SUBSIDIARYSkin Sciences, Inc. and Subsidiary
Condensed Consolidated Statements of CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITYChanges in Stockholders’ Equity
FOR THE NINE MONTHS ENDED SEPTEMBER
For the Six Months Ended June 30, 20172023 and 2022
(Inin thousands, except share and per share amounts)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)

     Additional 
     Total 
 
  Common Stock  Paid-In  Accumulated  
Stockholders’
 
  Shares  Amount  Capital  Deficit  Equity
 
Balance at January 1, 2023
  34,723,046  $35  $249,024  $(227,228) $21,831 
Stock-based compensation expense
  —   —   325   —   325 
Issuance of restricted stock
  158,407   —   —
   —
   — 
Net loss  —   —   —   (2,835)  (2,835)
Balance at March 31, 2023
  34,881,453   35   249,349   (230,063)  19,321 
Stock-based compensation expense
  —
   —
   352   —
   352 
Modification of common stock warrants
  —   —   384   —   384 
Net loss  —
   —   —   (3,148)  (3,148)
Balance at June 30, 2023
  34,881,453
  $
35  $
250,085  $(233,211) $
16,909 


     Additional 
     Total 
 
  Common Stock  Paid-In  Accumulated  
Stockholders’
 
  Shares  Amount  Capital  Deficit  Equity 
Balance at January 1, 2022
  
34,364,679
  
$
34
  
$
247,059
  
$
(221,679
)
 
$
25,414
 
Stock-based compensation expense
  
—
   
—
   
368
   
—
   
368
 
Issuance of common stock for acquisition
  
358,367
   
1
   
499
   
—
   
500
 
Net loss  
—
   
—
   
—
   
(2,502
)
  
(2,502
)
Balance at March 31, 2022
  
34,723,046
   
35
   
247,926
   
(224,181
)
  
23,780
 
Stock-based compensation expense
  
—
   
—
   
452
   —   
452
 
Net loss  
—
   
—
   
—
   
(1,892
)
  
(1,892
)
Balance at June 30, 2022
  
34,723,046
  
$
35
  
$
248,378
  
$
(226,073
)
 
$
22,340
 






















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

6

4

Table of Contents

STRATA Skin Sciences, Inc. and Subsidiary
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
Condensed Consolidated CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSStatements of Cash Flows
(In thousands, unaudited)in thousands)

(unaudited)


  For the Nine Months Ended September 30, 
  2017  2016 
Cash Flows From Operating Activities:      
Net loss $ (17,111) $ (2,448)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:        
Depreciation and amortization  4,811   4,844 
Provision for doubtful accounts  58   91 
Loss on disposal of property, plant and equipment  -   124 
Gain on cancelation of distributor rights agreement  (40)  - 
Intangible asset write-off  23   - 
Stock-based compensation  136   401 
Deferred tax provision  180   180 
Amortization of debt discount  2,344   1,821 
Amortization of deferred financing costs  171   145 
Loss on extinguishment of debt  11,799   - 
Change in fair value of warrant liability  (77)  (5,316)
Changes in operating assets and liabilities:        
Accounts receivable  130   1,041 
Inventories  (716)  899 
Prepaid expenses and other assets  406   202 
Accounts payable  71   (2,559)
Other accrued liabilities  (162)  (623)
Other liabilities  108   (40)
Deferred revenues  115   154 
Net cash provided by (used in) operating activities  2,246   (1,084)
         
Cash Flows From Investing Activities:        
Lasers placed-in-service, net  (1,450)  (607)
Purchases of property and equipment, net  (321)  - 
Payments on distributor rights liability  (115)  - 
Acquisition costs, net of cash received  -   125 
Restricted cash  -   15 
Net cash used in investing activities  (1,886)  (467)
         
  For the Six Months Ended June 30, 
  2023
  2022
 
Cash flows from operating activities:      
Net loss 
$
(5,983
)
 
$
(4,394
)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation and amortization  
1,390
   
1,224
 
Amortization of operating lease right-of-use assets  
168
   
181
 
Amortization of intangible assets
  1,435   1,436 
Amortization of deferred financing costs and debt discount  83   76 
Change in allowance for credit losses  
(138
)
  
(47
)
Stock-based compensation expense  
677
   
820
 
Loss on disposal of property and equipment
  24   35 
Loss on debt extinguishment
  909   — 
Changes in operating assets and liabilities:        
Accounts receivable  
208
   
491
 
Inventories  
(272
)
  
(898
)
Prepaid expenses and other assets  
190
   
(203
)
Accounts payable  
351
   
1,419
 
Accrued expenses and other liabilities  
211
   
(217
)
Deferred revenues  
(95
)
  
(135
)
Operating lease liabilities  
(186
)
  
(197
)
Net cash used in operating activities  
(1,028
)
  
(409
)
Cash flows from investing activities:        
Purchase of property and equipment  (2,337)  (1,510)
Cash paid in connection with TheraClear asset acquisition  —   (631)
Net cash used in investing activities  (2,337)  (2,141)
Cash flows from financing activities:
        
Proceeds from long-term debt
  7,000   — 
Payment of deferred financing costs
  (35)  — 
Net cash provided by financing activities
  6,965   — 
Net increase (decrease) in cash, cash equivalents and restricted cash  
3,600
   
(2,550
)
Cash, cash equivalents and restricted cash, beginning of period  
6,795
   
12,586
 
Cash, cash equivalents and restricted cash, end of period 
$
10,395
  
$
10,036
 
         
Cash and cash equivalents 
$
9,034
  
$
10,036
 
Restricted cash  
1,361
   
—
 
  
$
10,395
  
$
10,036
 
Supplemental disclosure of cash flow information:        
Cash paid for interest 
$
497
  
$
329
 
         
Supplemental disclosure of non-cash operating, investing and financing activities:        
Inventories acquired in connection with TheraClear asset acquisition $—  $71 
Intangible assets acquired in connection with TheraClear asset acquisition
 $—  $10,182 
Contingent consideration issued in connection with TheraClear asset acquisition
 $—  $9,122 
Common stock issued in connection with TheraClear asset acquisition
 $—  $500 
Modification of common stock warrants
 $
384  $
— 
Transfer of property and equipment to inventories $102  $449 
Accrued payment of contingent consideration $42  $— 
Accrued exit fee recorded as debt discount $
450  $
— 
Deferred financing costs in accounts payable
 $
62  $
— 






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

7

5

Table of Contents

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 SUBSIDIARYSkin Sciences, Inc. and Subsidiary
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSNotes to Unaudited Condensed Consolidated Financial Statements
(Inin 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 dedicated to developing, commercializing and marketing innovative products for the therapeutic and aesthetic dermatology market. STRATA sales treatment of dermatologic conditions. Its products include the following products: XTRAC® laserXTRAC® and VTRAC®Pharos® excimer lasers and VTRAC® lamp systems utilized in the treatment of psoriasis, vitiligo and various other skin conditions;conditions. In January 2022, the STRATAPEN™ MicroSystem, a micropigmentation device; and Nordlys, a multi-technology aesthetic laserCompany acquired the TheraClear Acne Therapy System to broaden its opportunities with expansion potential in the acne care market. The Company markets the device for treating vascular and pigmented lesions.under the brand name TheraClear® X.

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, 2017,2023, there were 776930 XTRAC systems placed in dermatologists'dermatologists’ offices in the United States and 35 systems internationally under the Company'sCompany’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
The Pharos excimer laser system holds FDA clearance to license the exclusive US distribution rightstreat chronic skin diseases, including psoriasis, vitiligo, atopic dermatitis and leukoderma.

The TheraClear® Acne Therapy System combines intense pulse light with vacuum (suction) for the Ellipse familytreatment of products, Nordlys, from Ellipse USA ("Ellipse") through December 31, 2019. The agreement wasmild to be renewed if certain minimum purchase requirements were achievedmoderate inflammatory acne (including acne vulgaris), comedonal acne 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.pustular acne.
Effective February 1, 2017, the Company entered into an exclusive OEM distribution agreement with Esthetic Education, LLC to be the exclusive marketer and seller of private label versions of the SkinStylus MicroSystem and associated parts under the name of STRATAPen. This three-year agreement allows for two one year extensions.
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,Since 2019, the Company has dedicated most ofbeen transitioning its financial resourcesinternational dermatology procedures equipment sales through its master distributor to research and development,a direct distribution model for equipment sales and marketing,recurring revenue on a country-by-country basis. In January 2022, the Company’s agreement with its master distributor expired. The Company has signed distributor contracts by year as follows: 2019 – Korea, 2020 – Japan, 2021 – China, Israel, Saudi Arabia, Kuwait, Oman, Qatar, Bahrain, UAE, Jordan, Iraq and general2023 – Mexico, India.

COVID-19 Pandemic

In late 2019, there was an outbreak of a new strain of coronavirus (“COVID-19”) which became a global pandemic. Since March 2020, the COVID-19 pandemic has negatively impacted business conditions in the industry in which the Company operates, disrupted global supply chains, constrained workforce participation and administrative expenses.
Management believes that its cashcreated significant volatility and cash equivalents asdisruption of September 30, 2017 combined withfinancial markets. The pandemic led to the anticipated revenues fromsuspension of elective procedures in the saleU.S. and to the temporary closure of many physician practices, which are the Company’s primary customers. While most offices have reopened, some physician practices closed and never reopened, and the impact of the Company's productsCOVID-19 pandemic and its variants on the Company’s operational and financial performance, including its ability to execute its business strategies and initiatives in the expected time frames, will depend on future developments, including, but not limited to, impact on supply chains and transport, and governmental and customer responses, including staffing issues, all of which are uncertain and cannot be sufficientpredicted.
Russia-Ukraine War
Prior to satisfy its working capital needs, capital asset purchases, outstanding commitments, paymentsthe outbreak of the long-term debtRussia-Ukraine War, Ukraine was the largest exporter of noble gases including neon, krypton, and xenon. Historically, Ukraine has been the source of a significant amount of gas supplied to the Company by its contract suppliers. Neon gas is essential to the proper functioning of the Company’s lasers. The Company’s suppliers have been resourceful in continuing to supply gases to the Company but cannot assure the Company that the supply will not remain uninterrupted. The reduced supply and ongoing conflict have raised the price of gas significantly worldwide. Additionally, the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 has led to a further tightening of rare gas supplies as they become due and other liquidity requirements associated with its existing operations throughsemiconductor chip manufacturers reconfigure their supply chains to address the next twelve months followingneed to secure their own supplies of rare gases for use in the filingmanufacture of this Form 10-Q.computer chips.
9See Note 2, Liquidity for discussion on Company liquidity.


6
Table of Contents

STRATA SKIN SCIENCES, INC. AND SUBSIDIARYSkin Sciences, Inc. and Subsidiary
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSNotes to Unaudited Condensed Consolidated Financial Statements
(Inin thousands, except share and per share amounts and number of lasers)
(unaudited)

Basis of Presentation: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 Photomedex India Private Limited, its wholly-owned, subsidiary.inactive subsidiary in India. All significant intercompany balances and transactions have been eliminated in consolidation.

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"(“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, 2016,2022 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, 20172023 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017,2023 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 (“U.S. GAAP”) have been condensed or 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 ourthe Company’s Annual Report on Form 10-K for the year ended December 31, 2016 ("20162022 (the “2022 Form 10-K"10-K”), and other forms filed with the SEC from time to time. Dollar amounts included herein are in thousands, except share and per share amounts and number of lasers.
Reclassification
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.

Significant Accounting Policies
The significant accounting policies used in preparation of these condensed consolidated financial statements are disclosed in our 2016the Company’s 2022 Form 10-K, and there have been no changes to the Company'sCompany’s significant accounting policies during the three and ninesix months ended SeptemberJune 30, 2017.2023.

Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with USU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts reported of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amountamounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The Company’s significant estimates and be based on events different from those assumptions. As of September 30, 2017, the more significant estimatesjudgments include (1) revenue recognition in regardswith respect to deferred revenues and the contract term and valuation allowances of accounts receivable, (2)inputs used when evaluating goodwill for impairment, inputs used in the valuation of contingent consideration, state sales and use tax accruals, the estimated useful lives of intangible assets, and property and equipment, (3) the inputs used in determining the fair value of equity-based awards, (4) the valuation allowance related to deferred tax assets and (5) the fair value of financial instruments, including derivative instruments.assets.
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 financial assets and disclosesliabilities at fair value in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification 820, Fair Value Measurementsat each reporting period using a fair value hierarchy that requires the use of observable inputs and Disclosures ("ASC Topic 820"). ASC Topic 820minimizes the use of unobservable inputs. The Company defines fair value establishes a framework and gives guidance regardingas 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 sellfrom selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fairFair 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-valueestimated by applying the following hierarchy, which prioritizes the inputs used in measuringto measure fair value as follows:into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

 •
Level 1 – unadjusted quoted market prices are available in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date.liabilities.
 •
Level 2 – pricingobservable inputs are other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are directly observable for the asset or liability or indirectly observable through corroboration withcan be corroborated by observable market data.data for substantially the full term of the assets or liabilities.
 •
Level 3 – pricing inputs that are generally unobservable forand typically reflect the non-financial asset or liability and only used when there is little, if any,Company’s estimate of assumptions that market activity forparticipants would use in pricing the 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 factorsliability.

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 valuevalues of cash and cash equivalents and restricted cash are based on their respective demand value,values, which are equal to the carrying value. The fair value of derivative warrant liabilities is estimated using option pricing models that are based on the fair value of the Company's common stock as well as assumptions for volatility, remaining expected life, risk-free interest rate and, in some cases, credit spread. The derivative warrant liabilities are the only recurring Level 3 fair value measures.values. The carrying valuevalues of all other short-term monetary assets and liabilities isare estimated to approximate their fair valuevalues due to the short-term nature of these instruments. The Company assessed itsAs of June 30, 2023 and December 31, 2022, the carrying value of the Company’s long-term debt (including the current portion) and determined that theapproximated its fair value of total debt was $10,778 as of September 30, 2017. As of December 31, 2016 the fair value of long-term debt and convertible debentures was $20,082.due to its variable interest rate.

11

7
Table of Contents

STRATA SKIN SCIENCES, INC. AND SUBSIDIARYSkin Sciences, Inc. and Subsidiary
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSNotes to Unaudited Condensed Consolidated Financial Statements
(Inin thousands, except share and per share amounts and number of lasers)
(unaudited)

Accrued Warranty Costs
SeveralThe 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 warrants outstanding as of September 30, 2017 and 2016 have non-standard terms as they relate to a fundamental transaction and require a net-cash settlement upon change in control offuture warranty claims on the Company and other warrants as of September 30, 2016 contained full ratchet provisions that reducedate the exercise price of the warrantsproduct is sold. The activity in the event of a transaction resulting inwarranty accrual during the issuance of equity below the current price of the warrants. Therefore these warrants are, or were, classifiedthree and six months ended June 30, 2023 and 2022 is summarized as derivatives. These warrants have been recorded at their fair value using a binomial option pricing model and will be recorded at their respective fair value at each subsequent balance sheet date. See Note 8,Warrants, for additional discussion.follows:
Earnings

  Three Months Ended June 30, 
  2023  2022 
Balance, beginning of period $229  $99 
Additions  93   60 
Expirations and claims satisfied  (53)  (26)
Total  269   133 
Less current portion within accrued expenses and other current liabilities  (163)  (98)
Balance within deferred revenues and other liabilities $106  $231 

  Six Months Ended June 30, 
  
2023
  
2022
 
Balance, beginning of period $207  $79 
Additions  120   94 
Expirations and claims satisfied  (58)  (40)
Total  269   133 
Less current portion within accrued expenses and other current liabilities  (163)  (98)
Balance within deferred revenues and other liabilities $106  $231 

Net Loss Per Share
The Company calculatesBasic net income (loss)loss per share in accordance with ASC 260, Earnings per Share. Under ASC 260, basic net income (loss) perof common sharestock is calculatedcomputed by dividing net incomeloss attributable to common stockholders by the weighted-average number of common shares outstanding during the reporting period and excludes dilution for potentially dilutive securities. Diluted earnings per share ("EPS") gives effect to dilutive options, warrants and other potential common shares outstanding during the period.
The Company's Series C Preferred Shares are subordinate to all other securities at the same subordination level as common stock and they participate in all dividends and distributions declared or paid with respect to common stock of the Company, on an as-converted basis. Therefore, the Series C Preferred Shares meet the definition of common stock under ASC 260. Earningsoutstanding during each period. Diluted loss per share is presentedof common stock includes the effect, if any, from the potential exercise or conversion of securities such as unvested restricted stock awards, stock options and warrants for each classcommon stock which would result in the issuance of security meeting the definitionincremental shares 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 andFor diluted net loss per share, by each classthe weighted-average number of securityshares of common stock is the same as for the three and nine months ended September 30, 2017:
  
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 alldue to the fact that when a net loss exists, dilutive securities are not included in the calculation as the impact is anti-dilutive.

The following potentially dilutive securities are anti-dilutive.have been excluded from the computation of diluted weighted-average shares of common stock outstanding, as they would be anti-dilutive:
  June 30,
 
  2023  2022 
Restricted stock units
  119,597   75,540 
Stock options
  5,369,714   4,544,714 
Common stock warrants  800,000   373,626 
Total  6,289,311   4,993,880 

Accounting Pronouncements Recently Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-13,Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended subsequently by ASUs 2018-19, 2019-04, 2019-05, 2019-10, 2019-11 and 2020-03. The gainguidance in the ASUs requires that credit losses be reported using an expected losses model rather than the incurred losses model that is currently used. The standard also establishes additional disclosures related to credit risks. This standard is effective for fiscal years beginning after December 15, 2022. The adoption of this guidance on January 1, 2023 did not have a material effect 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.condensed consolidated financial statements.
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.
12

8
Table of Contents

STRATA SKIN SCIENCES, INC. AND SUBSIDIARYSkin Sciences, Inc. and Subsidiary
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSNotes to Unaudited Condensed Consolidated Financial Statements
(Inin thousands, except share and per share amounts and number of lasers)
(unaudited)

Recent Accounting Pronouncements Not Yet Adopted
Diluted
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting and in January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope. These pronouncements provide temporary optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. The transition period for adopting these ASUs is March 2020 through December 31, 2024, as further amended by ASU 2022-06. The adoption of this guidance is not expected to have a material effect on the condensed consolidated financial statements as the Company does not have any hedging activities.

In August 2020, the FASB issued ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivative and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s own Equity. The pronouncement simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Specifically, the ASU simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. In addition, the ASU removes certain settlement conditions that are required for equity contracts to qualify for it and simplifies the diluted earnings per share (EPS) calculations in certain areas. The guidance is effective for annual periods, including interim periods, beginning after December 15, 2023 and early adoption is permitted. The Company does not currently engage in contracts covered by this guidance and does not believe it will have a material effect on the Company’s condensed consolidated financial statements, but it could in the future.
Note 2
Liquidity:

The Company has been negatively impacted by the COVID-19 pandemic, has historically experienced recurring losses, and has been dependent on raising capital from the sale of securities in order to continue to operate and has been required to restrict cash for potential sales tax liabilities (see Note 14, Commitments and Contingencies). In October 2021, the Company entered into an equity distribution agreement with an investment bank under which the Company may sell up to $11,000 of its common share were calculated usingstock in registered “at-the-market” offerings. In June 2023, the Company amended its credit facility with MidCap Financial Trust to: (i) refinance its existing $8,000 term loan, (ii) borrow an additional $7,000, and (iii) provide for an additional $5,000 tranche that can be drawn under certain conditions in 2024. Management believes that the Company’s cash and cash equivalents, combined with the anticipated revenues from the sale or use of its products and operating expense management, will be sufficient to satisfy the Company’s working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with its existing operations for at least the next 12 months following net lossthe date of the issuance of these condensed consolidated financial statements. However, market conditions, including the negative impact of the COVID-19 pandemic and weighted average shares outstandingthe Russia-Ukraine War on the financial markets, supply chain disruptions, customer behavior, and rising interest rates, could interfere with the Company’s ability to access financing and on favorable terms.

Note 3
Revenue Recognition:

Revenues from the Company’s dermatology recurring procedures customers are earned by providing physicians with its dermatology devices and charging the physicians a fee for a fixed number of treatment sessions or 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. The placement of the dermatology devices at physician locations represents embedded leases which are accounted for as operating leases. For the dermatology devices placed-in service under these arrangements, the terms of the domestic arrangements are generally up to 36 months with automatic one-year renewals and include a termination clause that can be effected at any time by either party with 30 to 60 day notice. Amounts paid are generally non-refundable. Sales of access codes for a fixed number of treatment sessions are considered variable treatment code payments and are recognized as revenue over the estimated usage period of the agreed upon number of treatments. Sales of access codes for a specified period of time and monthly rental fees are recognized as revenue on a straight-line basis as the dermatology devices are being used over the term period specified in the agreement. Variable treatment code payments that will be paid only if the customer exceeds the agreed upon number of treatments are recognized only when such treatments are being exceeded and used. Internationally, the Company generally sells access codes for a fixed amount on a monthly basis to its distributors and the terms are generally 48 months, with termination in the event of the customers’ failure to remit payments timely and include a potential buy-out at the end of the term of the contract. Currently, this is the only foreign recurring revenue. Prepaid amounts recorded in deferred revenues and customer deposits recorded in accounts payable are recognized as revenue over the lease term in the patterns described above. 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, 2016:arrangement as a single lease component.
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


13

9
Table of Contents

STRATA SKIN SCIENCES, INC. AND SUBSIDIARYSkin Sciences, Inc. and Subsidiary
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSNotes to Unaudited Condensed Consolidated Financial Statements
(Inin thousands, except share and per share amounts and number of lasers)
(unaudited)

Revenues from the Company’s dermatology procedures equipment are recognized when control of the promised goods or services is transferred to its customers or distributors, in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. Accordingly, the Company determines revenue recognition through the following steps:

•identification of the contract, or contracts, with a customer;
•identification of the performance obligations in the contract;
•determination of the transaction price;
•allocation of the transaction price to the performance obligations in the contract; and
•recognition of revenue when, or as, performance obligations are satisfied.

Accounting for the Company’s contracts involves the use of significant judgments and estimates including determining the separate performance obligations, allocating the transaction price to the different performance obligations and determining the method to measure the entity’s performance toward satisfaction of performance obligations that most faithfully depicts when control is transferred to the customer. The Company allocates the contract’s transaction price to each performance obligation using the Company’s best estimate of the standalone selling price for each distinct good or service in the contract. The Company maximizes the use of observable inputs by beginning with average historical contractual selling prices and adjusting as necessary and on a consistent and rational basis for other inputs such as pricing trends, customer types, volumes and changing cost and margins.

Revenues from dermatology procedures equipment are recognized when control of the promised products is transferred to either the Company’s distributors or end-user customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those products (the transaction price). Control transfers to the customer at a point in time. To indicate the transfer of control, the Company must have a present right to payment and legal title must have passed to the customer. The Company ships most of its products FOB shipping point, and as such, the Company primarily transfers control and records revenue upon shipment. From time to time the Company will grant certain customers, for example governmental customers, FOB destination terms, and the transfer of control for revenue recognition occurs upon receipt. The Company has elected to recognize the cost of freight and shipping activities as fulfillment costs. Amounts billed to customers for shipping and handling are included as part of the transaction price and recognized as revenue when control of the underlying goods are transferred to the customer. The related shipping and freight charges incurred by the Company are included in cost of revenues.

The weighted averagefollowing table summarizes the Company’s expected future undiscounted fixed treatment code payments from dermatology recurring procedures as of potential common stock equivalents outstanding duringJune 30, 2023 :

Remaining 2023
 
$
641
 
2024
  
1,103
 
2025
  
530
 
2026
  
312
 
2027
  
90
 
Total 
$
2,676
 

Remaining performance obligations related to Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, represent 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,aggregate transaction price allocated to performance obligations with an original contract term greater than one year, 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
Adoptionfully or partially unsatisfied at the end 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): Clarifyingperiod. Remaining performance obligations include the Definition of a Business, which clarifies the definition of a business with the objective of adding guidancepotential obligation to assist entities with evaluating whether transactions should beperform under extended warranties but exclude any equipment accounted for as acquisitions (or disposals)leases. As of assets or businesses. UnderJune 30, 2023, 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 allaggregate amount of the fair valuetransaction price allocated to remaining performance obligations was $725, and the Company expects to recognize $235 of the grossremaining performance obligations within one year and the balance over one to three years. Contract assets acquired (or disposed of) is concentratedprimarily relate to the Company’s rights to consideration for work completed in a single identifiable asset or a group of similar identifiablerelation to its services performed but not billed at the reporting date. The contract assets are transferred to receivables when the set is not a business. For public business entities,rights become unconditional. Currently, 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 the 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 ASU diddoes not have any contract assets which have not transferred to a significant impact on the condensed consolidated financial statements.receivable.
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

10
Table of Contents

STRATA SKIN SCIENCES, INC. AND SUBSIDIARYSkin Sciences, Inc. and Subsidiary
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSNotes to Unaudited Condensed Consolidated Financial Statements
(Inin thousands, except share and per share amounts and number of lasers)
(unaudited)

Contract liabilities primarily relate to extended warranties where the Company has received payments but has not yet satisfied the related performance obligations. The allocations of the transaction price are based on the price of stand-alone warranty contracts sold in the ordinary course of business. The advance consideration received from customers for the warranty services is a contract liability that is recognized ratably over the warranty period. As of June 30, 2023, the $235 of short-term contract liabilities is presented as deferred revenues and the $490 of long-term contract liabilities is presented within deferred revenues and other liabilities on the condensed consolidated balance sheet. For the three months ended June 30, 2023 and 2022, the Company recognized $104 and $255, respectively, as revenue from amounts classified as contract liabilities (i.e. deferred revenues) as of December 31, 2022 and 2021. For the six months ended June 30, 2023 and 2022, the Company recognized $236 and $683, respectively, as revenue from amounts classified as contract liabilities (i.e. deferred revenues) as of December 31, 2022 and 2021.
With respect to contract acquisition costs, the Company applies the practical expedient and expenses these costs immediately.

Note 4
TheraClear Asset Acquisition:

In July 2015, The FASB issued ASU 2015-11, SimplifyingJanuary 2022, 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. PriorCompany acquired certain assets related to the issuanceTheraClear devices from Theravant Corporation (“Theravant”). The TheraClear asset acquisition allows the Company to further develop, commercialize and market the TheraClear devices that are used for acne treatment, as well as advance the TheraClear technology into multiple other devices that can be used to treat a range of ASU 2015-11, inventory was measured at the loweradditional indications.

The Company made an upfront cash payment of cost or market (where market was defined as replacement cost,$500 and issued to Theravant 358,367 shares of common stock with a ceilingan aggregate value 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 1 of ASU 2017-11 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected$500 as of the beginningclosing date in connection with the TheraClear asset acquisition. During the fourth quarter of 2022, the Company also made a $500 milestone payment upon the launch of the fiscal year that includes that interim period. The amendmentsTheraClear Acne Therapy System, one of the development-related targets. Theravant is eligible to receive up to $3,000 in Part 2future earnout payments upon the achievement of ASU 2017-11 do not require any transition guidance because those amendments do not have an accounting effect.certain annual net revenue milestones, up to $20,000 in future royalty payments based upon a percentage of gross profit from future domestic sales ranging from 10-20%, 25% of gross profit from international sales over the subsequent four-year period, and up to $500 in future milestone payments upon the achievement of certain development and commercialization related targets. The Company owes Theravant $28 and $42, respectively, based on gross profit from domestic and international sales during the three and six months ended June 30, 2023, which is currently evaluatingincluded in accounts payable as of June 30, 2023.

The Company determined this transaction represented an asset acquisition as substantially all of the impactvalue was in the TheraClear technology intangible asset as defined by ASC 805, Business Combinations.

The purchase price was allocated, on a relative fair basis, to the technology intangible asset and acquired inventories as follows:

Consideration:   
Cash payment 
$
500
 
Common stock issued
  500
 
Transaction costs  
131
 
Contingent consideration  9,122
 
Total consideration 
$
10,253
 
     
Assets acquired:    
Technology intangible asset
 $
10,182
 
Inventories 
71
 
Total assets acquired 
$
10,253
 

The technology intangible asset is being amortized on a straight-line basis over a period of this guidance onten years, to be updated for subsequent changes in the Company's condensed consolidated financial statements.
In January 2017,contingent consideration that is allocated to its carrying value. The intangible asset was valued using the FASB issued ASU 2017-04, Intangibles – Goodwillrelief from royalty method. Significant assumptions used in the relief from royalty method include a 14.5% weighted average cost of capital and Other (Topic 350): Simplifying15.0% of revenues for the Test for Goodwill Impairment.royalty rate. The new guidance eliminated Step 2 from the goodwill impairment test which was required in computing the implied fairnet book value of goodwill. Instead, under the new amendments, an entity should performacquired inventories approximated its annual or interim goodwill impairment test by comparingfair value. To calculate the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment chargethe earnout using Monte Carlo simulations, Company projections were utilized to develop expected revenues and gross profits based on the risk inherent in the projections using the Geometric-Brownian motion for the amount by whichearnout periods and related earnout payments. Significant assumptions used in the carrying amount exceedsGeometric-Brownian motion analysis include projected revenues, projected gross profit, risk free rate of return of 1.6%, revenue volatility of 45.0%, and a cost of equity of 10.5%. Due to uncertainties associated with the reporting unit'sdevelopment of a new product line and the use of estimates and assumptions to determine the fair value however,of the loss recognized should not exceedcontingent consideration, the total amount ultimately paid in connection with the earnout may differ from the estimated fair value at the acquisition date. A revaluation of goodwill allocatedthe contingent consideration would only be required if there is a significant change to that reporting unit. If applicable,the underlying valuation assumptions. The contingent consideration will be adjusted when the contingency is resolved and the consideration is paid or becomes payable. Any difference between the cash payment and the amount accrued for contingent consideration will result in an entity should consider income tax effects from any tax deductible goodwilladjustment to the technology intangible asset. Contingent consideration expected to be paid within the next year is classified as current 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. The Company is currently evaluating the impact of this guidance on the Company's condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, This statement requires lessees to present right-of-use assets and lease liabilities on 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. The Company is currently evaluating the effect the guidance will have on its financial condition and results of operations.
15

11
Table of Contents

STRATA SKIN SCIENCES, INC. AND SUBSIDIARYSkin Sciences, Inc. and Subsidiary
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSNotes to Unaudited Condensed Consolidated Financial Statements
(Inin thousands, except share and per share amounts and number of lasers)
(unaudited)

Note 5
In May 2014, The FASB issued ASU 2014-09, Revenue 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
Inventories:
Inventories consist 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 when the Company has transferred control of the services. The potential impact of that change could increase or decrease our revenues in any given period and will depend, among others, on the estimated unused treatments as of the end of any reporting period. We are still evaluating the ASU for its potential impact on our consolidated financial statements. We currently plan to adopt the ASU using the "modified retrospective" approach, which requires the cumulative effect of initially applying the guidance to be recognized as an adjustment to our accumulated deficit as of the January 1, 2018 adoption date.following:
Note 2
  June 30, 2023  December 31, 2022 
Raw materials and work-in-process 
$
5,622
  
$
5,418
 
Finished goods  
299
   
129
 
Total inventories 
$
5,921
  
$
5,547
 
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'sCompany’s typically short manufacturing cycle and therefore, is disclosed in conjunctionincluded with raw materials.
Note 36
Property 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 
Property and equipment consist of the following:
  June 30, 2023  December 31, 2022 
Dermatology devices placed-in-service $30,767  $28,790 
Equipment, computer hardware and software  293   293 
Furniture and fixtures  235   235 
Leasehold improvements  96   136 
   31,391   29,454 
Accumulated depreciation and amortization  (23,072
)
  (21,956
)
Property and equipment, net $8,319  $7,498 

Depreciation and related amortization expense was $3,292$713 and $3,482$599 for the ninethree months ended SeptemberJune 30, 20172023 and 2016,2022, respectively. Depreciation and amortization expense was $1,390 and $1,224 for the six months ended June 30, 2023 and 2022, respectively.
16Note 7

Intangible Assets, net:
Intangible assets consist of the following as of June 30, 2023 and December 31, 2022:
  Balance  
Accumulated
Amortization
  
Intangible
Assets, net
 
June 30, 2023         
Core technology $5,700  $(4,560) $1,140 
Product technology  12,182   (3,527)  8,655 
Customer relationships  6,900   (5,520)  1,380 
Tradenames  1,500   (1,200)  300 
Pharos customer lists  5,314   (830)  4,484 
  $31,596  $(15,637) $15,959 
             
December 31, 2022            
Core technology $5,700  $(4,275) $1,425 
Product technology  12,182   (3,018)  9,164 
Customer relationships  6,900   (5,175)  1,725 
Tradenames  1,500   (1,125)  375 
Pharos customer lists  5,314   (609)  4,705 
  $31,596  $(14,202) $17,394 

12
Table of Contents

STRATA SKIN SCIENCES, INC. AND SUBSIDIARYSkin Sciences, Inc. and Subsidiary
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSNotes to Unaudited Condensed Consolidated Financial Statements
(Inin thousands, except share and per share amounts and number of lasers)
(unaudited)

Note 4
Intangibles, net:
Set forth below is a detailed listing 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 amortizationAmortization expense was $1,519$715 and $1,362$740 for the ninethree months ended SeptemberJune 30, 20172023 and 2016,2022, respectively. DuringAmortization expense was $1,435 and $1,436 for the six months ended June 30, 2023 and 2022, respectively.
Finite-lived intangible assets are tested for impairment when events or changes in circumstances indicate that the carrying value of the asset group may not be recoverable. The Company recognizes an impairment loss when and to the extent that the recoverable amount of an asset group is less than its carrying value. There were no impairment charges for the three and ninesix months ended SeptemberJune 30, 2017,2023 or 2022.

The following table summarizes the Company wrote off core technology of $274 and accumulated amortization of $251 related to the discontinuance of the MELAfind product. The value written off of $23 was recorded in cost of revenues.
Estimatedestimated future amortization expense for amortizable patents and licensed technologiesthe above intangible assets for the future periods is as follows:next five years:
Remaining 2017 $476 
2018  1,905 
2019  1,905 
2020  1,670 
2021  1,410 
Thereafter  4,936 
Total $12,302 
As discussed in
Remaining 2023
 
$
1,436
 
2024
  
2,871
 
2025
  
2,166
 
2026
  
1,461
 
2027
  
1,461
 

Note 1, effective January 1, 20178
Accrued Expenses and Other Current Liabilities:

Accrued expenses and other current liabilities consist of the following:

  June 30, 2023  December 31, 2022 
Warranty obligations $163  $136 
Compensation and related benefits  2,145   1,997 
State sales, use and other taxes  4,203   3,986 
Professional fees and other  220   436 
Total accrued expenses and other current liabilities $6,731  $6,555 

Note 9
Long-term Debt:


Senior Term Facility
On September 30, 2021, the Company followsentered into a credit and security agreement with MidCap Financial Trust (“MidCap”), also acting as the guidance in ASU 2017-01, which providesadministrative agent, and the lenders identified therein. The credit and security agreement was amended on June 30, 2023. The original terms provided for an $8,000 senior term loan that was drawn upon by the Company upon executing the agreement. Borrowings under the senior term loan bore interest at LIBOR (with a new framework for determining whether transactions should be accounted for as acquisitions (or disposals)LIBOR floor rate of assets or businesses. Under the new guidance, companies are required0.50%) plus 7.50% per year and were scheduled to utilize an initial screening testmature on September 1, 2026, unless terminated earlier. The Company was obligated to determine whethermake monthly interest-only payments through September 30, 2024. All borrowings were secured by substantially all of the fair value ofCompany’s assets. The credit and security agreement was amended on January 10, 2022 to provide MidCap’s consent to 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 agreementsTheraClear (Note 4). In September 2022, the Company reversedamended the intangible asset and corresponding liability recorded on March 1, 2017 and recordedfacility to transition, upon the distribution rights at the present valuecessation of the payments under the new agreements, amountingLIBOR, to $286. The reversalone-month Secured Overnight Financing Rate (“SOFR”), or such other applicable period, plus 0.10%, with a floor of the aforementioned intangible asset and corresponding liability resulted in a $40 gain, recognized in sales and marketing expense.0.50%.

17

13
Table of Contents

STRATA SKIN SCIENCES, INC. AND SUBSIDIARYSkin Sciences, Inc. and Subsidiary
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSNotes to Unaudited Condensed Consolidated Financial Statements
(Inin thousands, except share and per share amounts and number of lasers)
(unaudited)

Note 5
Other Accrued Liabilities:
  
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 
Note 6
Convertible Debentures:
InOn June 30, 2023, the following table is a summary ofCompany entered into (a) 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 balanceAmendment No. 3 to Credit and Security Agreement (the “Amendment”) among MidCap, as administrative agent, and the lenders identified therein, which amended the credit and security agreement, dated as of September 30, 2017.2021, as amended January 10, 2022 and September 6, 2022 (as amended by the Amendment, the “Senior Term Facility”); (b) the Amended and Restated Warrant Agreement (the “A&R Warrant”) with MidCap Funding XXVII Trust (together with any registered holder from time to time or any holder of the shares issuable or issued upon the exercise or conversion of the warrant, the “Warrantholder”), which amended and restated the warrant agreement to purchase shares of the common stock of the Company, dated as of September 30, 2021 (the “Prior Warrant”), with the Warrantholder; (c) the Amended and Restated Registration Rights Agreement (the “A&R Registration Rights Agreement”) with the Warrantholder, which amended and restated the registration rights agreement, dated as of September 30, 2021, with the Warrantholder; and (d) a letter agreement (the “Fee Letter Agreement”) with MidCap, as agent.


In connection with the Amendment, the Senior Term Facility provides for a senior secured term loan facility of $20,000, of which $8,000 was drawn by the Company on September 30, 2021 (“Credit Facility #1”), $7,000 was drawn by the Company on June 30, 2023 (“Credit Facility #2”), and an additional $5,000 tranche (“Credit Facility #3”) is available to be drawn by the Company if its Dermatology Recurring Procedures Revenue (as defined in the Senior Term Facility) for the preceding twelve calendar months (ending on the last day of the calendar month for which a compliance certificate is delivered) is greater than or equal to $30,000 (such condition, the “Applicable Funding Condition”).  Credit Facility #3 can be drawn beginning on the later of the satisfaction of the Applicable Funding Condition and January 1, 2024, with such commitment terminating on the earlier to occur of December 31, 2024 and the delivery of a written notice by MidCap to the Company terminating the applicable commitments following an Event of Default (as defined in the Senior Term Facility) that has not been waived or cured at the time such notice is delivered. All borrowings are secured by substantially all of the Company’s assets.


Borrowings under the Senior Term Facility bear interest at a rate per annum equal to the sum of (a) the greater of (i) the sum of (A) 30-day forward-looking term rate of one month SOFR, as published by CME Group Benchmark Administration Limited, from time to time, plus (B) 0.10%, and (ii) the applicable floor rate of 3.50%, with such sum reset monthly, and (b) 7.50%.  The effective interest rate of the Senior Term Facility as of June 30, 2023 was 13.48%. The Company is obligated to make only interest payments (payable monthly in arrears) through June 1, 2026. Commencing on July 1, 2026 and continuing for the remaining 24 months of the facility, the Company will be required to make monthly interest payments and monthly principal payments based on a straight-line amortization schedule set forth in the Senior Term Facility, subject to certain adjustments as described in the Senior Term Facility.  The final maturity date under the Senior Term Facility is June 1, 2028, unless earlier terminated.  The Senior Term Facility requires the Company to dedicate 100% of certain insurance proceeds to the prepayment of the outstanding term loan, subject to certain exceptions and net of certain expenses and repayments.

The Company issued $32,500 aggregate principal amount of Debentures (the "June 2015 Debentures") that, subjectmay voluntarily prepay the outstanding term loan under the Senior Term Facility, with such prepayment at least $5,000, at any time upon 30 days’ written notice.  Upon prepayment, the Company will be required 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, werepay a prepayment fee equal to mature on the five-year anniversary(i) 4.00% of the dateoutstanding principal prepaid or required to be prepaid (whichever is greater), if the prepayment is made within 12 months of issuance, June 22, 2020.30, 2023, (ii) 3.00% of the outstanding principal prepaid or required to be prepaid (whichever is greater), if the prepayment is made between 12 months and 24 months after June 30, 2023, (iii) 2.00% of the outstanding principal prepaid or required to be prepaid (whichever is greater), if the prepayment is made between 24 months and 36 months after June 30, 2023, or (iv) 1.00% of the outstanding principal prepaid or required to be prepaid (whichever is greater), if the prepayment is made after 36 months after June 30, 2023 and prior to the maturity date.


The Senior Term Facility contains certain customary representations and warranties, affirmative covenants and conditions, as well as various negative covenants.  Further, the Senior Term Facility contains (a) a quarterly financial covenant that requires the Company to not have less than $29,000 of net revenue (raised to $40,000 by December 31, 2025 and, for periods ending after December 31, 2025, such net revenue as determined in good faith by MidCap, which shall not be less than the applicable minimum net revenue amount for the immediately preceding period and $40,000) for the trailing 12-month period as of June 2015 Debentures included30, 2023, and (b) a beneficial conversion feature valuedminimum of unrestricted cash (as defined in the Senior Term Facility), at $27,300 thatall times, of not less than $3,000. At June 30, 2023, the Company was recorded as a discount toin compliance with all financial covenants within 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.
18Senior Term Facility.


Upon the occurrence and during the continuance of an event of default, MidCap may, and at the direction of a requisite percentage of the lenders must, (i) suspend or terminate the term loan commitment and Midcap and the other lenders’ obligations with respect thereto, and (ii) by notice to the Company, declare all or any portion of the obligations under the Senior Term Facility to be immediately due and payable.  In addition to MidCap’s other rights and available remedies, but subject to applicable cure periods, upon the occurrence and during the continuance of an event of default, MidCap may, and at the direction of a requisite percentage of the lenders must, terminate the Senior Term Facility.  At June 30, 2023, no event of default had occurred, and the Company believed that events or conditions having a material adverse effect, giving rise to an acceleration of any amounts outstanding under the Senior Term Facility, had not occurred and was remote.


14
Table of Contents

STRATA SKIN SCIENCES, INC. AND SUBSIDIARYSkin Sciences, Inc. and Subsidiary
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSNotes to Unaudited Condensed Consolidated Financial Statements
(Inin thousands, except share and per share amounts and number of lasers)
(unaudited)


On July 21, 2014,Pursuant to the Fee Letter Agreement, the Company entered into a definitive Securities Purchase Agreement (the "Purchase Agreement") with institutional investors (the "Investors") providing foragreed to pay MidCap, as administrative agent, the issuancefollowing fees: (a) an origination fee on June 30, 2023 in an amount equal to (i) the Credit Extensions (as defined in the Senior Term Facility) in respect of Credit Facility #2, multiplied by (ii) 0.50%; (b) on the maturity date of the Senior Secured Convertible DebenturesTerm Facility or any earlier date on which the obligations thereunder become due and payable in full or are otherwise paid in full (such date, the “Full Exit Fee Payment Date”), the Company shall pay an exit fee equal to (i) 3.00% of the total aggregate principal amount of $15,000, due, subjectCredit Extensions (as defined in the Senior Term Facility) made pursuant to the terms therein,Senior Term Facility (regardless of any repayment or prepayment thereof) as of the Full Exit Fee Payment Date (such aggregate amount, the “Exit Fee Base Amount”), less (ii) any Partial Exit Fee (as defined below) previously paid; (c) on the date of any voluntary or mandatory partial prepayment of the borrowings under the Senior Term Facility (or on the date such mandatory prepayment becomes due and payable) (each such date, a “Partial Exit Fee Payment Date”), the Company shall pay an exit fee equal to 3.00% of the principal amount of the credit facilities paid or prepaid (or required to be paid in July 2019 (the "July 2014 Debentures"the case of a mandatory prepayment) as of the Partial Exit Fee Payment Date (such amount, the “Partial Exit Fee”),; and warrants (the "July 2014 Series A Warrants")(d) an origination fee payable contemporaneously with funding Credit Facility #3 in an amount equal to (i) the Credit Extensions (as defined in the Senior Term Facility) in respect of Credit Facility #3, multiplied by (ii) 0.50%.



The Prior Warrant allowed the Warrantholder, an affiliate of the lender, to purchase up to an aggregate of 1,239,769373,626 shares of the Company’s common stock $0.001 par value per share, at an exercise price of $12.25equal to $1.82 per share expiringfor a 10-year period ending September 30, 2031. Pursuant to, and in July 2019. The July 2014 Debentures were bearing interest at an annual rateaccordance with, the terms and conditions of 4%, payable quarterly or upon conversion intothe A&R Warrant, which amended and restated the Prior Warrant, the Warrantholder can purchase 800,000 shares of common stock. The Debentures were convertible at any time into an aggregate of 1,169,595 shares ofthe Company’s common stock at an initial conversionexercise price of $12.825 per share. The Company's obligations under the July 2014 Debentures was secured byequal to $0.88 for a first priority lien10-year period ending on all of the Company's intellectual property pursuantJune 30, 2033.  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 theA&R Registration Rights Agreement, the Company filed a registration statement on August 19, 2014, which was declared effective byshall register the SEC on October 20, 2014 (File No. 333-198249).
For financial reporting purposes, out ofshares underlying 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 inA&R Warrant, with an initial carrying value offiling due no later than the Debentures of $4,647. The initial debt discount on the July 2014 Debentures totaled $10,353 and was being amortized using the effective interest method over the five year life of the July 2014 Debentures.
During the nine months ended September 30, 2017, the investors converted debentures amounting to $262 into 70,000 shares of common stock for the June 2015 note. The debt discount and deferred financing cost adjustment resulting from the conversions increased interest expense by $197 for the nine months ended September 30, 2017.
As a condition of the new note facility (See Note 7, Long-term Debt) the Debentures from both the 2014 and 2015 financings were amended. The Debentures holders' first priority lien was subordinated to the new term note facility. Additionally, as a condition of the term note facility, the maturity date of both Debentures was extended to June 30, 2021 and treated as a modification.
On June 6, 2017, the Company entered into a Securities Exchange Agreement (the "Agreement") with the holders of its 2.25% Senior Series A Secured Convertible Debentures due June 30, 2021 and 4% Senior Secured Convertible Debentures due July 30, 2021, pursuant to which the holders have agreed to exchange all of such outstanding debentures into shares of newly created Series C Convertible Preferred Stock. The elimination of the senior secured debt will also 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 on45th day following the date of extinguishment, nonethe A&R Registration Rights Agreement.  The amendment of the proceeds were allocated to the extinguishment of the beneficial conversion feature. As such, the difference betweenwarrant resulted in an increase in the fair value of the convertible preferred stock issued (determined basedwarrant, which has been accounted for as a lender fee.


The June 2023 amendment to the Senior Term Facility has been accounted for as a debt extinguishment, as the new loan is considered substantially different from the original loan. The Company recorded a loss on debt extinguishment of $909 for the three and six months ended June 30, 2023, which includes unamortized debt discount on the marketoriginal loan of $441, an increase in the fair value of the underlying common stock)warrant of $384 and lender fees of $84. In connection with the net carrying valueAmendment, the Company has recorded the $450 exit fee as both a debt discount and an increase to the principal amount of the convertible debentures (adjusted for unamortized premium discount),debt. The debt discount, which also includes third party costs incurred in connection with the Amendment of $11,799 was$13, is being recognized as a loss on extinguishment of debentures.
Other thaninterest expense over the limitations on conversions to keep each such holders beneficial ownership below 9.99%, the termsterm of the Series C Convertible Preferred Stock generally bestowSenior Term Facility using the same rightseffective-interest method. The unamortized debt discount was $463 as of June 30, 2023. The Company recognized interest expense of $298 and $584 during the three and six months ended June 30, 2023, respectively, of which $42 and $83 was related to each holder as such holder would receive if they are common stock shareholderthe amortization of the debt discount for the three and are not redeemable bysix months ended June 30, 2023. The Company recognized interest expense of $208 and $407 during the holders, exceptthree and six months ended June 30, 2022, of which $39 and $76 was related to the Series C Convertible Preferred Stock shares do not have voting rights. The Series C Convertible Preferred Stock haveamortization of the same level of subordination as common stock. Each share of Series C Convertible Preferred Stock has a stated value of $1,000debt discount for the three 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.six months ended June 30, 2022.

19Future minimum principal payments at June 30, 2023 are as follows:


2026
 
$
3,750
 
2027
  7,500 
2028
  3,750 

 

15,000
 
Exit fee  450 
   15,450 
Less: unamortized debt discount
  (463)
Long-term debt, net
 $
14,987 

15
Table of Contents

STRATA SKIN SCIENCES, INC. AND SUBSIDIARYSkin Sciences, Inc. and Subsidiary
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSNotes to Unaudited Condensed Consolidated Financial Statements
(Inin thousands, except share and per share amounts and number of lasers)
(unaudited)

Note 710
Long-term Debt:Stock-based Compensation:
  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 
Term-Note Credit Facility
The Company’s 2016 Omnibus Incentive Stock Plan (“2016 Plan”), as amended, has reserved up to 7,832,651 shares of common stock for future issuance. As of June 30, 2023, there were 2,298,706 shares of common stock remaining available for issuance for awards under the 2016 Plan.
The Company measures stock‑based awards at their grant‑date fair value and records compensation expense on a straight‑line basis over the requisite service period of the awards. The Company recorded stock‑based compensation expense of $296 and $452 for the three months ended June 30, 2023 and 2022, respectively, and $578 and $820 for the six months ended June 30, 2023 and 2022, respectively, within general and administrative expenses in the accompanying condensed consolidated statements of operations. During the three and six months ended June 30, 2023, the Company also recorded share-based compensation expense of $56 and $99, respectively, within selling and marketing expenses in the accompanying condensed consolidated statement of operations.

On DecemberApril 3, 2023 and March 30, 2015,2022, the Company entered intogranted 150,000 and 160,000 stock-based options, respectively, to the Chief Executive Officer. The vesting of these awards is contingent upon meeting one or more financial goals (a performance condition) or a $12,000 credit facility pursuant to a Creditcommon stock share price (a market condition). The fair value of stock-based awards is determined at the date of grant. Stock-based compensation expense is recorded ratably for market condition awards during the requisite service period and Security Agreement (the "Agreement")is not reversed, except for forfeitures, at the vesting date regardless of whether the market condition is met. The market condition was not met for the 2022 awards and related financing documents with MidCap Financial Trust ("MidCap") and the lenders listed therein. Under the Agreement, the credit facility may be drawn down in two tranches, the first of which was drawn for $10,500 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 Company's obligations under the credit facility are secured by a first priority lien on all60,000 of the Company's assets. This credit facility includes both financial and non-financial covenants, including a minimum net revenue covenant, beginning in January 2016. The Companystock-based options were forfeited during 2022. Stock-based compensation expense for performance condition awards is in compliance with these covenants as of September 30, 2017. On November 10, 2017, the minimum net revenue covenant was amended prospectively. Additionally on November 10, 2017, the Company entered into an amendment to modify the principal payments including are-evaluated at each reporting period of six months where there is no principal payments due. Interest ratebased on the credit facility is one month LIBOR plus 8.25%, subject to a LIBOR floorprobability of 0.5% (9.49% asthe achievement of September 30, 2017).  As of September 30, 2017 the net balance of long-term debt is $8,842.goal.
Stock Options

The following table summarizes stock option activity for the future payments thatsix months ended June 30, 2023:

  
Number of
Shares
  
Weighted Average
Exercise Price
per Share
  
Weighted Average
Remaining
Contractual Term
(in years)
 
Outstanding at January 1, 2023
  4,474,714  $1.72    
Granted
  905,000  $1.06    
Exercised
  — $—    
Forfeited and expired
  (10,000) $1.45    
Outstanding at June 30, 2023  5,369,714  $1.61   7.9 
Exercisable at June 30, 2023  2,787,390  $1.81   7.1 
Vested and expected to vest  5,369,714  $1.61   7.9 

As of June 30, 2023, the total unrecognized compensation expense related to unvested stock option awards was $1,961, which the Company expects to make forrecognize over a weighted‑average period of approximately 2.4 years. The aggregate intrinsic value of options outstanding at June 30, 2023 was $1. There was no aggregate intrinsic value of options exercisable at June 30, 2022.

For the long-term debt forsix months ended June 30, 2023, the future periods:fair value of each option was estimated on the date of grant using the weighted average assumptions in the table below:
Remaining in 2017 $572 
2018  2,387 
2019  4,092 
2020  4,092 
  $11,143 
     


Expected volatility71.4%
Risk‑free interest rate3.6%
Expected term (in years)6.2
Expected dividend yield0.0%
20


16
Table of Contents

STRATA SKIN SCIENCES, INC. AND SUBSIDIARYSkin Sciences, Inc. and Subsidiary
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSNotes to Unaudited Condensed Consolidated Financial Statements
(Inin thousands, except share and per share amounts and number of lasers)
(unaudited)

Restricted Stock Units
Note 8
Warrants:
The Company accounts for warrants that require net cash settlement upon change of control of the Company and warrants that
Restricted stock units have provisions that protect holders from a declinebeen issued to certain board members. Restricted stock units unvested are summarized 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 during the nine months ended September 30, 2017 or as of December 31, 2016.following table:
The Company recognizes these liabilities at the fair value on each reporting date. The Company computed the value 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 
  
Number of
Shares
  
Weighted Average
Grant Date
Fair Value
 
Unvested at January 1, 2023
  119,597  $0.93 
Granted
  —  $— 
Vested
  (79,730) $0.93 
Unvested at June 30, 2023  39,867  $0.93 
Recurring Level 3 Activity and Reconciliation
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 


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)


 
 
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:
At September 30, 2017, the Company had 855,389 options outstanding with a weighted-average exercise price of $4.93 and a weighted average remaining contractual life of 8.5 years. 401,077 options are vested and exercisable.
Stock-based compensation expense, primarily included in general and administration, for the three and nine months ended September 30, 2017 was $63 and $136, respectively. For the three and nine months ended September 30, 2016 stock-based compensation was $116 and $401, respectively. As of SeptemberJune 30, 2017 there was $211 in2023, the total unrecognized compensation expense which will be recognized over a weighted average period of 2.75 years.related to unvested restricted stock units was de minimus.

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.method. 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.
IncomeNo income tax expense of $38 and $181was incurred for the three and nineor six months ended SeptemberJune 30, 20172023 and $64 and $191 for the three and nine months ended September 30, 2016, was 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.2022.

Note 12
Business Segments and Geographic Data:Segments:
The Company has organized its business into threetwo operating segments to better align its organization based upon the Company'sCompany’s management structure, products and services offered, markets served and types of customers, as follows:follows. The Dermatology Recurring Procedures segment derives its revenues from the usage of its equipment by dermatologists to perform XTRAC procedures performed by dermatologists.and TheraClear Acne Therapy System procedures. The Dermatology Procedures Equipment segment generates revenues from the sale of equipment, such as lasers, lamp products and lamp products. The Dermatology Imaging segment generated revenues from the sale and usage of imagingTheraClear 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 is are also not allocated to the operating segments.

The following tables reflect results of operations from the Company’s business segments for the periods indicated below:

  
Dermatology
Recurring
Procedures
  
Dermatology
Procedures
Equipment
  TOTAL 
Three Months Ended June 30, 2023         
Revenues, net
 $5,456  $2,794  $8,250 
Cost of revenues  2,205   1,727   3,932 
Gross profit  3,251   1,067   4,318 
Gross profit %  59.6%  38.2%  52.3%
             
Allocated expenses:            
Engineering and product development  289   85   374 
Selling and marketing  2,850   566   3,416 
Unallocated expenses  —   —   2,490 

  3,139   651   6,280 
Income (loss) from operations
  112  416   (1,962)
Loss on debt extinguishment
  —   —   (909)
Interest expense
  —   —   (298)
Interest income  —   —   21 
Net income (loss)
 $112 $416  $(3,148)
23

17
Table of Contents

STRATA SKIN SCIENCES, INC. AND SUBSIDIARYSkin Sciences, Inc. and Subsidiary
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSNotes to Unaudited Condensed Consolidated Financial Statements
(Inin 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 September 30, 2017 (unaudited)

  
Dermatology
Recurring
Procedures
  
Dermatology
Procedures
Equipment
  
Dermatology
Imaging
  
TOTAL
 
Revenues $5,720  $1,751  $9  $7,480 
Costs of revenues  2,084   967   225   3,276 
Gross profit  3,636   784   (216)  4,204 
Gross profit %  63.6%  44.8%  (2400.0%)  56.2%
                 
Allocated operating expenses:                
Engineering and product development  348   63   -   411 
Selling and marketing expenses  2,238   449   -   2,687 
                 
Unallocated operating expenses  -   -   -   1,678 
   2,586   512   -   4,776 
Income (loss) from operations  1,050   272   (216)  (572)
                 
Interest expense, net  -   -   -   (1,343)
Change in fair value of warrant liability  -   -   -   81 
Loss on extinguishment of debt  -   -   -   (11,799)
                 
Income (loss) before income taxes $1,050  $272  
$ 
(216) 
$ 
(13,633)
                 



Three Months Ended September 30, 2016 (unaudited)

  
Dermatology
Recurring
Procedures
  
Dermatology
Procedures
Equipment
  
Dermatology
Imaging
  
TOTAL
 
Revenues $6,205  $1,550  $12  $7,767 
Costs of revenues  2,162   877   31   3,070 
Gross profit  4,043   673   ( 19)  4,697 
Gross profit %  65.2%  43.4%  (158.3%)  60.5%
                 
Allocated operating expenses:                
Engineering and product development  343   31   8   382 
Selling and marketing expenses  2,767   57   16   2,840 
                 
Unallocated operating expenses  -   -   -   1,880 
   3,110   88   24   5,102 
Income (loss) from operations  933   585   (43)  (405)
                 
Interest expense, net  -   -   -   (1,175)
Change in fair value of warrant liability  -   -   -   132 
Other income (expense), net  -   -   -   3 
                 
Income (loss) before income taxes $933  $585  
$ 
(43) 
$ 
(1,445)


24
  
Dermatology
Recurring Procedures
  
Dermatology
Procedures
Equipment
  TOTAL 
Six Months Ended June 30, 2023         
Revenues, net
 $10,665  $5,152  $15,817 
Cost of revenues  4,225   2,886   7,111 
Gross profit  6,440   2,266   8,706 
Gross profit %  60.4%  44.0%  55.0%
             
Allocated expenses:            
Engineering and product development  534   155   689 
Selling and marketing  6,203   955   7,158 
Unallocated expenses  —   —   5,407 

  6,737   1,110   13,254 
(Loss) income from operations
  (297)  1,156   (4,548)
Loss on debt extinguishment  —   —   (909)
Interest expense
  —   —   (584)
Interest income  —   —   58 
Net (loss) income
 $(297) $1,156  $(5,983)


  
Dermatology
Recurring
Procedures
  
Dermatology
Procedures
Equipment
  TOTAL 
Three Months Ended June 30, 2022            
Revenues, net
 $5,582  $3,523  $9,105 
Cost of revenues  2,298   1,814   4,112 
Gross profit  3,284   1,709   4,993 
Gross profit %  58.8%  48.5%  54.8%
             
Allocated expenses:            
Engineering and product development  133   76   209 
Selling and marketing  3,629   517   4,146 
Unallocated expenses  —   —   2,332 
   3,762   593   6,687 
(Loss) income from operations  (478)  1,116   (1,694)
Interest expense
  —   —   (208)
Interest income  —   —   10 
Net (loss) income
 $(478) $1,116  $(1,892)

18
Table of Contents

STRATA SKIN SCIENCES, INC. AND SUBSIDIARYSkin Sciences, Inc. and Subsidiary
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSNotes to Unaudited Condensed Consolidated Financial Statements
(Inin thousands, except share and per share amounts and number of lasers)
(unaudited)

  
Dermatology
Recurring
Procedures
  
Dermatology
Procedures
Equipment
  TOTAL 
Six Months Ended June 30, 2022            
Revenues, net
 $10,649  $5,497  $16,146 
Cost of revenues  4,330   2,695   7,025 
Gross profit  6,319   2,802   9,121 
Gross profit %  59.3%  51.0%  56.5%
             
Allocated expenses:            
Engineering and product development  259   113   372 
Selling and marketing  6,929   833   7,762 
Unallocated expenses  —   —   4,984 

  7,188   946   13,118 
(Loss) income from operations  (869)  1,856   (3,997)
Interest expense
  —   —   (407)
Interest income  —   —   10 
Net (loss) income
 $(869) $1,856  $(4,394)
Nine Months Ended September 30, 2017 (unaudited)

  
Dermatology
Recurring
Procedures
  
Dermatology
Procedures
Equipment
  
Dermatology
Imaging
  
TOTAL
 
Revenues $17,653  $5,784  $17  $23,454 
Costs of revenues  5,969   2,988   225   9,182 
Gross profit  11,684   2,796   ( 208)  14,272 
Gross profit %  66.2%  48.3%  (1223.5%)  60.9%
                 
Allocated operating expenses:                
Engineering and product development  1,104   204   1   1,309 
Selling and marketing expenses  7,747   1,167   -   8,914 
                 
Unallocated operating expenses  -   -   -   4,999 
   8,851   1,371   1   15,222 
Income (loss) from operations  2,833   1,425   (209)  (950)
                 
Interest expense, net  -   -   -   (4,264)
Change in fair value of warrant liability  -   -   -   77 
Extinguishment of debt  -   -   -   (11,799)
Other income (expense), net  -   -   -   6 
                 
Income (loss) before income taxes $2,833  $1,425  
$ 
(209) 
$ 
(16,930)
                 



Nine Months Ended September 30, 2016 (unaudited)

  
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

For the three and six months ended June 30, 2023 and 2022, depreciation and amortization by reportable segment were as follows:


  Three Months Ended June 30, 
  2023
  2022
 
Dermatology recurring procedures $1,238  $1,059 
Dermatology procedures equipment  187   277 
Unallocated expenses  3   3 
Consolidated total $1,428  $1,339 

  Six Months Ended June 30, 
  2023
  2022
 
Dermatology recurring procedures $2,451  $2,211 
Dermatology procedures equipment  367   442 
Unallocated expenses  7   7 
Consolidated total $2,825  $2,660 

19
Table of Contents

STRATA SKIN SCIENCES, INC. AND SUBSIDIARYSkin Sciences, Inc. and Subsidiary
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSNotes to Unaudited Condensed Consolidated Financial Statements
(Inin thousands, except share and per share amounts and number of lasers)
(unaudited)

ForThe following tables present the Company’s revenue disaggregated by geographical region for the three and ninesix months ended SeptemberJune 30, 20172023 and 2016 there were no material net revenues attributable2022, respectively. Domestic refers to any individualrevenue from customers based in the United States, and 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% locatedrevenue is derived from sales to the Company’s distributors, primarily in domestic markets as of September 30, 2017 and December 31, 2016.Asia.

  Dermatology Recurring Procedures  Dermatology Procedures Equipment  TOTAL 
Three Months Ended June 30, 2023            
Domestic $5,141  $926  $6,067 
Foreign  315   1,868   2,183 
Total $5,456  $2,794  $8,250 
             
Six Months Ended June 30, 2023            
Domestic $9,988  $1,422  $11,410 
Foreign  677   3,730   4,407 
Total $10,665  $5,152  $15,817 

  Dermatology Recurring Procedures  Dermatology Procedures Equipment  TOTAL 
Three Months Ended June 30, 2022            
Domestic $5,177  $547  $5,724 
Foreign  405   2,976   3,381 
Total $5,582  $3,523  $9,105 
             
Six Months Ended June 30, 2022            
Domestic $9,866  $1,242  $11,108 
Foreign  783   4,255   5,038 
Total $10,649  $5,497  $16,146 

Note 13
Significant Customer Concentration:Concentrations:

For the three months ended SeptemberJune 30, 2017,2023 and 2022, revenues from sales to one of the Company's international master distributor (GlobalMed Technologies)Company’s distributors were $1,148,$959, or 15.3%11.6%, of total revenues for such period.and $1,840, or 20.2%, respectively. For the ninesix months ended SeptemberJune 30, 2017,2022, revenues from sales to two of the Company's international master distributorCompany’s distributors were $3,861,$3,773, or 16.5%, of total revenues for such period. At September 30, 2017, the accounts receivable balance from GlobalMed Technologies was $418, or 13.1%, of total net accounts receivable. For the three months ended September 30, 2016, revenues from sales to the Company's international master distributor were $1,457, or 18.8%, 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. 23.4%.

No other customer represented more than 10% of total companyCompany revenues for the three and ninesix months ended SeptemberJune 30, 20172023 and 2016. 2022.

No other customer represented more than 10% of totalnet accounts receivable as of SeptemberJune 30, 2017.2023. One customer represented 11% of net accounts receivable as of December 31, 2022.

Note 14
Related Parties:
On June 22, 2015,
Commitments and Contingencies:
Leases
The Company recognizes right-of-use assets (“ROU assets”) and operating lease liabilities when it obtains the right to control an asset under a leasing arrangement with an initial term greater than 12 months. The Company entered into a securities purchase agreement withadopted the Purchasers, including certain funds managed by Sabby Management, LLC and Broadfin Capital LLC (existing Company shareholders), in connectionshort-term accounting election for leases with a private placement.duration of less than one year. The Purchasers were issued Warrants to purchase an aggregate of 0.6 million shares of common stock, having an exercise price of $3.75 per share. We also issued $32.5 million aggregate principal amount of Debentures that, subject toCompany leases its facilities and certain ownership limitationsIT and stockholder approval conditions, were convertible into 8,666,668 shares of common stock at an initial conversion price of $3.75 per share. The Debentures were bearing interest at the rate of 2.25% per year, and, unless previously converted, were to mature on the five-year anniversaryoffice equipment under non-cancellable operating leases. All of the date of issuance. ReferCompany’s leasing arrangements are classified as operating leases with remaining lease terms ranging from one to Note 6 for additional information on the terms of the Debentures. On September 30, 2015, the Company repriced outstanding Warrants held by certain investors to reduce the exercise price to $3.75 per share.four years.

26

20
Table of Contents

STRATA SKIN SCIENCES, INC. AND SUBSIDIARYSkin Sciences, Inc. and Subsidiary
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSNotes to Unaudited Condensed Consolidated Financial Statements
(Inin thousands, except share and per share amounts and number of lasers)
(unaudited)

Operating lease costs were $123 and $99 for the three months ended June 30, 2023 and 2022, respectively. Operating lease costs were $229 and $212 for the six months ended June 30, 2023 and 2022, respectively. Cash paid for amounts included in the measurement of operating lease liabilities was $109 and $114 for the three months ended June 30, 2023 and 2022, respectively. Cash paid for amounts included in the measurement of operating lease liabilities was $205 and $227 for the six months ended June 30, 2023 and 2022, respectively. As of June 30, 2023, the weighted average incremental borrowing rate was 8.71% and the weighted average remaining lease term was 2.3 years. 
On
The following table summarizes the Company’s operating lease maturities as of June 6, 2017,30, 2023:

Remaining 2023 
$
220
 
2024  
386
 
2025  
195
 
2026  55 
Total remaining lease payments 
$
856
 
Less: imputed interest  
(77
)
Total lease liabilities 
$
779
 

Accrued State Sales and Use Tax
The Company records state sales tax collected and remitted for its customers on dermatology procedures equipment sales on a net basis, excluded from revenue. The Company’s sales tax expense that is not presently being collected and remitted for the recurring revenue business is recorded in general and administrative expenses within the condensed consolidated statements of operations.

The Company believes its state sales and use tax accruals have been properly recognized such that, if the Company’s arrangements with customers are deemed more likely than not that the Company entered intowould not be exempt from sales tax in a Securities Exchange Agreement (the "Agreement") withparticular state, 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 eliminationbasis for measurement 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, 2017state sales and $40,465 of principle was exchanged for 40,482 shares of Series C Preferred Stock. Inuse tax is calculated in accordance with ASC Topic 470, Debt,405, Liabilities, as a transaction tax. If and when the aforementioned exchange was treatedCompany is successful in defending itself or in settling the sales tax obligation for a lesser amount, the reversal of this liability is to be recorded in the period the settlement is reached. However, the precise scope, timing, and time period at issue, as an extinguishmentwell as the final outcome of debt. As there was no intrinsic value forany audit and actual settlement, remains uncertain.

In the conversion feature onordinary course of business, the date of extinguishment, none of the proceeds were allocatedCompany is, from time to the extinguishment of the beneficial conversion feature. As such, the difference between the fair value of the convertible preferred stock issued (determinedtime, subject to audits performed by state taxing authorities. These actions and proceedings are generally based on the market valueposition that the arrangements entered into by the Company are subject to sales and use tax rather than exempt from tax under applicable law. Several states have assessed the Company an aggregate of $2,375 including penalties and interest for the period from March 2014 through April 2020. The Company received notification that an administrative state judge issued an opinion finding in favor of the underlying common stock)Company that the sale of XTRAC treatment codes was not taxable as sales tax with respect to that state’s first assessment. This ruling covers $1,484 of the total $2,375 of assessments. The relevant taxing authority filed an appeal of the administrative law judge’s finding and, following the submission of legal briefs by both sides and oral argument held in January 2022, on May 6, 2022, the Company received a written decision from State of New York Tax Appeals Tribunal (“Tribunal”) overturning the favorable sales tax determination of the administrative law judge. The Company filed an appeal of the Tribunal’s decision and posted the required appellate bond requiring posting cash collateral, with the New York State Appellate Division, and is awaiting for the appellate court to set a schedule for oral argument.

The Company is also in another jurisdiction’s administrative process of appeal with respect to the remaining $891 of assessments, and the net carrying valuetiming of the convertible debentures (adjusted for unamortized premium discount), of $11,799 was recognized asprocess has been impacted by the COVID-19 pandemic. If there is a loss on extinguishment of debentures.
Other thandetermination that the limitations on conversions to keep each such holders beneficial ownership below 9.99%, the termstrue object of the Series C Convertible Preferred Stock generally bestowCompany’s recurring revenue model is not exempt from sales taxes and is not a prescription medicine, or 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 doCompany does 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,other defenses where 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 toprevails, the Company may be subject to sales taxes in those particular states for previous years and its management team in connection with the integrationfuture, plus potential interest 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.penalties.
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

21
Table of Contents

STRATA SKIN SCIENCES, INC. AND SUBSIDIARYSkin Sciences, Inc. and Subsidiary
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSNotes to Unaudited Condensed Consolidated Financial Statements
(Inin thousands, except share and per share amounts and number of lasers)
(unaudited)

Note 15
Commitments and Contingencies:
Leases
The precise scope, timing and time periods at issue, as well as the final outcomes of the investigations and judicial proceedings, remain uncertain. Accordingly, the Company’s estimate may change from time to time, and actual losses could vary.

Milestone Payments
In January 2022, the Company has entered into a Development Agreement (the “Development Agreement”) with Theravant. Under the Development Agreement, the Company will reimburse Theravant for costs incurred in further developing certain TheraClear technology and other healthcare products and methods for the medical aesthetic marketplace. In connection with the development of three devices, Theravant is eligible to receive $500 upon FDA clearance for each device and $500 upon achievement of certain net revenue targets for each device, aggregating to $3,000 of potential future milestone payments under the Development Agreement. The Development Agreement has a three-year term, unless terminated sooner by either party, and is being accounted for separately from the TheraClear asset acquisition discussed in Note 4.

Legal Matters
In the ordinary course of business, the Company is routinely a defendant in or party to pending and threatened legal actions and proceedings, including actions brought on behalf of various non-cancelable operating lease agreementsclasses 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 real propertysubstantial monetary damages are asserted against the Company. In the ordinary course of business, the Company is also subject to regulatory and three minor operating leasesgovernmental 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 personal property. These arrangements expiredocuments, testimony, and information in connection with various aspects of its activities.

On April 1, 2022, a proposed representative class action under California’s Private Attorneys General Act (“PAGA”) was filed in Superior Court of California, County of San Diego against the Company and an employment agency which provided the Company with temporary employees. The complaint alleges various violations of the California Labor Code, including California’s wage and hour laws, relating to current and former non-exempt employees of the Company. The complaint seeks class status and payments for allegedly unpaid compensation and attorney’s fees. In a related matter, the attorneys in this matter and the proposed class representative, in a letter dated March 12, 2022, to the California Labor & Workforce Development Agency made nearly identical claims seeking the right to pursue a PAGA action against the Company and the employment agency. On or about May 16, 2022, the plaintiff filed a First Amended Complaint adding a PAGA claim to the action. On or about June 2, 2022, the plaintiff filed an Application to Dismiss Class and Individual Claim without prejudice, in an attempt to pursue a PAGA only complaint. On or about June 30, 2022, the parties entered into a stipulation to allow the plaintiff to file a Second Amended Complaint to clarify the PAGA claim and to stay the pending action to allow an attempt at various datesresolution through 2019.mediation. The mediation was held on February 23, 2023, and the matter was settled on terms agreeable to the Company. The settlement, which requires the Company to pay $106, is subject to the right of individual class members to opt out of the settlement and proceed on their own. As of SeptemberJune 30, 2017, aggregate annual minimum payments due under the Company's lease obligations are as follows:2023, $106 has been accrued for this matter.
Year,
   
2017 (remaining three months) $113 
2018  429 
2019  160 
Total $702 

Note 16
Subsequent Events:
During October 2017, investors converted Series C Preferred Stock amounting to $4,299 into 1,598,346 shares of common stock.

ITEM 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 2.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.business including the scope and duration of the COVID-19 outbreak and its impact on global economic systems. In particular, we encourage you to review the risks and uncertainties described in ItemPart II-Item 1A "Risk Factors" included elsewhere in this report,“Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.2022. These risks and uncertainties could cause actual results to differ materially from those projected in forward-looking statements contained in this reportReport or implied by past results and trends. Forward-looking statements are statements that attempt to forecast or anticipate future developments in our business, financial condition or results of operations and statements — see "Cautionary Note Regarding Forward-Looking Statements" that appears at the end of this discussion. These statements, like all statements in this report,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 earningsnumber of shares, prices per share.treatment, number of treatments and number of devices.
Introduction, Outlook, and Overview of Business Operations and Recent Developments
STRATA Skin Sciences, Inc. ("STRATA" or "we" or the "Company") is a medical technology company focused onin dermatology 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® laserXTRAC® and VTRAC®Pharos® excimer lasers and VTRAC® lamp systems utilized in the treatment of psoriasis, vitiligo, and various other skin conditions;conditions, as well as the STRATAPEN™ MicroSystems, a micropigmentation device; and Nordlys, a multi-technology aesthetic laser device for treating vascular and pigmented lesions.TheraClear® X Acne Therapy System utilized in the treatment of acne-related skin conditions.
The XTRAC deviceultraviolet light excimer laser system is 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 308um308nm ultraviolet light to affected areas of skin, leading to psoriasis clearing and vitiligo repigmentation, following a series of treatments. As of SeptemberJune 30, 2017,2023, there were 776930 XTRAC systems placed in dermatologists'dermatologists’ offices in the United States under our dermatology recurring revenueprocedures model, upan increase from 760 at the end909 as of September 30, 2016.December 31, 2022. Under the dermatology recurring revenueprocedures model, the XTRAC system is placed in a physician'sphysician’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. ThereThe Pharos excimer laser system holds FDA clearance to treat chronic skin diseases, including psoriasis, vitiligo, atopic dermatitis, and leukoderma. We believe there are approximately 7.58 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, over 351,000 XTRAC laser

The TheraClear® X Acne Therapy System combines intense pulse light with vacuum (suction) for the treatment of mild to moderate inflammatory acne (including acne vulgaris), comedonal acne and pustular acne. The TheraClear device was cleared by the FDA through the 510(k) process. Currently, there is little insurance reimbursement coverage for acne treatments, were performedsuch as those provided by TheraClear.

Our non-U.S. business focuses on approximately 22,000 patientsa direct distribution model for equipment sales and recurring revenue, and we have distribution agreements in place in the United States.Mid-East, Asia, and Mexico.

COVID-19 Pandemic
In late 2019, there was an outbreak of a new strain of coronavirus (“COVID-19”) which became a global pandemic. Since March 20172020, the COVID-19 pandemic has negatively impacted business conditions in the industry in which we informedoperate, disrupted global supply chains, constrained workforce participation, and created significant volatility and disruption of financial markets. The pandemic led to the suspension of elective procedures in the U.S. and to the temporary closure of many physician practices, which are our primary customers. While most offices have reopened, some physician practices closed and never reopened, and the impact of the COVID-19 pandemic and its variants on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frames, will depend on future developments, including, but not limited to, impact on supply chains and transport, and governmental and customer responses, including staffing issues, 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 developwhich are uncertain 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.cannot be predicted.

29

23

Table of Contents

Russia-Ukraine War
Effective March 1, 2017, we entered into an agreement
Prior 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 agreementoutbreak of the three parties involvedRussia-Ukraine War, Ukraine was the largest exporter of noble gases including neon, krypton, and xenon. Historically, Ukraine has been the source of a significant amount of gas supplied to us by our contract suppliers. Neon gas is essential to the proper functioning of our lasers. Our supporters have been resourceful in continuing to supply gases to us but cannot assure us that the supply will not remain uninterrupted. The reduced supply and ongoing conflict have raised the price of gas significantly worldwide. Additionally, the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 has led to a further tightening of rare gas supplies as chip manufacturers reconfigure their supply chains to address the need to secure their own supplies of rare gases for use 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 familymanufacture 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.computer chips.
Effective February 1, 2017, we entered into an exclusive OEM distribution agreement with Esthetic Education, LLC to be the exclusive marketer and seller of private label versions of the SkinStylus MicroSystem and associated parts under the name of STRATAPen. This three-year agreement allows for two one year extensions.
Key TechnologyTechnologies

•
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 January 2020, we announced the FDA granted clearance of our XTRAC Momentum Excimer Laser Platform. In February 2022, we announced the commercial launch, with the first installation in the U.S. market, of our next generation excimer laser system, XTRAC Momentum® 1.0.


•
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 indicationsTheraClear® X Acne Treatment Device. The TheraClear® Acne Therapy System was cleared by the FDA through the 510(k) process and hascombines intense pulse light with vacuum (suction) for the abilitytreatment of mild to use a multitude of light based technologies all in on compact platform–SWT (Selective Waveband Technology: the latest evolutionmoderate inflammatory acne (including acne vulgaris), comedonal acne and advancement of Intense Pulsed Light), Nd:YAG and the FRAX 1550 non-ablative fractionated technology.
•
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.pustular acne.
Sales and Marketing
As of September 30, 2017, our sales and marketing personnel consisted of 54 full-time positions, inclusive of a direct sales organization as well as an in-house call center staffed with patient advocates and a reimbursement group that provides necessary insurance information to our physician partners and their patients.Recent Developments
Reverse Stock Split
On April 6, 2017,June 30, 2023, we completed the reverse splitrefinancing of its common stock in the ratioour existing debt agreement with a new facility from MidCap Financial Trust (“MidCap”). The new debt facility consists 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 resultrefinancing of the stock split, we nowexisting $8,000 term loan and an additional $7,000 tranche funded at closing. We also have 2,183,243 shares of common stock outstanding, taking into account the rounding up of fractional shares.option to receive an additional $5,000 tranche in 2024. (For more information, see Notes 2, Liquidity and 9, Long-term Debt to the Notes to Unaudited Condensed Consolidated Financial Statements.)
30




Critical Accounting Policies and Estimates
There have been no changes to our critical accounting policies in the three and ninesix months ended SeptemberJune 30, 2017.2023. 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" and Estimates” in our "Management's“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 with2022 of our Annual Report on Form 10-K as filed with the SEC on March 13, 2017.31, 2023.
24
Table of Contents
Results of Operations(The following financial data, in this narrative, are expressed in thousands, except for the earnings per share.)
Revenues
The following table presentstables present 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, 
  2023  2022 
Dermatology recurring procedures 
$
5,456
  
$
5,582
 
Dermatology procedures equipment  
2,794
   
3,523
 
Total revenues 
$
8,250
  
$
9,105
 

  For the Six Months Ended June 30, 
  2023  2022 
Dermatology recurring procedures 
$
10,665
  
$
10,649
 
Dermatology procedures equipment  
5,152
   
5,497
 
Total revenues 
$
15,817
  
$
16,146
 

Dermatology Recurring Procedures
Recognized recurring treatment revenue for the three months ended SeptemberJune 30, 20172023 was $5,720,$5,456, which approximates 82,000we estimate is approximately 72,000 XTRAC treatments with prices between $65 to $95 per treatment, compared to recognized recurring treatment revenue for the three months ended SeptemberJune 30, 20162022 of $6,205,$5,582, which approximates 89,000we estimate is approximately 86,000 XTRAC treatments, with prices between $65 to $95 per treatment. Recognized recurring treatment revenue for the ninesix months ended SeptemberJune 30, 20172023 was $17,653,$10,665, which approximates 252,000we estimate is approximately 140,000 XTRAC treatments with prices between $65 to $95 per treatment, compared to recognized recurring treatment revenue for the ninesix months ended SeptemberJune 30, 20162022 of $17,826,$10,649, which approximates 244,000we estimate is approximately 157,000 XTRAC treatments, with prices between $65 to $95 per treatment. In connection with the launch of the TheraClear Acne Therapy System, there were 73 TheraClear devices placed in dermatologists’ offices in the United States under our recurring procedures model as of June 30, 2023, which includes devices placed during the soft launch in the fourth quarter of 2022. Nominal revenue was earned from these devices during the three and six months ended June 30, 2023.
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 limitedan 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
Revenues from dermatology recurring procedures are recognized over the three months ended September 30, 2017, we began to build a larger digital media presence while reducing our expenditures in both television and radio. During this quarter we had no direct to patient media which resulted in a decline in revenues, but we are ramping up new digital marketing strategies in the fourth quarter to stimulate patient referrals and related revenues.
We defer substantially all sales of treatment codes ordered by and delivered to 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, 20172023 and 2016,2022, we deferred net revenues of $200$2,027 and $213,$2,501, respectively, under this approach.which will be recognized as revenue over the remaining usage period for domestic placements. Higher deferred revenue from the fourth quarter of 2022 favorably impacted the first half of 2023 as compared to the first half of 2022 when lower deferred revenue negatively impacted that period.
31



Dermatology Procedures Equipment
For the three and six months ended SeptemberJune 30, 20172023, dermatology procedures equipment revenues were $1,751.$2,794 and $5,152, respectively. Internationally, we sold 1614 systems for the three months ended September 30, 2017, (5(13 XTRAC and 111 VTRAC). Domestically, we sold six XTRAC and 30 systems for the three months ended September 30, 2017. For the three months ended September 30, 2016 dermatology equipment revenues were $1,550. Internationally, we sold 19 systems for the three months ended September 30, 2016, (9(25 XTRAC and 105 VTRAC).
For the nine months ended September 30, 2017 dermatology equipment revenues were $5,784. Internationally, we sold 46 systems for the nine months ended September 30, 2017, (31 XTRAC and 19 VTRAC). Domestically, we sold 17 XTRAC systems for the nine months ended September 30, 2017. For the nine months ended September 30, 2016 dermatology equipment revenues were $5,174. Internationally, we sold 65 systems for the nine months ended September 30, 2016, (39 XTRAC and 26 VTRAC).
Additionally, included in, respectively, during the three and ninesix months ended SeptemberJune 30, 2017 was $1182023. Domestically, there were 12 and $50914 systems sold, respectively, in revenues for oneduring the three and six months ended June 30, 2023. In addition to equipment sales, we recognized approximately $60 and $140 of previously deferred service revenue associated with assumed service contracts from Ra Medical during the three Nordlys units and accessories,six months ended June 30, 2023, respectively. There were no such revenues in the comparable prior year periods.
Dermatology Imaging
For the three and six months ended SeptemberJune 30, 2017 and 2016, imaging2022, dermatology procedures equipment revenues were $9$3,523 and $12,$5,497, respectively. ForInternationally, we sold 35 systems (30 XTRAC and 5 VTRAC) and 49 systems (41 XTRAC and 8 VTRAC), respectively, during the ninethree and six months ended SeptemberJune 30, 20172022. Domestically, there was one XTRAC system sold during the three and 2016, imaging revenues were $17six months ended June 30, 2022. In addition to equipment sales, we recognized approximately $220 and $126, respectively. We have discontinued our efforts to develop$620, respectively, of previously deferred service revenue associated with assumed service contracts from Ra Medical during the MelaFind Systemthree and have discontinued our efforts to develop and commercialize it. We no longer have the resources to continue to support the device. In announcing our discontinuationsix months ended June 30, 2022.
25
Table 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.Contents
Cost of Revenues
The following table illustratestables illustrate 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, 
  2023  2022 
Dermatology recurring procedures 
$
2,205
  
$
2,298
 
Dermatology procedures equipment  
1,727
   
1,814
 
Total cost of revenues 
$
3,932
  
$
4,112
 

  For the Six Months Ended June 30, 
  2023  2022 
Dermatology recurring procedures 
$
4,225
  
$
4,330
 
Dermatology procedures equipment  
2,886
   
2,695
 
Total cost of revenues 
$
7,111
  
$
7,025
 

Gross Profit Analysis
The following tables present changes in our gross profit for the periods presented below:
Company Profit Analysis
  For the Three Months Ended June 30, 
  2023  2022 
Revenues 
$
8,250
  
$
9,105
 
Cost of revenues  
3,932
   
4,112
 
Gross profit 
$
4,318
  
$
4,993
 
Gross profit percentage  
52.3
%
  
54.8
%

  For the Six Months Ended June 30, 
  2023  2022 
Revenues 
$
15,817
  
$
16,146
 
Cost of revenues  
7,111
   
7,025
 
Gross profit 
$
8,706
  
$
9,121
 
Gross profit percentage  
55.0
%
  
56.5
%
Gross profit decreased to $4,204$4,318 for the three months ended SeptemberJune 30, 20172023 from $4,697$4,993 during the same period in 2016.2022. As a percentagepercent of revenues, the gross marginprofit was 56.2%52.3% for the three months ended SeptemberJune 30, 20172023, as compared to 54.8% for the same period in 2022. The decrease in gross profit percentage was primarily the result of higher depreciation due to more XTRAC lasers and 60.5%new TheraClear devices placed into service and higher material costs during the three months ended June 30, 2023.
Gross profit decreased to $8,706 for the six months ended June 30, 2023 from $9,121 during the same period in 2016. Gross2022. As a percent of revenues, the gross profit increased to $14,272was 55.0% for the ninesix months ended SeptemberJune 30, 2017 from $13,495 during2023, as compared to 56.5% for the same period in 2016. As a2022. The decrease in gross profit percentage was primarily the result of revenues,higher depreciation due to more XTRAC lasers and new TheraClear devices placed into service and higher material costs during the gross margin was 60.9% for the ninesix months ended SeptemberJune 30, 2017 and 58.4% during the same period in 2016.2023.
32

26

Table of Contents

The following tables analyzepresent changes in our gross margin,profit, 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%


Dermatology Recurring Procedures
Dermatology Recurring Procedures
 
For the Three Months Ended
September 30,
  
For the Nine Months Ended
September 30,
 
  2017  2016  2017  2016 
Revenues $5,720  $6,205  $17,653  $17,826 
Percent decrease  (7.8%)      (1.0%)    
Cost of revenues  2,084   2,162   5,969   6,723 
Percent decrease  (3.6%)      (11.2%)    
Gross profit $3,636  $4,043   11,684  $11,103 
Gross margin percentage  63.6%  65.2%  66.2%  62.3%
The primary reason for the change in gross
  For the Three Months Ended June 30, 
  2023  2022 
Revenues 
$
5,456
  
$
5,582
 
Cost of revenues  
2,205
   
2,298
 
Gross profit 
$
3,251
  
$
3,284
 
Gross profit percentage  
59.6
%
  
58.8
%
  For the Six Months Ended June 30, 
  2023  2022 
Revenues 
$
10,665
  
$
10,649
 
Cost of revenues  
4,225
   
4,330
 
Gross profit 
$
6,440
  
$
6,319
 
Gross profit percentage  
60.4
%
  
59.3
%
Gross profit decreased to $3,251 for the three months ended SeptemberJune 30, 2017,2023 from $3,284 during the same period in 2022. As a percent of revenues, the gross profit was 59.6% for the three months ended June 30, 2023, as compared to 58.8% for the same period in 2022. The primary reason that gross profit percentage increased for the three months ended June 30, 2023 as compared to the same period in 2016,2022 was a reduction in training and other startup costs for outsourced field service technicians and higher absorption of overhead costs, offset by higher depreciation costs due to more XTRAC lasers and new TheraClear devices placed into service.
Gross profit increased to $6,440 for the six months ended June 30, 2023 from $6,319 during the same period in 2022. As a declinepercent of revenues, the gross profit was 60.4% for the six months ended June 30, 2023, as compared to 59.3% for the same period in media presence, which resulted in a decline in treatments, but we are ramping up new digital marketing strategies in the fourth quarter to stimulate patient referrals and related revenues.2022. The primary reason that gross profit percentage increased for the change in gross profit for the ninesix months ended SeptemberJune 30, 2017,2023 as compared to the same period in 2016,2022 was higher absorption of overhead costs and a reduction in training and other startup costs for outsourced field service technicians, offset by higher depreciation costs due to technical improvements in the product which reduced gas consumptionmore XTRAC lasers and service repairsnew TheraClear devices placed into service.
Dermatology Procedures Equipment
  For the Three Months Ended June 30, 
  2023  2022 
Revenues 
$
2,794
  
$
3,523
 
Cost of revenues  
1,727
   
1,814
 
Gross profit 
$
1,067
  
$
1,709
 
Gross profit percentage  
38.2
%
  
48.5
%

  For the Six Months Ended June 30, 
  2023  2022 
Revenues 
$
5,152
  
$
5,497
 
Cost of revenues  
2,886
   
2,695
 
Gross profit 
$
2,266
  
$
2,802
 
Gross profit percentage  
44.0
%
  
51.0
%

Gross profit decreased to $1,067 for the ninethree months ended SeptemberJune 30, 2017. Incremental treatments delivered on existing equipment incur negligible incremental costs, so increases and/or decreases2023 from $1,709 during the same period in those treatments have an impact on2022. As a percent of revenues, the gross margin.

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%
profit was 38.2% for the three months ended June 30, 2023, as compared to 48.5% for the same period in 2022. The primary reason for the changedecrease in gross profit percentage for the three and nine months ended SeptemberJune 30, 2017,2023 as compared to the same period in 2022 was lower recognition of previously deferred service revenue associated with assumed service contracts from Ra Medical, which is decreasing as the related service contracts expire, and an increase in domestic sales with longer warranty periods, in 2016, was product mix. The gross margin change is affected by the mix of products sold as XTRAC systems have a lower gross margin than parts. Additionally, domestic XTRAC system sales and Nordlys system sales haveleading to a greater gross margin than internationalamount of deferred revenue for those sales.

33

27

Table of Contents

Dermatology Imaging
Gross profit decreased to $2,266 for the six months ended June 30, 2023 from $2,802 during the same period in 2022. As a percent of revenues, the gross profit was 44.0% for the six months ended June 30, 2023, as compared to 51.0% for the same period in 2022. The primary reason for the changedecrease in gross profit percentage for the three and ninesix months ended SeptemberJune 30, 2017,2023 as compared to the same period in 2022 was lower recognition of previously deferred service revenue associated with assumed service contracts from Ra Medical, which is decreasing as the related service contracts expire, and an increase in domestic sales with longer warranty periods, in 2016, was the fact that we have discontinued our effortsleading to develop the MelaFind System and are in the processa greater amount 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 offereddeferred revenue 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 productthose sales.

Engineering and Product Development
EngineeringFor the three months ended June 30, 2023, engineering and product development expenses were $374 as compared to $209 for the three months ended SeptemberJune 30, 2017 increased2022. For the six months ended June 30, 2023, engineering and product development expenses were $689 as compared to $410 from $382$372 for the threesix months ended SeptemberJune 30, 2016.2022. Engineering and product development expenses for the nine months ended September 30, 2017 decreased to $1,308 from $1,541 for the nine months ended September 30, 2016. The decreases were due to having ended the ongoing research and development efforts for the MelaFind technology on product enhancementscosts during the nine months ended September 30, 2016.three- and six-month periods in 2023 were higher primarily as a result of an increase in consulting expenses related to future enhancements of our devices.
Selling and Marketing Expenses
For the three months ended SeptemberJune 30, 2017,2023, selling and marketing expenses decreasedwere $3,416 as compared to $2,687 from $2,840$4,146 for the three months ended SeptemberJune 30, 2016. 2022. Selling and marketing expenses for the three months ended June 30, 2023 were lower as compared to the same period in 2022 primarily due to our national sales meeting, which was held in the first quarter of 2023 compared to the second quarter of 2022, a reduction in advertising costs, lower bonuses and a decrease in commissions.
For the ninesix months ended SeptemberJune 30, 2017,2023, selling and marketing expenses decreasedwere $7,158 as compared to $8,914 from $10,073$7,762 for the ninesix months ended SeptemberJune 30, 2016. The decreases2022. Selling and marketing expenses for the six months ended June 30, 2023 were relatedlower as compared to the plannedsame period in 2022 primarily due to a reduction of expense in TVadvertising costs and radio media as we transition over to more ofa decrease in commissions, partially offset by an internet and social media campaign.increase in salaries.
General and Administrative Expenses
For the three months ended SeptemberJune 30, 2017,2023, general and administrative expenses decreasedincreased to $1,678$2,490 from $1,880$2,332 for the three months ended SeptemberJune 30, 2016. For the nine months ended September 30, 2017, general2022. General and administrative expenses decreased to $4,999 from $5,882 for the nine months ended September 30, 2016. The decrease for the nine months ended September 30, 2017 was primarily due to:
·           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 expensewere higher for the three months ended SeptemberJune 30, 2017 was $1,3432023 as compared to $1,175the same period in 2022 primarily due to higher legal and accounting and sales tax costs. We incurred additional legal services and accounting fees associated with the threeadoption of a new accounting standard. Further, our sales tax accrual is based on historical revenues for a period that includes higher revenues recognized subsequent to the COVID-19 pandemic.
For the six months ended SeptemberJune 30, 2016. Interest expense2023, general and administrative expenses increased to $5,407 from $4,984 for the ninesix months ended SeptemberJune 30, 2017 was $4,2652022. General and administrative expenses were higher for the six months ended June 30, 2023 as compared to $3,571the same period in 2022 primarily due to higher legal and accounting and sales tax costs. We incurred additional legal services and accounting fees associated with the nine months ended September 30, 2016. Interest expense during all periods relate2022 financial statement audit and the adoption of a new accounting standard. Further, our sales tax accrual is based on historical revenues for a period that includes higher revenues recognized subsequent to the 4% senior convertible debentures issued in July 2014 andCOVID-19 pandemic.
Loss on Debt Extinguishment
During the 2.25% senior convertible debentures issued on June 22, 2015, which include amortizationsecond quarter of the related debt discount and deferred financing fees, which are amortized using the effective interest method. The periods also include interest expense related 2023, we refinanced our Senior Term Facility with MidCap (see Note 9, Long-term Debt to the termNotes to Unaudited Condensed Consolidated Financial Statements). The new loan is considered substantially different from the original loan and, as such, we recorded a loss on debt issued in December 2015. Additionally, approximately $197extinguishment of interest expense was recognized as a result of the conversion of $262 of debentures into common stock$909 during the nine months ended September 30, 2017. Additionally, approximately $203 of interest expense was recognized as a result of the conversion of $248 of debentures into common stock during the nine months ended September 30, 2016.
Change in Fair Value of Warrant Liability
In accordance with FASB ASC 470, "Debt – Debt with Conversion and Other Options" ("ASC Topic 470") and FASB ASC 820, Fair Value Measurements and Disclosures ("ASC Topic 820"), we measured the fair value of our warrants that were recorded at their fair value and recognized as liabilities as of September 30, 2017, and recorded $81 and $77 in other income for the three and ninesix months ended SeptemberJune 30, 2017, respectively. We measured the fair value of these warrants as of September 30, 2016, and recorded $132 and $5,316 in other income for2023. There was no such financing event or debt extinguishment during 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 62022.

Interest Expense
Interest expense is primarily attributable to the accompanying consolidated financial statements.
Income Taxes
Income taxour debt obligations. Interest expense increased to $298 for the three months ended SeptemberJune 30, 2017 was $38 compared to $642023 from $208 for the three months ended September,June 30, 2016. Income tax2022. Interest expense increased to $584 for the ninesix months ended SeptemberJune 30, 2017 was $180 compared to $1912023 from $407 for the ninesix months ended June 30, 2022. The increase was primarily the result of a higher interest rate on our variable rate Senior Term Facility entered into in September 2016. The expense is comprised2021.

28
Table 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.Contents
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, weWe have determined to supplement our condensed consolidated financial statements, prepared in accordance with GAAP,accounting principles generally accepted in the United States of America (“U.S. GAAP”), presented elsewhere within this report, we will provideReport, with certain non-GAAP measures of financial performance. These non-GAAP measures include non-GAAP gross profit, which excludes the non-cash expense of amortization of acquired intangible assets classified as cost of revenues, and non-GAAP adjusted EBITDA.EBITDA, “Earnings Before Interest, Taxes, Depreciation, and Amortization.”
These non-GAAP disclosures have limitations as an analytical tool, should not be viewed as a substitute for Gross Profit or Net Earnings (Loss) determined in accordance with U.S. GAAP, and should not be considered in isolation or as a substitute for analysis of the Company’s results as reported under U.S. GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. We consider these non-GAAP measures in addition to our results prepared under current accounting standards, but they are not a substitute for, nor superior to, U.S. GAAP measures. These non-GAAP measures are provided to enhance readers'readers’ overall understanding of our current financial performance and to provide further information for comparative purposes.
35



This supplemental presentation should not be construed as an inference that the Company’s future results will be unaffected by similar adjustments to Gross Profit or Net Earnings (Loss) determined in accordance with U.S. GAAP. Specifically, we believe the non-GAAP measures provide useful information to management and investors by isolating certain expenses, gains and losses that may not be indicative of our core operating results and business outlook. In addition, we believe non-GAAP measures enhance the comparability of results against prior periods. Reconciliation to the most directly comparable U.S. GAAP measure of all non-GAAP measures included in this reportReport 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)
             
* Includes depreciation on lasers placed-in-service of $1,078 and $1,040 for the three months ended September 30, 2017 and 2016, respectively.
  For the Three Months Ended June 30, 
  2023  2022 
Gross profit 
$
4,318
  
$
4,993
 
Amortization of acquired intangible assets  
508
   
532
 
Non-GAAP gross profit 
$
4,826
  
$
5,525
 
Gross profit percentage  
52.3
%
  
54.8
%
Non-GAAP gross profit percentage  
58.5
%
  
60.7
%


   
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 
             
  For the Six Months Ended June 30, 
  2023  2022 
Gross profit 
$
8,706
  
$
9,121
 
Amortization of acquired intangible assets  
1,016
   
1,016
 
Non-GAAP gross profit 
$
9,722
  
$
10,137
 
Gross profit percentage  
55.0
%
  
56.5
%
Non-GAAP gross profit percentage  
61.5
%
  
62.8
%
* Includes depreciation on lasers placed-in-service of $3,229 and $3,329 for the nine months ended September 30, 2017 and 2016, respectively.
  For the Three Months Ended June 30, 
  2023  2022 
Net loss 
$
(3,148
)
 
$
(1,892
)
         
Adjustments:        
Depreciation and amortization  
1,428
   
1,339
 
Amortization of operating lease right-of-use assets  
63
   
92
 
Loss on disposal of property and equipment  
24
   
18
 
Interest expense, net  
277
   
198
 
Non-GAAP EBITDA  
(1,356
)
  
(245
)
Stock-based compensation expense  
352
   
452
 
Loss on debt extinguishment  
909
   
—
 
Non-GAAP adjusted EBITDA 
$
(95
)
 
$
207

36

29

Table of Contents

  For the Six Months Ended June 30, 
  2023  2022 
Net loss 
$
(5,983
)
 
$
(4,394
)
         
Adjustments:        
Depreciation and amortization  
2,825
   
2,660
 
Amortization of operating lease right-of-use assets  
168
   
181
 
Loss on disposal of property and equipment  
24
   
35
 
Interest expense, net  
526
   
397
 
Non-GAAP EBITDA  
(2,440
)
  
(1,121
)
Stock-based compensation expense  
677
   
820
 
Loss on debt extinguishment  
909
   
—
 
Non-GAAP adjusted EBITDA 
$
(854
)
 
$
(301
)
Liquidity and Capital Resources
As of SeptemberJune 30, 20172023, we had $3,927$7,125 of working capital compared to $4,619$4,078 as of December 31, 2016. Cash2022. The change in working capital was primarily the result of an increase in cash and cash equivalents from additional proceeds received upon the refinancing of the Senior Term Facility on June 30, 2023. Cash, cash equivalents and restricted cash were $3,127$10,395 as of SeptemberJune 30, 2017,2023, as compared to $3,928$6,795 as of December 31, 2016.2022.

In September 2021, we entered into a credit and security agreement with MidCap, also acting as the administrative agent, and the lenders identified therein and borrowed $8,000 in the form of a senior term loan. The term loan bore interest at LIBOR (with a LIBOR floor rate of 0.50%) plus 7.50% per year and matured on September 1, 2026, unless terminated earlier. All borrowings are secured by substantially all of our assets. In September 2022, we amended the facility to transition, upon the cessation of LIBOR, to one-month Secured Overnight Financing Rate (“SOFR”), or such other applicable period, plus 0.10%, with a floor of 0.50%. On June 2015,30, 2023, we raisedamended our credit facility with MidCap to: (i) refinance our existing $8,000 term loan, (ii) borrow an additional gross proceeds$7,000, and (iii) provide for an additional $5,000 tranche that can be drawn under certain conditions in 2024. The facility matures on June 1, 2028. Borrowings under the Senior Term Facility bear interest at a rate per annum equal to the sum of approximately $42,500 through(a) the issuancegreater of $32,500(i) the sum of 2.25%(A) 30-day forward-looking term rate of one month SOFR, as published by CME Group Benchmark Administration Limited, from time to time, plus (B) 0.10%, and (ii) the applicable floor rate of 3.50%, with such sum reset monthly, and (b) 7.50%. The senior secured convertible debentures dueterm loan provides for monthly interest only-payments until June 2020, $10,0001, 2026, and monthly straight-line amortization of Senior secured notesprincipal plus interest for the remaining term. We also amended and warrantsrestated the existing warrant to allow MidCap to purchase common stock. The debentures were convertible at any time into an aggregate of approximately 8.7 million800,000 shares of our common stock at aan exercise price of $3.75$0.88 per share. Our obligations undershare for a 10-year period ending June 30, 2033.  We agreed to register the debentures were secured byshares underlying this warrant for resale.

In January 2022, we acquired certain assets related to the TheraClear devices from Theravant Corporation (“Theravant”). Theravant is eligible to receive up to $3,000 in future earnout payments upon the achievement of certain annual net revenue milestones, up to $20,000 in future royalty payments based upon a subordinated first priority lienpercentage of gross profit from future domestic sales ranging from 10-20%, 25% of gross profit from international sales over the subsequent four-year period, and up to $500 in future milestone payments upon the achievement of certain development and commercialization related targets. We owe Theravant $42 based on all of our assets.gross profit from domestic and international sales during the six months ended June 30, 2023.
On December 30, 2015, the Company
In October 2021, we entered into a $12,000 credit facility pursuantan equity distribution agreement with an investment bank under which we may sell up to a Credit and Security Agreement (the "Agreement") and related financing documents with MidCap Financial Trust ("MidCap") and the lenders listed therein. The Company's obligations under the credit facility are secured by a first priority lien on all$11,000 of the Company's 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 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.
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 have no voting rights. Each share of Series C Convertible Preferred Stock has a stated value of $1,000 and is convertible intoour shares of common stock in registered “at-the-market” offerings. The shares will be offered at a conversion price equalprevailing market prices, and we will pay commissions of up to $2.69 for a total3.00% of approximately 15,099,000 shares of common stock.
Since inception, we have experienced recurring losses and, until 2016, negative cash flows from operations. Historically, we have been dependent on raising capitalthe gross proceeds from the sale of securities in ordershares sold through our agent, which may act as an agent and/or principal. We have no obligation to continue to operatesell any shares under this agreement and to meetmay, at any time, suspend solicitations under this agreement. No shares of our obligationscommon stock have been sold under this distribution agreement through June 30, 2023.

30
Table of Contents
We cannot predict our revenues and expenses in the ordinary courseshort term as a result of business. Wethe COVID-19 pandemic, the ongoing Russia-Ukraine war, supply chain disruptions, rising interest rates, and related responses by our customers and our ultimate consumers as a result thereof. Based on our current business plan, we believe that our cash as of September 30, 2017and cash equivalents, combined with the anticipated revenues from the sale or use of our products and operating expense management, will be sufficient to satisfy our working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with our existing operations throughfor at least the next twelve12 months following the filingdate of this Form 10-Q.the issuance of these unaudited interim condensed consolidated financial statements.  However, if these sources are insufficient to satisfy our liquidity requirements, we may seek to sell additional debt or equity securities or enter into a new credit facility or another form of third-party funding or seek other debt financing. If we raise additional funds by issuing equity or equity-linked securities, our stockholders would experience dilution and any new equity securities could have rights, preferences, and privileges superior to those of holders of our common stock. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. We cannot be assured that additional equity, equity-linked or debt financing will be available on terms favorable to us or our stockholders, or at all. It is also possible that we may allocate significant amounts of capital towards products or technologies for which market demand is lower than expected and, as a result, abandon such efforts. If we are unable to maintain our current financing or obtain adequate additional financing when we require it, or if we obtain financing on terms which are not favorable to us, or if we expend capital on products or technologies that are unsuccessful, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, or we may be required to delay the development, commercialization and marketing of our products.
Net cash and cash equivalents provided byused in operating activities was $2,246$1,028 for the ninesix months ended SeptemberJune 30, 20172023, compared to net cash used in operating activities of $1,084$409 for the ninesix months ended SeptemberJune 30, 2016.2022. The increase in operating cash flows isused in operating activities for the six months ended June 30, 2023 was primarily attributedthe result of an increase in the net loss; a decrease in accounts payable, net of inventories, as we had increased our inventories during 2022 to overall reduction of operating expenses of approximately $2,723avoid supply chain disruptions; and an increase in accrued state sales and use taxes during the nine months ended September 30, 2017first half of 2023 compared to a decrease in accrued compensation and related benefits during the nine months ended September 30, 2016.first half of 2022.
Net cash and cash equivalents used in investing activities was $1,886$2,337 for the ninesix months ended SeptemberJune 30, 20172023, compared to net cash used in investing activities of $467$2,141 for the ninesix months ended SeptemberJune 30, 2016.2022. The primary reason forincrease is primarily the change wasresult of an increase in capital assets as a result of the increased investmentlaunch of the TheraClear Acne Therapy System, offset by the cash paid to acquire the TheraClear devices in lasers placed in service during the 2017 period.first half of 2022.
Net cash and cash equivalents used inprovided by financing activities was $1,161$6,965 for the ninesix months ended SeptemberJune 30, 20172023 compared to net cash provided by financing activities of $1,201$0 for the ninesix months ended September30, 2016. InJune 30, 2022. The increase is a result of the nine months ended September 30, 2017,refinancing of the Senior Term Facility, pursuant to which we had repayments on the term debtborrowed an additional $7,000, net of $857. In the nine months ended September 30, 2016, we drew down $1,500 on a long-term debt facility.financing costs.
37




Commitments and Contingencies
There were no items except as described above, that significantly impacted our commitments and contingencies as discussed in the notes to our 20162022 annual financial statements included in our Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
At September 30, 2017, we had no off-balance sheet arrangements.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the "safe harbor" created by those sections. Forward-looking statements are based on our management's beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "could," "would," "expect," "plan," "anticipate," "believe," "estimate," "project," "predict," "intend," "potential" and similar expressions intended to identify forward-looking statements. These statements, including statements relating to our anticipated revenue streams and our belief that the cash flow generated by these businesses will be sufficient to finance our operations, involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in our Annual Report on Form 10-K for the year ended December 31, 2016, and in this Quarterly Report on Form 10-Q in greater detail under Item 1A. "Risk Factors." Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by our cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
ITEM 3.Quantitative and Qualitative Disclosure about Market Risk
Not applicable.
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.
ITEM 4.Controls and Procedures
ITEM 4.  Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")), as of June 30, 2017.2023. Based on that evaluation, management has concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level described below.effective.
38



Limitations on the Effectiveness of Controls.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,Report, that our disclosure controls and procedures were effective to provide reasonable assurance that the objectives of our disclosure control system were met.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting in our most recent fiscal quarter that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.


31
Table of Contents
PART II - Other Information

ITEM 1.
ITEM 1.Legal Proceedings
From
On April 1, 2022, a proposed representative class action under California’s Private Attorneys General Act (“PAGA”) was filed in Superior Court of California, County of San Diego against the Company and an employment agency(“Co-Defendant”) which provided us with temporary employees. The complaint alleges various violations of the California Labor Code, including California’s wage and hour laws, relating to certain of our current and former non-exempt employees. The complaint seeks class status and payments for allegedly unpaid compensation and attorney’s fees. In a related matter, the attorneys in this matter and the proposed class representative, in a letter dated March 12, 2022, to the California Labor & Workforce Development Agency made nearly identical claims seeking the right to pursue a PAGA action against us and the employment agency. On or about May 16, 2022, the plaintiff filed a First Amended Complaint adding a PAGA claim to the action. On or about June 2, 2022, the plaintiff filed an Application to Dismiss Class and Individual Claim without prejudice, in an attempt to pursue a PAGA only complaint. On or about June 30, 2022, the parties entered into a stipulation to allow the plaintiff to file a Second Amended Complaint to clarify the PAGA claim and to stay the pending action to allow an attempt at through mediation. The mediation was held on February 23, 2023, and the matter was settled on terms agreeable to us. The settlement, which requires us to pay $0.1 million, is subject to the right of individual class members to reject the settlement and proceed on their own.

In the ordinary course of business, we are, 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 us are subject to sales and use tax rather than exempt from tax under applicable law. Several states have assessed us an aggregate of $2.4 million including penalties and interest for the period from March 2014 through April 2020. We received notification that an administrative state judge issued an opinion finding in favor of us that the sale of XTRAC treatment codes was not taxable as sales tax with respect to that state’s first assessment. This ruling covers $1.5 million of the total $2.4 million of assessments. The relevant taxing authority filed an appeal of the administrative law judge’s finding and, following the submission of legal briefs by both sides and oral argument held in January 2022, on May 6, 2022, we received a written decision from the State of New York Appeals Tribunal (“Tribunal”) overturning the favorable sales tax determination of the administrative law judge. We filed an appeal of the Tribunal’s decision, and posted the required appellate bond requiring posting cash collateral, with the New York State Appellate Division, and are awaiting for the appellate court to set a schedule for oral argument.

We are also in another jurisdiction’s administrative process of appeal with respect to the remaining $0.9 million of assessments, and the timing of the process has been impacted by the COVID-19 pandemic. If there is a determination that the true object of our recurring revenue model is not exempt from sales taxes and is not a prescription medicine, or we do not have other defenses where we prevail, we may be subject to sales taxes in those particular states for previous years and in the future, plus potential interest and penalties.

Additionally, 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
ITEM 1A.Risk Factors
A
Except as set forth below, 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, 20162022 and filed with the SEC on March 13, 2017. There31, 2023.
Our indebtedness could materially adversely affect our financial condition and our ability to operate our business, react to changes in the economy or industry or pay our debts and meet our obligations under our debt and could divert our cash flow from operations for debt payments.

We are parties to a $20.0 million secured borrowing facility (the “Senior Credit Facility”) with MidCap, of which (a) $8.0 million was drawn in September 2021, (b) $7.0 million was drawn in June 2023, and (c) $5.0 million may be drawn, under certain conditions, in 2024. The Senior Credit Facility bears interest at (i)(A) 30-day forward looking term rate of one-month SOFR plus (B) 0.10%, with such sum reset monthly, plus (ii) 7.50%, with a an adjusted SOFR floor of 3.50%, and matures on June 1, 2028. We are obligated to make interest-only payments through June 2026. From July 2026 to maturity, we will make monthly interest and principal payments based on a straight-line amortization schedule set forth in the Senior Credit Facility. The borrowing is senior to all other indebtedness and is secured by substantially all of our assets. We are subject to customary affirmative and negative covenants including a financial covenant based on minimum revenue thresholds and unrestricted cash (as defined in the Senior Credit Facility) of $3.0 million at all times. Upon an event of default, including a covenant violation, all principal and interest are due on demand. See Note 2 - Liquidity for discussion included in Item 1 of this Quarterly Report on Form 10-Q. In addition, subject to restrictions in the agreements governing our credit facilities, we may incur additional debt.

32
Table of Contents
Our indebtedness could have been no materialnegative consequences, including the following:


-
it may be difficult for us to satisfy our obligations, including debt service requirements under our outstanding debt, resulting in possible defaults on and acceleration of such indebtedness;

-
our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions or other general corporate purposes may be impaired;

-
a substantial portion of cash flow from operations may be dedicated to the payment of principal and interest on our debt, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures, future business opportunities, acquisitions and other purposes;

-
we are more vulnerable to economic downturns and adverse industry conditions and our flexibility to plan for, or react to, changes in our business or industry is more limited;

-
our ability to capitalize on business opportunities and to react to competitive pressures, as compared to our competitors, may be compromised due to our high level of debt; and

-
our ability to borrow additional funds or to refinance debt may be limited.

Furthermore, all of our debt under the Senior Credit Facility bears interest at variable rates. As these rates increase as they did in 2022, our debt service obligations increase even though the amount borrowed remains the same, and our net income and cash flows, including cash available for servicing our indebtedness, correspondingly decrease. If interest rates continue to increase, we will see a corresponding increase in these obligations. Accordingly, our ability to borrow additional funds may be reduced and risks related to our indebtedness would intensify. Each quarter-point increase in the variable interest rates would increase interest expense on our current variable rate debt by approximately $20 thousand during the threeremainder of 2023.

As discussed above, the Senior Credit Facility uses SOFR to calculate interest. SOFR is a daily index of the interest rate banks and nine months ended September 30, 2017.hedge funds pay to borrow money overnight, secured by U.S. Treasury securities. We also anticipate that we may use SOFR as the interest rate index in future agreements. SOFR differs fundamentally from LIBOR. For example, SOFR is a secured overnight rate, while LIBOR is an unsecured rate that represents interbank funding over different maturities. In addition, because SOFR is a transaction-based rate, it is backward-looking, whereas LIBOR is forward-looking. Because of these and other differences, there can be no assurance that SOFR will perform in the same way as LIBOR would have done at any time, and there is no guarantee that it is a comparable substitute for LIBOR.

Your percentage ownership will be further diluted in the future.

Your percentage ownership in our common stock will be diluted in the future because of equity awards that we expect will be granted to our directors, officers and employees.  Our Equity Incentive Plan provides for the grant of equity-based awards, including restricted stock, restricted stock units, stock options, stock appreciation rights and other equity-based awards to our directors, officers and other employees, advisors and consultants.  In June 2023, we amended and restated a warrant to MidCap Financial Trust which provides for the purchase of 800,000 shares of our common stock, with an exercise price of $0.88 per share.  We also maintain a shelf-registration statement that provides us with the ability, from time to time, to offer and sell up to $25.0 million in securities, including selling up to $11.0 million of our common stock in registered “at-the-market” offerings pursuant to an equity distribution agreement entered into with Ladenburg Thalmann & Co. Inc. in October 2021. As a result of shares sold or issued under the circumstances described above, your percentage ownership in our common stock will be diluted in the future.
ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds
None
ITEM 2. Unregistered sales of equity securities and use of proceeds
None.
ITEM 3.Defaults Upon Senior Securities.
ITEM 3. Defaults upon senior securities.
None.

33
Table of Contents
ITEM 4.
ITEM 4.Mine Safety Disclosures
None.
ITEM 5.
ITEM 5.Other Information
None.
39



ITEM 6.Exhibits
ITEM 6.  Exhibits
3.1
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).
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).
10.51
Second Amendment to Credit and Security Agreement, dated as of November 10, 2017June 30, 2023, among STRATA Skin Sciences, Inc., MidCap Financial Trust, as administrative agent, the Lenders as listed on the signature pages thereto and the Company. (Filed here within).lenders identified therein. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 6, 2023.)
10.52
Letter Agreement, dated as of November 10, 2017, byJune 30, 2023, between STRATA Skin Sciences, Inc. and between MidCap Financial Trust, as Agent andadministrative agent. (Incorporated by reference to Exhibit 10.3 to the Company. (Filed here within).Company’s Current Report on Form 8-K filed July 6, 2023.)
31.1  
Amended and Restated Warrant Agreement to Purchase Shares of the Common Stock of STRATA Skin Sciences, Inc., dated as of June 30, 2023, between STRATA Skin Sciences, Inc. and MidCap Funding XXVII Trust. (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed July 6, 2023.)
Amended and Restated Registration Rights Agreement, dated as of June 30, 2023, between STRATA Skin Sciences, Inc. and MidCap Funding XXVII Trust. (Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed July 6, 2023.)
Intellectual Property Security Agreement Supplement, dated July 5, 2023, between STRATA Skin Sciences, Inc. and MidCap Financial Trust
Rule 13a-14(a) Certificate of Chief Executive Officer (attached hereto)
Rule 13a-14(a) Certificate of Chief Financial Officer
(attached hereto)
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
(attached hereto)
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

34

Table of Contents




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   August 9, 2023
By:
/s/ Robert J. Moccia
 
  
Date   November 14, 2017By:/s/ Francis
Name:  Robert J. McCaneyMoccia
 
  Name  Francis J. McCaney
Title:    President & Chief Executive Officer

Date   August 9, 2023
By:
/s/ Christopher Lesovitz
 
  Title    President and Chief Executive Officer
Name:  Christopher Lesovitz
Date   November 14, 2017By:/s/ Christina L. Allgeier 
  Name  Christina L. Allgeier
Title
Title:    Chief Financial Officer
 




41
 35