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

FORM 10-Q

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

For the quarterly period ended SeptemberJune 30, 20212022

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
graphicgraphic
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.)
 

5 Walnut Grove Drive, Suite 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 ☒No☒  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒  No☐No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 Large accelerated filer ☐
 Accelerated filer ☐
 
 Non-accelerated filer ☒ Smaller reporting company ☒ 
 Emerging growth company ☐   

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

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

The number of shares outstanding of the issuer'sissuer’s common stock as of November 4, 2021August 8, 2022 was [34,364,679]34,723,046 shares.


STRATA SKIN SCIENCES, INC.

TABLE OF CONTENTS

Part I. Financial Information:
PAGE
    
 
ITEM 1.  Financial Statements:
 
 
a.
Condensed Consolidated Balance Sheets as of SeptemberJune 30, 20212022 (unaudited) and December 31, 20202021
1
    
 
b.
Condensed Consolidated Statements of Operations for the three months ended SeptemberThree Months Ended June 30, 20212022 and 20202021 (unaudited)
2
    
 
c.
Condensed Consolidated Statements of Operations for the nine months ended SeptemberSix Months Ended June 30, 20212022 and 20202021 (unaudited)
3
    
 
d.
Condensed Consolidated StatementStatements of Changes in Stockholders’ Equity for the nine months ended SeptemberSix Months Ended June 30, 20202022 and 2021 (unaudited)
4
    
 e
e.
Condensed Consolidated StatementStatements of Changes in Stockholders’ EquityCash Flows for the nine months ended SeptemberSix Months Ended June 30, 2022 and 2021 (unaudited)
5
    
 
f.
6
g.
Notes to Unaudited Condensed Consolidated Financial Statements
7
6
    
 
ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
2523
    
 
ITEM 3.  Quantitative and Qualitative Disclosure about Market Risk
34
32
    
 
ITEM 4.  Controls and Procedures
34
32
    
Part II. Other Information:
 
    
 
ITEM 1.  Legal Proceedings
35
33
    
 
ITEM 1A.  Risk Factors
3533
    
 
ITEM 2.  Unregistered Sales of Equity Securities and Use of Proceeds
3533
    
 
ITEM 3.  Defaults Upon Senior Securities
3534
    
 
ITEM 4.  Mine Safety Disclosures
3534
    
 
ITEM 5.  Other Information
3534
    
 
ITEM 6.  Exhibits
3634
    
  
Signatures
3735
    
  E-31.1

Table of Contents

PART I – Financial Information

ITEM 1.  Financial Statements

STRATA SKIN SCIENCES, INC. AND SUBSIDIARYSkin Sciences, Inc. and Subsidiary
CONDENSED CONSOLIDATED BALANCE SHEETSCondensed Consolidated Balance Sheets
(Inin thousands, except share and per share amounts)

 September 30, 2021  December 31, 2020  June 30, 2022  December 31, 2021 
ASSETS (unaudited)    
Assets (unaudited)    
Current assets:            
Cash and cash equivalents 
$
13,047
  
$
10,604
  
$
10,036
  
$
12,586
 
Restricted cash  
0
   
7,508
 
Accounts receivable, net of allowance for doubtful accounts of $248 and $274, respectively
  
3,151
   
2,944
 
Accounts receivable, net of allowance for doubtful accounts of $228 and $275 at June 30, 2022 and December 31, 2021, respectively
  
2,989
   
3,433
 
Inventories  
3,225
   
3,444
   
4,907
   
3,489
 
Prepaid expenses and other current assets  
623
   
331
   
696
   
462
 
Total current assets  
20,046
   
24,831
   
18,628
   
19,970
 
                
Property and equipment, net  
6,403
   
5,529
   
6,685
   
6,883
 
Operating lease right-of-use assets, net  
727
   
988
 
Operating lease right-of-use assets
  
457
   
638
 
Intangible assets, net  
10,546
   
6,345
   
18,829
   
10,083
 
Goodwill  
8,803
   
8,803
   
8,803
   
8,803
 
Other assets  
233
   
282
   
185
   
216
 
Total assets 
$
46,758
  
$
46,778
  
$
53,587
  
$
46,593
 
                
LIABILITIES AND STOCKHOLDERS' EQUITY        
Liabilities and Stockholders’ Equity        
Current liabilities:                
Note payable 
$
0
  
$
7,275
 
Current portion of long-term debt  
0
   
1,478
 
Accounts payable  
2,480
   
2,764
  
$
4,241
  
$
2,822
 
Other accrued liabilities  
5,548
   
4,690
 
Accrued expenses and other current liabilities  
6,144
   
6,377
 
Deferred revenues  3,253
   3,285
 
Current portion of operating lease liabilities  
359
   
369
   
224
   
318
 
Deferred revenues  
3,767
   
2,262
 
Current portion of contingent consideration
  
500
   
0
 
Total current liabilities  
12,154
   
18,838
   
14,362
   
12,802
 
                
Long-term liabilities:        
Long-term debt, net  
7,282
   
1,050
 
Long-term debt
  
7,395
   
7,319
 
Deferred revenues and other liabilities
  313
   400
 
Deferred tax liability  
266
   
254
   
266
   
266
 
Long-term operating lease liabilities, net  
445
   
710
 
Other liabilities  
428
   
34
 
Operating lease liability, net of current portion
  
289
   
392
 
Contingent consideration, net of current portion
  
8,622
   
0
 
Total liabilities  
20,575
   
20,886
   
31,247
   
21,179
 
                
Commitments and contingencies (see Note 15)  0   0 
Commitments and contingencies (Note 14)      
          
   
 
Stockholders' equity:        
Series C Convertible Preferred Stock, $0.10 par value, 10,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2021 and December 31, 2020
  
0
   
0
 
Common Stock, $0.001 par value, 150,000,000 shares authorized; 34,364,679, and 33,801,045 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively
  
34
   
34
 
Stockholders’ equity:        
Series C convertible preferred stock, $0.10 par value; 10,000,000 shares authorized; 0 shares issued and outstanding
  
0
   
0
 
Common stock, $0.001 par value, 150,000,000 shares authorized; 34,723,046 and 34,364,679, shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively
  
35
   
34
 
Additional paid-in capital  
246,979
   
244,831
   
248,378
   
247,059
 
Accumulated deficit  
(220,830
)
  
(218,973
)
  
(226,073
)
  
(221,679
)
Total stockholders' equity  
26,183
   
25,892
 
Total stockholders’ equity  
22,340
   
25,414
 
Total liabilities and stockholders’ equity 
$
46,758
  
$
46,778
  
$
53,587
  
$
46,593
 

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

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

 
For the Three Months Ended
September 30,
  
For the Three Months Ended
June 30,
 
 2021
  2020
  2022
  2021
 
Revenues, net 
$
7,711
  
$
5,613
  
$
9,105
  
$
7,382
 
        
Cost of revenues  
2,335
   
2,383
   
4,112
   
2,621
 
        
Gross profit  
5,376
   
3,230
   
4,993
   
4,761
 
                
Operating expenses:                
Engineering and product development  
371
   
411
   
209
   
403
 
Selling and marketing  
3,295
   
2,051
   
4,146
   
3,160
 
General and administrative  
2,175
   
1,929
   
2,332
   
2,121
 
  
5,841
   
4,391
   
6,687
   
5,684
 
                
Loss from operations  
(465
)
  
(1,161
)
  
(1,694
)
  
(923
)
Interest expense net  
(52
)
  
(21
)
Other income (expense):        
Gain on debt extinguishment  0   2,028 
Interest expense
  
(208
)
  
(26
)
Interest income
  10   7 
          (198)  2,009 
Loss before income taxes  
(517
)
  
(1,182
)
(Loss) income before income taxes  
(1,892
)
  
1,086
 
Income tax expense  
(4
)
  
(72
)
  
0
   
(4
)
Net loss 
$
(521
)
 
$
(1,254
)
Net (loss) income
 
$
(1,892
)
 
$
1,082
 
                
Loss per common share - basic and diluted 
$
(0.02
)
 
$
(0.04
)
Weighted average shares of common stock outstanding – basic and diluted  
34,150,438
   
33,754,909
 
Net (loss) earnings per share of common stock:        
Basic
 $(0.05) $0.03 
Diluted 
$
(0.05
)
 
$
0.03
 
        
Weighted average shares of common stock outstanding:
        
Basic
  34,723,046   33,876,568 
Diluted  34,723,046   34,318,495 

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

2
Table of Contents
STRATA SKIN SCIENCES, INC. AND SUBSIDIARYSkin Sciences, Inc. and Subsidiary
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONSCondensed Consolidated Statements of Operations
(In thousands, except share and per share amounts)
(unaudited)

 
For the Nine Months Ended
September 30,
  
For the Six Months Ended
June 30,
 
 2021
  2020
  2022
  2021
 
Revenues, net $
20,920
  
$
16,373
  
$
16,146
  
$
13,209
 
        
Cost of revenues  
7,070
   
6,780
   
7,025
   
4,735
 
        
Gross profit  
13,850
   
9,593
   
9,121
   
8,474
 
                
Operating expenses:                
Engineering and product development  
1,158
   
950
   
372
   
787
 
Selling and marketing  
9,387
   6,446   
7,762
   6,092 
General and administrative  
7,085
   
5,921
   
4,984
   
4,910
 
  
17,630
   
13,317
   
13,118
   
11,789
 
                
Loss from operations  
(3,780
)
  
(3,724
)
  
(3,997
)
  
(3,315
)
                
Other income (expense), net:        
Gain on forgiveness of debt  
2,028
   
0
 
Interest expense, net  
(93
)
  
(38
)
Other income (expense):        
Gain on debt extinguishment  0   2,028 
Interest expense  (407)  (56)
Interest income  10   15 
  
1,935
   
(38
)
  (397)  1,987 
                
Loss before income taxes  
(1,845
)
  
(3,762
)
  
(4,394
)
  
(1,328
)
Income tax expense  
(12
)
  
(207
)
  
0
   
(8
)
Net loss 
$
(1,857
)
 
$
(3,969
)
 
$
(4,394
)
 
$
(1,336
)
                
Loss attributable to common shares $
(1,857) $(3,947)
Loss attributable to Preferred Series C shares $
0
  
$
(22
)
Loss per common share – basic and diluted 
$
(0.05
)
 
$
(0.12
)
Weighted average common shares outstanding – basic and diluted  
33,944,321
   
33,551,070
 
Loss per Preferred Series C share - basic and diluted  
0
  
$
(43.73
)
Shares used in computing loss per basic and diluted Preferred Series C Shares  
0
   
491
 
Net loss per share of common stock, basic and diluted
 $(0.13) $(0.04)
        
Weighted average shares of common stock outstanding, basic and diluted  34,701,267
   33,839,554
 

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

3
Table of Contents
STRATA SKIN SCIENCES, INC. AND SUBSIDIARYSkin Sciences, Inc. and Subsidiary
CONDENSED CONSOLIDATED STATEMENT OF
Condensed Consolidated CHANGES IN STOCKHOLDERS’ EQUITYStatements of Changes in Stockholders’ Equity
FOR THE NINE MONTHS ENDED SEPTEMBER
For the Six Months Ended June 30, 20202022 and 2021
(Inin thousands, except share amounts)
(unaudited)
 
  
Convertible
Preferred Stock – Series C
  Common Stock  Additional Paid-In  Accumulated    
  Shares  Amount  Shares  Amount  Capital  Deficit  Total 
BALANCE, January 1, 2020  
2,103
  
$
1
   
32,932,273
  
$
33
  
$
243,180
  
$
(214,561
)
 
$
28,653
 
Stock-based compensation  
-
   
0
   
-
   
0
   
430
   
0
   
430
 
Conversion of convertible preferred stock into common stock  
(2,103
)
  
(1
)
  
782,089
   
1
   0
   0
   
0
 
Net loss  
-
   
0
   
-
   
0
   
0
   
(1,035
)
  
(1,035
)
BALANCE, March 31, 2020
  
0
  
$
0
   
33,714,362
  
$
34
  
$
243,610
  
$
(215,596
)
 
$
28,048
 
                             
Stock-based compensation  
-
   
0
   -
   0
   
410
   
0
   
410
 
Issuance of restricted stock  
0
   
0
   
40,547
   
0
   0
   0
   
0
 
Net loss  
-
   
0
   
-
   
0
   
0
   
(1,680
)
  
(1,680
)
BALANCE, June 30, 2020
  
0
  
$
0
   
33,754,909
  
$
34
  
$
244,020
  
$
(217,276
)
 
$
26,778
 
                             
Stock based compensation  -
   0
   -   0
   403   0
   403
 
Net loss  -   0   -   0   0   (1,254)  (1,254)
BALANCE, September 30, 2020
  0  $0   33,754,909  $34  $244,423  $(218,530) $25,927 
  Common Stock  Additional Paid-In  Accumulated   Total Stockholders’ 
  Shares  Amount  Capital  Deficit  Equity
 
Balance at January 1, 2022
  
34,364,679
  
$
34
  
$
247,059
  
$
(221,679
)
 
$
25,414
 
Stock-based compensation  
-
   
0
   
368
   
0
   
368
 
Issuance of common stock for acquisition  
358,367
   
1
   499
   0
   
500
 
Net loss  
-
   
0
   
0
   
(2,502
)
  
(2,502
)
Balance at March 31, 2022
  
34,723,046
  

35
  

247,926
  

(224,181
)
 

23,780
 
Stock-based compensation  -
   0
   
452
   
0
   
452
 
Net loss  
-
   
0
   
0
   
(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.

4
Table of Contents
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021
(In thousands, except share amounts)
(unaudited)

 Common Stock  Additional Paid-In  Accumulated     Common Stock  Additional Paid-In  Accumulated   Total Stockholders’ 
 Shares  Amount  Capital  Deficit  Total  Shares  Amount  Capital  Deficit  Equity 
BALANCE, January 1, 2021
  
33,801,045
  
$
34
  
$
244,831
  
$
(218,973
)
 
$
25,892
 
Balance at January 1, 2021
  
33,801,045
  
$
34
  
$
244,831
  
$
(218,973
)
 
$
25,892
 
Stock-based compensation  
-
   
0
   
662
   
0
   
662
   
-
   
0
   
662
   
0
   
662
 
Issuance of restricted stock  
16,260
   
0
   
0
   
0
   
0
   
16,260
   
0
   
0
   
0
   
0
 
Net loss  
-
   
0
   
0
   
(2,418
)
  
(2,418
)
  
-
   
0
   
0
   
(2,418
)
  
(2,418
)
                    
BALANCE, March 31, 2021
  
33,817,305
  
$
34
  
$
245,493
  
$
(221,391
)
 
$
24,136
 
                    
Balance at March 31, 2021
  
33,817,305
  

34
  

245,493
  

(221,391
)
 

24,136
 
Stock-based compensation  
-
   
0
   
581
   -   
581
   
-
   
0
   
581
   0   
581
 
Issuance of restricted stock  
71,934
   
0
   
0
   -   
0
   
71,934
   
0
   
0
   0   
0
 
Net income  
-
   
0
   
0
   
1,082
   
1,082
   
-
   
0
   
0
   
1,082
   
1,082
 
                    
BALANCE, June 30, 2021
  
33,889,239
  
$
34
  
$
246,074
  
$
(220,309
)
 
$
25,799
 
                    
Stock-based compensation  -   0   320   0   320 
Exercise of stock options  329,076   0   0   0   0 
Issuance of restricted stock  146,364   0   0   0   0 
Issuance of warrants  0   0   585   0   585 
Net Loss  -           (521)  (521)
                    
BALANCE, September 30, 2021
  34,364,679  $34  $246,979  $(220,830) $26,183 
Balance at June 30, 2021
  
33,889,239
  
$
34
  
$
246,074
  
$
(220,309
)
 
$
25,799
 

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

54
STRATA SKIN SCIENCES, INC. AND SUBSIDIARYSkin Sciences, Inc. and Subsidiary
CONDENSED CONSOLIDATEDCondensed Consolidated Statements of STATEMENTS OF CASH FLOWSCash Flows
(In thousands, unaudited)in thousands)
(unaudited)

 
For the Nine Months Ended
September 30,
  
For the Six Months Ended
June 30,
 
 2021
  2020
  2022
  2021
 
Cash Flows From Operating Activities:      
Cash flows from operating activities:      
Net loss 
$
(1,857
)
 
$
(3,969
)
 
$
(4,394
)
 
$
(1,336
)
Adjustments to reconcile net loss to net cash provided by operating activities:        
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:        
Amortization of intangible assets
  
1,436
   
705
 
Amortization of right-of-use assets  
181
   
174
 
Depreciation and amortization  
2,689
   
2,793
   1,224   1,001 
Amortization of right-of-use asset  
261
   
242
 
Provision (recoveries) for doubtful accounts  
(26
)
  
65
 
Amortization of deferred financing costs and debt discount
  76   0 
Provision for doubtful accounts  
(47
)
  
(68
)
Stock-based compensation  
1,563
   
1,243
   
820
   
1,243
 
Loss on disposal of property and equipment
  73   23   35   63 
Gain on forgiveness of debt
  (2,028)  0 
Gain on debt extinguishment  0   (2,028)
Deferred taxes  
12
   
207
   
0
   
8
 
Changes in operating assets and liabilities:                
Accounts receivable  
(181
)
  
1,811
   
491
   
158
 
Inventories  
219
   
(475
)
  
(898
)
  
395
 
Prepaid expenses and other assets  
(243
)
  
98
   
(203
)
  
(162
)
Accounts payable  
(284
)
  
1,608
   
1,419
   
(122
)
Other accrued liabilities  
859
   
(576
)
Other liabilities  
(88
)
  
(126
)
Accrued expenses and other liabilities  
(217
)
  
411
 
Deferred revenues
  
(135
)
  
128
 
Operating lease liabilities  
(275
)
  
(226
)
  
(197
)
  
(183
)
Deferred revenues  
145
   
(968
)
Net cash provided by operating activities  
839
   
1,750
 
Net cash (used in) provided by operating activities  
(409
)
  
387
 
                
Cash Flows From Investing Activities:        
Cash flows from investing activities:        
Purchase of property and equipment  (2,523)  (1,447)  (1,510)  (1,466)
Cash paid in connection with Ra Medical asset acquisition  (3,473)  0 
Cash paid in connection with TheraClear asset acquisition  (631)  0 
Net cash used in investing activities  (5,996)  (1,447)  (2,141)  (1,466)
                
Cash Flows From Financing Activities        
Proceeds from Senior Term Facility borrowings, net of fees
  
7,867
   
0
 
Repayment of note payable  (7,275)  0 
Proceeds from (repayment of) long-term debt  (500)  2,528 
Net cash provided by financing activities  
92
   2,528
 
        
Net (decrease) increase in cash and cash equivalents and restricted cash  
(5,065
)
  
2,831
 
Net decrease in cash, cash equivalents and restricted cash  
(2,550
)
  
(1,079
)
Cash, cash equivalents and restricted cash, beginning of period  
18,112
   
15,629
   
12,586
   
18,112
 
                
Cash, cash equivalents and restricted cash, end of period 
$
13,047
  
$
18,460
  
$
10,036
  
$
17,033
 
                
Cash and cash equivalents 
$
13,047
  
$
11,063
  
$
10,036
  
$
9,576
 
Restricted cash  
0
   
7,397
   
0
   
7,457
 
 
$
13,047
  
$
18,460
  
$
10,036
  
$
17,033
 
Supplemental information of cash and non-cash transactions:        
Supplemental disclosure of cash flow information:        
Cash paid for interest 
$
109
  
$
157
  
$
329
  
$
57
 
Fair value of warrants issued in connection with debt $585  $0 
Assumed deferred revenue in connection with Ra Medical asset acquisition $1,841  $0 
Supplemental disclosure of non-cash operating, investing and financing activities:        
Inventories acquired in connection with TheraClear asset acquisition $71  $0 
Intangible assets acquired in connection with TheraClear asset acquisition $10,182  $0 
Contingent consideration issued in connection with TheraClear asset acquisition $9,122  $0 
Common stock issued in connection with TheraClear asset acquisition
 $500  $0 
Transfer of property and equipment to inventories $449  $0 

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

65

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. (the “Company”) is a medical technology company in dermatology dedicated to developing, commercializing and marketing innovative products for the treatment of dermatologic conditions. Its products include the XTRAC® and Pharos® excimer lasers and VTRAC® lamp systems utilized in the treatment of psoriasis, vitiligo and various other skin conditions. In January 2022, the Company acquired the TheraClear Acne Treatment Device to broaden its opportunities with expansion potential in the acne care market.

The XTRAC is an ultraviolet light excimer laser system utilized to treat psoriasis, vitiligo and other skin diseases. The XTRAC excimer laser system received clearance from the United States Food and Drug Administration (the “FDA”) in 2000. As of SeptemberJune 30, 2021,2022, there were 880915 XTRAC systems placed in dermatologists' offices in the United States and 4938 systems internationally under the Company's recurring revenue business model. The XTRAC systems deployed under the recurring revenue model generate revenue on a per procedure basis or include a fixed payment over an agreed upon period with a capped number of treatments, which if exceeded would incur additional fees. The per-procedure charge is inclusive of the use of the system and the services provided by the Company to the customer, which includes system maintenance and other services. The VTRAC Excimer Lamp system, offered in addition to the XTRAC system internationally, provides targeted therapeutic efficacy demonstrated by excimer technology with a lamp system.

In September 2020,
The Pharos excimer laser system holds FDA clearance to treat chronic skin diseases, including psoriasis, vitiligo, atopic dermatitis and leukoderma.

The TheraClear® Acne Clearing 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.

Since 2019, the Company signedhas been transitioning its international dermatology procedures equipment sales through its master distributor to a direct distribution agreement with its Japanese distributormodel for a combination of direct capitalequipment sales and recurring revenue foron a country-by-country basis, primarily in the country of Japan.Middle East and Asia.

In February 2021, the Company signed an agreement with its Chinese distributor for a combination of direct capital sales and recurring revenues for the country of China.

In the first quarter of 2021, the Company introduced its Home by XTRAC™ business on a pilot test basis, by leveraging in-house resources including DTC advertising, in-house call center and its insurance reimbursement team to provide an at-home, insurance-reimbursed treatment option for patients with certain skin diseases that do not qualify for in-office treatments. The Company has discontinued the pilot program and is evaluating this potential business opportunity.

In late 2019, there was an outbreak of a new strain of coronavirus (“COVID-19”) which became a global pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains constrained work force participation and created significant volatility and disruption of financial markets. In addition, the pandemic leadled to the suspension of elective procedures in the U.S. and to the temporary closure of many physician practices which are our primary customers. The Company does not know the extent of the impact on its customers, including their potential for permanent closure. While many offices have reopened, some practices closed and never reopened, and the ongoing impact of the COVID-19 pandemic and its variants on the Company’s operational and financial performance, including its ability to execute its business strategies and initiatives in the expected time frames, will depend on future developments, including the duration and ongoing spread of the COVID-19 outbreak and its variants, continued or renewed restrictions on business operations and transport,transportation, any governmental and societal responses thereto, including legislative or regulatory changes as well as the distributionpercentage of the populace vaccinated and the effectiveness of COVID-19 vaccines and the continued impact on worldwide economic and geopolitical conditions and inflation, all of which are uncertain and cannot be predicted.

Domestically, as the procedures for which the Company’s devices are used are elective in nature; and as social distancing, travel restrictions, quarantines and other restrictions became prevalent in the United States, this had a negative impact on the Company’s recurring revenue model and its financial position and cash flow. The virus has disrupted the supply chain from China and other countrieschains world-wide which the Company depends upon to provide a steady source of components to manufacture and repair ourthe Company’s devices. To mitigate the impact of COVID-19, the Company took a variety of measures to ensure the availability and functioning of its critical infrastructure by implementing business continuity plans. To promote the safety and security of its employees, while complying with various government mandates including work-from-home arrangements and social-distancing initiatives to reduce the transmission of COVID-19, the Company provided face masks for employeesis complying with federal and local regulations at facilities significantly impacted and required masks and on-site body temperature monitoring before enteringits facilities. In addition, the Company created and executed programs utilizing its direct to consumerdirect-to-consumer advertising and call center to contact patients and partner clinics to restart the Company’s partners’ businesses. In October 2021, the Company implemented a policy whereby all Company employees are required to be vaccinated or complete weekly COVID-19 testing. To conserve its cash in order to mitigate the ongoing impact of the COVID-19 pandemic, in the second quarter of 2020 the Company furloughed employees, who returned to work after the Company received proceeds from the PPP Loan. The Company also reduced discretionary spending in 2020. See Note 2, Liquidity for discussion on Company liquidity.

7

STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, and per share amounts and number of lasers)
(unaudited)
Supply chain disruptions which began during the pandemic have continued and may continue for the foreseeable future. While the Company’s operations have not been materially impacted by the general trends in supply chain problems, the Company continues to monitor and assess potential risks.


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STRATA Skin Sciences, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts and number of lasers)
(unaudited)
Basis of Presentation:Presentation:

Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and Photomedex India Private Limited, its wholly-owned, inactive subsidiary in India. All significant intercompany balances and transactions have been eliminated in consolidation.

Unaudited Interim Condensed Consolidated Financial Statements
The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission ("SEC") for interim financial reporting. These condensed consolidated statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to fairly present the results of the interim periods. The condensed consolidated balance sheet at December 31, 2020,2021 has been derived from the audited consolidated financial statements at that date. Operating results and cash flows for the ninethree and six months ended SeptemberJune 30, 20212022 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 20212022 or any other future period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP)(“U.S. GAAP”) have been omitted in accordance with the rules and regulations for interim reporting of the SEC. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20202021 (the “2020“2021 Form 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 data and number of lasers.

Reclassifications
Certain reclassifications from the prior year presentation have been made to conform to the current year presentation. These reclassifications did not have a material impact on the Company’s equity,condensed consolidation financial position, results of operations, or cash flows.

Significant Accounting Policies
The significant accounting policies used in preparation of these condensed consolidated financial statements are disclosed in the Company’s Annual Report on2021 Form 10-K, for the year ended December 31, 2020, and there have been no changes to the Company’s significant accounting policies during the ninesix months ended SeptemberJune 30, 2021.2022.

Use of Estimates
The preparation of the condensedcondensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect amounts reported of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates and be based on events different from those assumptions. As of September June 30, 2021,2022, the more significant estimates include (1) revenue recognition in regardswith respect to deferred revenues and the contract term and valuation allowances of accounts receivable, (2) theinputs used when evaluating goodwill for impairment, inputs used in the impairment analysisvaluation of goodwill, (3)acquired intangible assets, state sales and tax accruals, the estimated useful lives of intangible assets, and property and equipment, (4) the inputs used in determining the fair value of equity-based awards, (5) the valuation allowance related to deferred tax assets, (6) the inventory reserves, (7) state sales and use tax accruals and (8) warranty claims.
Additionally, the full impact of the ongoing COVID-19 outbreak is unknown and cannot be reasonably estimated. However, management has made appropriate accounting estimates on certain accounting matters, which include the allowance for doubtful accounts, inventory valuation, carrying value of the goodwill and other long-lived assets, based on the facts and circumstances available as of the reporting date. The Company’s future assessment of the magnitude and duration of the ongoing COVID-19 outbreak, as well as other factors, could result in material impacts to the Company’s financial statements in future reporting periods.
8assets.


STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, and per share amounts and number of lasers)
(unaudited)
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 – inputs that are generally unobservable and typically reflect the Company’s estimate of assumptions that market participants would use in pricing inputs are unobservable for the non-financial asset or liabilityliability.

7
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STRATA Skin Sciences, Inc. and only used when there is little, if any, market activity for the non-financial asset or liability at the measurement date. The inputs into the determinationSubsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts and number of fair value require significant management judgment or estimation. Fair value is determined using comparable market transactions and other valuation methodologies, adjusted as appropriate for liquidity, credit, market and/or other risk factors.lasers)
(unaudited)
This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

The fair valuevalues of cash and cash equivalents and restricted cash are based on their respective demand value,values, which are equal to the carrying value.values. The carrying valuevalues of all short-term monetary assets and liabilities isare estimated to be approximate to their fair valuevalues due to the short-term nature of these instruments. As of SeptemberJune 30, 20212022 and December 31, 2020,2021, the carrying value of the note payable and the Company’s long termlong-term debt are estimatedapproximated its fair value due to approximate fair value.its variable interest rate.

Net Earnings (Loss) Per Share
The Company calculates
Basic net earnings (loss) per share of common share and Preferred Series C share in accordance with ASC 260, Earnings per Share. Under ASC 260, basic loss per common share and Preferred Series C sharestock is calculatedcomputed by dividing the lossnet earnings (loss) attributable to common shares and Preferred Series C sharesstockholders by the weighted-average number of common shares and Preferred Series C shares outstanding during the reporting period and excludes dilution for potentially dilutive securities. Diluted loss per common share and Preferred Series C share gives effect to dilutive options, warrants and other potential common shares outstanding during the period.
NaN shares of the Company’s Series C Convertible Preferred Stock were outstanding as of September 30, 2021 and 2020. These shares were subordinate to all other securities at the same subordination level as common stock and they participated in all dividends and distributions declared or paid with respect to common stock of the Company, on an as-converted basis. Therefore, the Series C Convertible Preferred Shares met the definition of common stock under ASC 260. Earningsoutstanding during each period. Diluted earnings (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. TheFor diluted net loss is allocated to each classper share, the weighted-average number of security meeting the definitionshares of common stock based on their contractual terms.is the same as for basic net loss per share due to the fact that when a net loss exists, dilutive securities are not included in the calculation as the impact is anti-dilutive.

The Company considered its Series C Convertible Preferred Stock to be participating securities in the presentation of earnings (loss) per share. For the three and nine months ended September 30, 2021 and the three and nine months ended September 30, 2020, diluted loss per common share and Series C Convertible Preferred Stock share is equal to the basic loss per common share and Series C Convertible Preferred Stock share, respectively, since allfollowing potentially dilutive securities were anti-dilutive.
9

STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, and per share amounts and number of lasers)
(unaudited)
The following table sets forth the potentially dilutive securities outstanding as of September 30, 2021 and 2020 that have been excluded from the losscomputation of diluted weighted-average shares of common stock outstanding for the three and six months ended June 30, 2022 and for the six months ended June 30, 2021, as they would be anti-dilutive:
  June 30,
 
  2022  2021 
Unvested restricted stock units
  75,540   20,000 
Stock options
  4,544,714   6,925,478 
Common stock warrants  373,626   0 
Total  4,993,880   6,945,478 

Weighted average shares of common stock outstanding used in calculating basic and diluted earnings per share calculationof common stock for the three months ended June 30, 2021 were as their inclusion would have been anti-dilutive:follows:
  September 30,
 
 
 2021  2020 
Common stock purchase warrants
  373,626   149,901 
Restricted stock units
  144,497   119,330 
Common stock options
  3,963,889   4,908,038 
Total
  4,482,012   5,177,269 

Basic weighted average shares of common stock outstanding33,876,568
Effect of dilutive stock options441,927
Diluted weighted average shares of common stock outstanding34,318,495

Accounting Pronouncements Recently Adopted
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 eliminated certain exceptions and changed guidance on other matters. The exceptions relate to the allocation of income taxes in separate company financial statements, tax accounting for equity method investments and accounting for income taxes when the interim period year-to-date loss exceeds the anticipated full year loss. Changes relate to the accounting for franchise taxes that are income-based and non-income-based, determining if a step up in tax basis is part of a business combination or if it is a separate transaction, when enacted tax law changes should be included in the annual effective tax rate computation, and the allocation of taxes in separate company financial statements to a legal entity that is not subject to income tax. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The adoption of ASU No. 2019-12 on January 1, 2021 did not have a material effect on the Company’s condensed consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Statements. This pronouncement provides temporary optional expedients and exceptions for applying U.S. GAAP principles to contract modifications and hedging relationships to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. The guidance is effective upon issuance in March 2020, and will apply through December 31, 2022. The Company continues to evaluate the temporary expedients and options available under this guidance and the effects of these pronouncements, and as the Company does not have any hedging activities does not believe this will have a material effect on its condensed consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivative and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40); Accounting for Convertible Instruments and Contracts in an Entity’s own Equity. The pronouncement simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity's own equity. Specifically, the ASU "simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP." In addition, the ASU "removes certain settlement conditions that are required for equity contracts to qualify for it" and "simplifies the diluted earnings per share (EPS) calculations in certain areas.” The guidance is effective beginning after December 15, 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 could in the future.

In May 2021, the FASBFinancial Accounting Standards Board (“FASB”) issued ASUAccounting Standards Update (“ASU”) 2021-04,Earnings per Share (Topic 260), Debt – Modifications and Extinguishments (Subtopic 470-50), Compensation – Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges or Freestanding Equity-Classified Written Call Options. The pronouncement outlines how an entity should account for modifications made to equity-classified written call options, including stock options and warrants to purchase the entity’s own common stock. The guidance in the ASU requires an entity to treat a modification of an equity-classified written call option that does not cause the option to become liability-classified as an exchange of the original option for a new option. This guidance applies whether the modification is structured as an amendment to the terms and conditions of the equity-classified written call option or as termination of the original option and issuance of a new option. The guidance is effective prospectively for fiscal years beginning after December 15, 20212021. The adoption of this guidance on January 1, 2022 did not have a material effect on the condensed consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued 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 guidance 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 and early adoption is permitted. The Company does not believe this will have a material effect on its condensed consolidated financial statements.
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 31,2022. The Company continues to evaluate the temporary expedients and options available under this guidance and the effects of these pronouncements and, as the Company does not have any hedging activities, does not believe this will have a material effect on its condensed consolidated financial statements.

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STRATA Skin Sciences, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts and number of lasers)
(unaudited)

STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(
In thousands, except share,August 2020, the FASB issued ASU 2020-06,Debt with Conversion and Other Options (Subtopic 470-20) and Derivative and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s own Equity. The pronouncement simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity's own equity. Specifically, the ASU simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. In addition, the ASU removes certain settlement conditions that are required for equity contracts to qualify for it and simplifies the diluted earnings per share amounts(EPS) calculations in certain areas. The guidance is effective beginning after December 15,2023 and number of lasers)
(unaudited)
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
LiquidityLiquidity:
 
The Company has been negatively impacted by the ongoing COVID-19 pandemic, has historically experienced recurring losses, has been dependent on raising capital from the sale of securities in order to continue to operate and refinanced its debt at a lower interest rate. During the COVID-19 pandemic, the Company received cash proceeds from the PPPa Paycheck Protection Program (“PPP”) loan, which was forgiven, and the EIDL loan (each as defined in Note 10 below)an Economic Injury Disaster Loan (the “EIDL loan”) that was repaid at the time the senior credit facilitySenior Term Facility was entered into with MidCap Financial Trust in September 2021 (see Note 10)(Note 9). Additionally, 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$11.0 million of its common stock in registered “at-the-market” offerings (see Note 16).offerings. Management believes that the Company’s cash and cash equivalents, combined with the anticipated revenues from the sale or use of the Company’sits products, will be sufficient to satisfy ourthe Company’s working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with its existing operations throughfor at least the next 12 months following the date of the issuance of these unaudited interim condensed consolidated financial statements. However, market conditions, including the negative impact of the ongoing COVID-19 outbreak on the financial markets and supply chain disruptions, could interfere with the Company’s ability to access financing and on favorable terms.

Note 3 
Revenue RecognitionRecognition:

InRevenues from the Dermatology Recurring Procedures SegmentCompany’s dermatology recurring procedures customers are earned by providing physicians with its laser products and charging the Company has two types of arrangements for its phototherapy treatment equipment as follows: (i) the Company places its lasers in a physician’s office at no charge to the physician, and generally charges the physicianphysicians a fee for an agreed upona fixed number of treatments;treatment sessions or (ii) the Company places its lasers in a physician’s office and charges the physician a fixed fee for a specified period of time not to exceed an agreed upon number of treatments; if that number is exceeded additional fees will have to be paid.

For the purposes of U.S. GAAP only, these two types of arrangements are treated under the guidance of ASC 842, Leases. While these arrangements are not contractually operating leases, since the Company sells the physician access codes in order to operate the treatment equipment, these arrangements are similar to operating leases for accounting purposes since the Company provides the customers limited rights to use the treatment equipment and the treatment equipment resides in the physician’s office and the Company may exercise the right to remove the equipment upon notice, under certain circumstances, while the physician controls the utility and output of such equipment during the term The placement of the arrangementlaser products at physician locations represents embedded leases which are accounted for as it pertains to the use of access codes to treat the patients.operating leases. For the lasers placed-in service under these arrangements, the terms of the domestic arrangements are generally 36 months with automatic one-year renewals and include a termination clause that can be affectedeffected at any time by either party with 30 to 60 day notice. Amounts paid are generally non-refundable. For the first type of arrangement, salesSales 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. For the second typeSales of arrangement, customers purchase access codes andfor a specified period of time are recognized as revenue is recognized ratably on a straight-line basis as the lasers are being used over the term period specified in the agreement. Variable treatment code payments that will be paid only if the customer exceeds the agreed upon number of treatments are recognized only when such treatments are being exceeded and used. Internationally, through its Korean, Japanese and, in 2021, Chinese distributors, the Company generally sells access codes for a fixed amount on a monthly basis to end-user customersits 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. Pre-paidPrepaid amounts are recorded in deferred revenue and customer deposits recorded in accounts payable are recognized as revenue over the lease term in the patterns described above. Under both methods, pricingPricing is fixed with the customer.

With respect to lease and non-lease components, the Company adopted the practical expedient to account for the arrangement as a single lease component.

InRevenues from the Dermatology Procedures Equipment segment,sales of 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 sells its products internationallydetermines revenue recognition through distributorsthe 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.

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STRATA Skin Sciences, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts and number of lasers)
(unaudited)
Accounting for the Company’s contracts involves the use of significant judgments and domestically directlyestimates including determining the separate performance obligations, allocating the transaction price to physicians. For the productdifferent 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 the sales the Company recognizes revenuesof dermatology procedures equipment are recognized when control of the promised products is transferred to either the Company'sCompany’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.

11The following table summarizes the Company’s expected future undiscounted fixed treatment code payments from international recurring revenue customers as of June 30, 2022 :

Remaining 2022
 
$
617
 
2023
  
1,193
 
2024
  
835
 
2025
  
218
 
2026
  
4
 
Total 
$
2,867
 

STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, and per share amounts and number of lasers)
(unaudited)
Remaining performance obligations related to ASCAccounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, represent the aggregate transaction price allocated to performance obligations with an original contract term greater than one year, which are fully or partially unsatisfied at the end of the period. Remaining performance obligations include the potential obligation to perform under extended warranties but excludesexclude any equipment accounted for as leases. As of SeptemberJune 30, 2021,2022, the aggregate amount of the transaction price allocated to remaining performance obligations was $1,549,$741, and the Company expects to recognize $1,148$464 of the remaining performance obligations within one year and the balance over one to three years. At September 30, 2021, $1,506 of the $1,549 remaining performance obligations are comprised of the deferred revenue acquired in connection with the RA Medical asset acquisition. Contract assets primarily relate to the Company’s rights to consideration for work completed in relation to its services performed but not billed at the reporting date. The contract assets are transferred to receivables when the rights become unconditional. Currently, the Company does not have any contract assets which have not transferred to a receivable.
Contract liabilities primarily relate to extended warranties where the Company has received payments but has not yet satisfied the related performance obligations.
The allocations of the transaction price are based on the price of stand-alone warranty contracts sold in the ordinary course of business. The advance consideration received from customers for the warranty services is a contract liability that is recognized ratably over the warranty period. As of SeptemberJune 30, 2021,2022, the $1,148$464 of short-term contract liabilities is presented as deferred revenues and the $401$277 of long-term contract liabilities is presented within Other Liabilitiesdeferred revenues and other liabilities on the condensed consolidated balance sheet. For the three and nine months ended SeptemberJune 30, 20212022 and 2020,2021, the Company recognized $19$225 and $73, and $52 and $162$20, respectively, as revenue from amounts classified as contract liabilities (i.e.(e.g. deferred revenues) as of December 31, 2020,2021 and 2019.2020. For the six months ended June 30, 2022 and 2021, the Company recognized $638 and $54, respectively, as revenue from amounts classified as contract liabilities (e.g. deferred revenues) as of December 31, 2021 and 2020.
 
With respect to contract acquisition costs, the Company applied the practical expedient and expenses these costs immediately.
The Company records co-pay reimbursements made to patients receiving laser treatments as a reduction of revenue. For the three and nine months ended September 30, 2021, and 2020, the Company recorded such reimbursements in the amounts of $199 and $542, and $160 and $414, respectively.

1210

STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
Table of Contents
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts and number of lasers)
(unaudited)
The following tables present the Company’s revenue disaggregated by geographical region for the three and nine months ended September 30, 2021 and 2020, respectively. Domestic refers to revenue from customers based in the United States, and substantially all foreign revenue is derived from sales to our distributors, primarily in Asia.
  
Three Months Ended
September 30, 2021
 
  Dermatology Recurring Procedures  Dermatology Procedures Equipment  
 
 
TOTAL
 
Domestic
 
$
5,370
  
$
519
  
$
5,889
 
Foreign
  
340
   
1,482
   
1,822
 
Total
 
$
5,710
  
$
2,001
  
$
7,711
 

  
Nine Months Ended
September 30, 2021
 
  Dermatology Recurring Procedures  Dermatology Procedures Equipment  
 
 
TOTAL
 
Domestic
 
$
14,923
  
$
1,113
  
$
16,036
 
Foreign
  
918
   
3,966
   
4,884
 
Total
 
$
15,841
  
$
5,079
  
$
20,920
 

    
  
Three Months Ended
September 30, 2020
 
  Dermatology Recurring Procedures  Dermatology Procedures Equipment  TOTAL 
Domestic
 
$
3,690
  
$
261
  
$
3,951
 
Foreign
  
145
   
1,517
   
1,662
 
Total
 
$
3,835
  
$
1,778
  
$
5,613
 

  
Nine Months Ended
September 30, 2020
 
  Dermatology Recurring Procedures  Dermatology Procedures Equipment  
 
 
TOTAL
 
Domestic
 
$
11,957
  
$
701
  
$
12,658
 
Foreign
  
375
   
3,340
   
3,715
 
Total
 
$
12,332
  
$
4,041
  
$
16,373
 


The following table summarizes the Company’s expected future undiscounted fixed treatment code payments from international recurring revenue customers as of September 30, 2021:

Remaining 2021
 
$
390
 
2022
  
1,556
 
2023
  
1,479
 
2024
  
1,076
 
2025
  
362
 
Thereafter
  
0
 
Total 
$
4,863
 

13

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

Note 4
Acquisition of Pharos Assets and LiabilitiesTheraClear Assets:

In August 2021,January 2022, the Company acquired certain assets and liabilities related to the U.S. dermatology Pharos businessTheraClear Devices from Ra Medical Systems, Inc.Theravant Corporation (“Ra Medical”Theravant”). Ra Medical’s Pharos excimer laser system holds FDA clearance to treat chronic skin diseases, including psoriasis, vitiligo, atopic dermatitis and leukoderma. The TheraClear asset acquisition of these assets and liabilities allowswill allow the Company to further develop, commercialize and market its full business solutionsthe TheraClear Devices that are used for acne treatment, as well as advance the TheraClear technology into multiple other devices that can be used to Ra Medical’s existing customer base comprisedtreat a range of 400 dermatology practices offering opportunities to increase its recurring revenue base and a pathway to gain additional placements for the Company’s XTRAC excimer laser system.indications.

The purchase priceCompany made an upfront cash payment of $3,700 was paid$500 and issued to Theravant 358,367 shares of common stock with an aggregate value of $500 as of the closing date in cash at the time of acquisition. In addition, the Company assumed certain extended warranty service contracts associated with acquired laser system products. Concurrentconnection with the purchaseTheraClear asset acquisition. 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 percentage of gross profit from future domestic sales ranging from 10-20%, 25% of gross profit from international sales over the net assets,subsequent four-year period, and up to $1,000 in future milestone payments upon the Companyachievement of certain development and Ra Medical entered into a services agreement whereby Ra Medical will provide certain transitional services for the Company as it integrates the acquired assets into the Company. commercialization related targets.

The Company determined this transaction represented an asset acquisition as substantially all of the value was in the acquired customer listTheraClear technology intangible asset as defined by ASC 805, Business Combinations (“ASC 805”). Combinations.

The purchase price was allocated, on a relative fair value basis, to the technology intangible asset and acquired inventory, customer lists and deferred revenueinventories as follows (in thousands):follows:

Consideration:      
Cash payment 
$
3,700
  
$
500
 
Common stock issued
  500
 
Transaction costs  
57
   
131
 
Contingent consideration  9,122
 
Total consideration 
$
3,757
  
$
10,253
 
        
Assets acquired:        
Inventory 
$
284
 
Customer lists  
5,314
 
Technology intangible asset
 $
10,182
 
Inventories 
71
 
Total assets acquired 
$
5,598
  
$
10,253
 
    
Liabilities assumed:    
Deferred revenues - service contracts
 
$
1,841
 
Total liabilities assumed 
$
1,841
 
    
Net assets acquired 
$
3,757
 

11
Table of Contents
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts and number of lasers)
(unaudited)
The customer liststechnology intangible asset is being amortized on a straight-line basis over a period of twelve years. Asten years, to be updated for subsequent changes in the transaction was accounted for as an asset acquisition, the Company allocatedcontingent consideration paid to the inventory acquired and the deferred revenue assumed with the remaining consideration paidthat is allocated to the customer lists intangible asset which also equal its estimated faircarrying value. The intangible asset was valued using an excess earnings model.the relief from royalty method. Significant assumptions used in the excess earnings modelrelief from royalty method include estimated customer sales growth, customer attrition, anda 14.5% weighted average cost of capital and 15.0% of 3%revenues for the royalty rate. The net book value of acquired inventories approximated its fair value. To calculate the fair value of the 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 earnout periods and related earnout payments. Significant assumptions used in the Geometric-Brownian motion analysis include projected revenues, projected gross profit, risk free rate of return of 1.6%, 5%revenue volatility of 45.0%, and 17%, respectively.

14

STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share,equity of 10.5%. Due to uncertainties associated with the development of a new product line and per share amountsthe use of estimates and numberassumptions to determine the fair value of lasers)
(unaudited)
the contingent consideration, the amount ultimately paid in connection with the earnout may differ from the estimated fair value at the acquisition date. A revaluation of the contingent consideration would only be required if there is a significant change to 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 adjustment to the technology intangible asset. Contingent consideration expected to be paid within the next year is classified as current on the condensed consolidated balance sheet.

Note 5
Inventories:
 
Inventories consist of:of the following:
 
 September 30, 2021  December 31, 2020  June 30, 2022 December 31, 2021 
Raw materials and work-in-process 
$
3,024
  
$
2,949
  
$
4,485
  
$
3,201
 
Finished goods  
201
   
495
   
422
   
288
 
Total inventories 
$
3,225
  
$
3,444
  
$
4,907
  
$
3,489
 

Work-in-process is immaterial, given the Company’s typically short manufacturing cycle and therefore, is disclosed in conjunctionincluded with raw materials.
 
Note 6
Property and Equipment, net:
 
Property and equipment consist of:of the following:
 
 September 30, 2021  December 31, 2020  June 30, 2022  December 31, 2021 
Lasers placed-in-service 
$
25,190
  
$
22,942
  
$
26,984  $25,949 
Equipment, computer hardware and software  
224
   
146
   268   238 
Furniture and fixtures  
236
   
243
   227   213 
Leasehold improvements  
43
   
43
   63   254 
  
25,693
   
23,374
   27,542   26,654 
Accumulated depreciation and amortization  
(19,290
)
  
(17,845
)
  (20,857
)
  (19,771
)
Property and equipment, net 
$
6,403
  
$
5,529
  
$
6,685  $6,883 

Depreciation and related amortization expense was $575$599 and $1,576, and $454 and $1,535$520 for the three and nine months ended SeptemberJune 30, 2022 and 2021, respectively. Depreciation and 2020, respectively. Duringamortization expense was $1,224 and $1,001 for the ninesix months ended SeptemberJune 30, 2022 and 2021, the Company recognized a $73 loss on the disposal of property and equipment with an original cost of $204 and accumulated depreciation of $131 at the time of disposal.respectively.
 
12
Table of Contents
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts and number of lasers)
(unaudited)
Note 7
Intangible Assets, net:
 
Set forth below is a detailed listingIntangible assets consist of definite-lived intangible assetsthe following as of SeptemberJune 30, 2021:2022:
 
 Balance  
Accumulated
Amortization
  
Intangible
assets, net
  Balance  
Accumulated
Amortization
  
Intangible
Assets, net
 
Core technology
 
$
5,700
  
$
(3,562
)
 
$
2,138
  
$
5,700
  
$
(3,990
)
 
$
1,710
 
Product technology
  
2,000
   
(2,000
)
  
0
   
12,182
   
(2,510
)
  
9,672
 
Customer relationships
  
6,900
   
(4,313
)
  
2,587
   
6,900
   
(4,830
)
  
2,070
 
Tradenames
  
1,500
   
(938
)
  
562
   
1,500
   
(1,050
)
  
450
 
Pharos customer list  5,314
   (55)  5,259
 
Pharos customer lists  5,314
   (387)  4,927
 
 
$
21,414
  
$
(10,868
)
 
$
10,546
  
$
31,596
  
$
(12,767
)
 
$
18,829
 

15

STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, and per share amounts and number of lasers)
(unaudited)
Thethe following table is a detailed listing of definite-lived intangible assets as of December 31, 2020:2021:

 Balance  
Accumulated
Amortization
  
Intangible
assets, net
  Balance  
Accumulated
Amortization
  
Intangible
Assets, net
 
Core technology
 
$
5,700
  
$
(3,135
)
 
$
2,565
  
$
5,700
  
$
(3,705
)
 
$
1,995
 
Product technology
  
2,000
   
(2,000
)
  
0
   
2,000
   
(2,000
)
  
0
 
Customer relationships
  
6,900
   
(3,795
)
  
3,105
   
6,900
   
(4,485
)
  
2,415
 
Tradenames
  
1,500
   
(825
)
  
675
   
1,500
   
(975
)
  
525
 
Pharos customer lists
  5,314
   (166)  5,148
 
 
$
16,100
  
$
(9,755
)
 
$
6,345
  
$
21,414
  
$
(11,331
)
 
$
10,083
 

In August 2021, the Company acquired customer lists in connection with the Ra Medical asset acquisition with an estimated fair value of $5,314 at the time of acquisition (see Note 3).

Amortization expense was $408$740 and $1,113, and $353 and $1,258 for the three and nine months ended SeptemberJune 30, 2022 and 2021, respectively. Amortization expense was $1,436 and 2020,$705 for the six months ended June 30, 2022 and 2021, respectively.
 
Definite-livedFinite-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 0 impairment charges for the ninethree and six months ended SeptemberJune 30, 2022 or 2021.

EstimatedThe following table summarizes the estimated future amortization expense for the above amortizable intangible assets for future periods is as follows:the next five years:
 
Remaining 2021
 
$
463
 
2022
  
1,853
 
2023
  
1,853
 
2024
  
1,853
 
2025
  
1,148
 
Thereafter
  3,376 
Total 
$
10,546
 


Note 8
Other Accrued Liabilities:
Other accrued liabilities consist of:
  September 30, 2021  December 31, 2020 
       
Accrued warranty, current 
$
54
  
$
87
 
Accrued compensation, including commissions and vacation  
1,578
   
891
 
Accrued state sales, use and other taxes  
3,152
   
3,105
 
Accrued professional fees and other accrued liabilities  
764
   
607
 
Total other accrued liabilities 
$
5,548
  
$
4,690
 

Accrued State Sales and Use Tax
In the ordinary course of business, the Company is, from time to time, subject to audits performed by state taxing authorities. These actions and proceedings are generally based on the position that the arrangements entered into by the Company are subject to sales and use tax rather than exempt from tax under applicable law. The Company uses estimates when accruing its sales and use tax liability. All of the Company’s tax positions are subject to audit. One state has assessed the Company, in 2 assessments, an aggregate amount of $1,484 for the period from March 2014 through February 2020, including penalties and interest. The Company has declined an informal offer to settle at a substantially lower amount, and the Company appealed in that jurisdiction’s administrative process of appeal.
Remaining 2022
 
$
1,436
 
2023
  
2,871
 
2024
  
2,871
 
2025
  
2,166
 
2026
  
1,461
 

1613

STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
Table of Contents
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts and number of lasers)
(unaudited)
In January 2021, the Company received notification that the administrative judge from the respective state had issued an opinion finding in favorNote 8
Accrued Expenses and Other Current Liabilities:

Accrued expenses and other current liabilities consist of the Company that the sale of XTRAC treatment codes were not taxable as sales tax with respect to the first assessment. The jurisdiction has filed an appeal of the administrative law judge’s finding, and the appeal is in process.
A second jurisdiction has made an assessment of $720 from June 2015 through March 2018 plus interest of $171 through April 2020. The Company is also in that jurisdiction’s administrative process of appeal and the timing of the process has been impacted by the COVID-19 pandemic. If there is a determination that the true object of the Company’s recurring revenue model is not exempt from sales taxes and is not a prescription medicine or the Company does not have other defenses where the Company does not prevail, the Company may be subject to sales taxes in those particular states for previous years and in the future, plus potential interest and penalties.following:

  June 30, 2022  December 31, 2021 
 
      
Warranty obligations $98  $59 
Compensation and related benefits  1,545   2,052 
State sales, use and other taxes  3,739   3,697 
Professional fees and other  762   569 
Total accrued expenses and other current liabilities $6,144  $6,377 
The Company believes its state sales and use tax accruals have properly recognized such that if the Company’s arrangements with customers are deemed more likely than not that the Company would not be exempt from sales tax in a particular state are the basis for measurement of the state sales and use tax is calculated in accordance with ASC 405, Liabilities as a transaction tax. If and when the Company is successful in defending itself or in settling the sales tax obligation for a lesser amount, the reversal of this liability is to be recorded in the period the settlement is reached. However, the precise scope, timing and time period at issue, as well as the final outcome of any audit and actual settlement remains uncertain.
The Company records state sales tax collected and remitted for its customers on equipment sales on a net basis, excluded from revenue. The Company’s sales tax expense that is not presently being collected and remitted for the recurring revenue business is recorded in general and administrative expenses on the condensed consolidated statements of operations.
Accrued Warranty Costs
The Company offers a standard warranty on product sales generally for a one to two-year period, however, the Company has offered longer warranty periods, ranging from three to four years, in order to meet competition or meet customer demands. The Company provides for the estimated cost of the future warranty claims on the date the product is sold. Total accrued warranty is included in other accrued liabilities and other liabilities on the condensed consolidated balance sheets. The activity in the warranty accrual during the three and nine months ended September 30, 2021, and 2020, is summarized as follows:
  
Three Months Ended,
September 30,
  
Nine Months Ended,
September 30,
 
  2021
  2020
  2021
  2020
 
Accrual at beginning of period 
$
98
  
$
139
  
$
113
  
$
232
 
Additions charged to warranty expense  
11
   
37
   
52
   
46
 
Expiring warranties/claimed satisfied  
(28
)
  
(41
)
  
(84
)
  
(143
)
Total  
81
   
135
   
81
   
135
 
Less: current portion  
(54
)
  
(107
)
  
(54
)
  
(107
)
Total long-term accrued warranty costs 
$
27
  
$
28
  
$
27
  
$
28
 
Note 9
Note Payable

On December 30, 2020, the Company had renewed its $7,275 loan with a commercial bank pursuant to a one-year Fixed Rate – Term Promissory Note (the “Note”). The Company's obligations under the Note were secured by an Assignment and Pledge of Time Deposit, under which the Company had pledged to the commercial bank the proceeds of a time deposit account in the amount of the loan and recorded the time deposit and accrued interest as restricted cash on the balance sheet. The principal was due on December 30, 2021 with no penalties for prepayments. The interest rate is fixed at 1.40%. The secured time deposit had a fixed interest rate of 0.40%. On September 30, 2021, the Company repaid the Note with the proceeds from the Time Deposit.
17

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

Note 10
Long-term Debt:


Senior Term Facility
On September 30, 2021, the Company entered into a credit and security agreement with MidCap Financial Trust, also acting as the administrative agent, and the lenders identified therein (“Senior Term Facility”). The Senior Term Facility provides for an $8.0 million$8,000 senior term loan that was drawn upon by the Company upon executing the agreement. On September 30, 2021, the Company also repaid the outstanding principal and interest for its Note Payable (Note 9) and the Economic Injury Disaster Loan. Borrowings under the Senior Term Facility bear interest at LIBOR (with a LIBOR floor rate of 0.50%) plus 7.50% per year and maturesmature on September 1, 2026, unless terminated earlier. The Company is obligated to make monthly interest-only payments through September 30, 2024. From October 1, 2024 to the date of maturity, the Company will make 24 equal monthly principal payments plus interest, and all borrowings are secured by substantially all of the Company’s assets. The Senior Term Facility was amended on January 10, 2022 to permit the acquisition of TheraClear Devices (Note 4).

The Company may voluntarily prepay the outstanding term loan, with such prepayment at least $5.0 million,$5,000, at any time upon 30 days’ written notice. Upon prepayment, the Company will be required to pay a prepayment fee equal to (i) 4.00% of the outstanding principal prepaid or required to be prepaid (whichever is greater), if the prepayment is made within twelve12 months of September 30, 2021, (ii) 3.00% of the outstanding principal prepaid or required to be prepaid (whichever is greater), if the prepayment is made between twelve12 months and twenty-four24 months after September 30, 2021, (iii) 2.00% of the outstanding principal prepaid or required to be prepaid (whichever is greater), if the prepayment is made between twenty-four24 months and thirty-six36 months after September 30, 2021, or (iv) 1.00% of the outstanding principal prepaid or required to be prepaid (whichever is greater), if the prepayment is made after thirty-six36 months after September 30, 2021 and prior to the maturity date.

The Senior Term Facility contains certain customary representations and warranties, affirmative covenants and conditions. The Senior Term Facility also contains a number of negative covenants that subject the Company to certain exceptions and waivers and restrictions, as defined in the agreement. In addition, the Senior Term Facility contains a quarterly financial covenant that requires the Company to not have less than $24.0 milliona specified minimum amount of net revenue for the trailing 12-month period, as of September 30, 2021, with compliance measured on the last day of each fiscal quarter beginning on September 30, 2021. At June 30, 2022, the minimum net revenue threshold was $26,000. The minimum net revenue threshold will increase to $30.0 million$30,000 by December 31, 2023. At SeptemberJune 30, 2021,2022, the Company was in compliance with all financial and nonfinancial covenants within the Senior Term Facility. At December 31, 2021, the minimum net revenue threshold will be $25.0 million.

The Senior Term Facility contains customary indemnification obligations and customary events of default, including, among other things, (i) nonpayment, (ii) breach of warranty, (iii) nonperformance of covenants and obligations, (iv) default on other indebtedness, (v) judgments, (iv) change of control, (vii) bankruptcy and insolvency, (viii) impairment of security, (xi) regulatory matters, (xii) failure to remain a publicly traded company and (xiii) material adverse event. Where an event of default arises from certain bankruptcy events, the commitments shall automatically and immediately terminate and the principal of, and interest then outstanding on, all of the loans shall become immediately due and payable. Subject to certain notice requirements and other conditions, upon the occurrence of other events of default, including the occurrence of a condition having or reasonably likely to have a material adverse effect, commitments may be terminated and the principal of, and interest then outstanding on, all of the loans may become immediately due and payable. On SeptemberJune 30, 2021,2022, 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 Credit Agreement,Senior Term Facility, had not occurred and was remote.

14
Table of Contents
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts and number of lasers)
(unaudited)
In connection with entering into the Senior Term Facility, the Company issued an affiliate of the lender a warrant to purchase 373,626 shares of the Company'sCompany’s common stock at an initial exercise price of $1.82 per share. The warrants are equity classified and are exercisable at any time on or prior to the tenth anniversary of their issue date. The estimated fair value of the warrants was $0.6 million$585 and determined using the Black-Scholes option pricing model. The key assumptions used in the Black-Scholes option pricing model were (i) an expected term of ten years, (ii) expected volatility of 88.6%, (iii) a risk-free rate of 1.5%1.50% and (iv) 0 estimated dividend yield. In addition, the Company incurred third party costs and lender fees of $0.1 million.$133. The proceeds were allocated on a basis that approximates the relative fair value method. The fair value of the warrants and fees incurred were recorded as a debt discount and are being recognized as interest expense over the life of the Senior Term Facility using the effective-interest method. NaN interest or amortization ofThe unamortized debt discount was $605 as of June 30, 2022. The Company recognized interest expense of $208 and $407 during the three and ninesix months ended SeptemberJune 30, 2021 in connection with2022, of which $39 and $76 was related to the Senior Term Facility.amortization of the debt discount for the three and six months ended June 30, 2022.

18

STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, and per share amounts and number of lasers)
(unaudited)
Future minimum principal payments at SeptemberJune 30, 20212022 are as follows (in thousands):follows:

2024
 
$
1,000
 
2025
  
4,000
 
2026
  
3,000
 
Total
 
$
8,000
 

Paycheck Protection Program Loan
On April 22, 2020, the Company closed a loan of $2,028 (the “PPP loan”) from a commercial bank, pursuant to the Paycheck Protection Program (“PPP”) administered by the Small Business Administration (the “SBA”) pursuant to the CARES Act. The PPP loan would have matured on May 1, 2022 and bore an interest rate of 1% per annum. Payments of principal and interest of any unforgiven balance was scheduled to commence December 1, 2020, but was deferred until the SBA approved of the forgiveness amount. In the second quarter of 2021, the Company received notification that the PPP loan had been forgiven. In the second quarter, the Company recorded a gain on the forgiveness of debt in the amount of the loan of $2,028.

Economic Injury Disaster Loan
On May 22, 2020, the Company executed the standard loan documents required for securing a loan (the “EIDL Loan”) from the SBA under its Economic Injury Disaster Loan (“EIDL”) assistance program in light of the impact of the COVID-19 pandemic on the Company’s business. The principal amount of the EIDL Loan is up to $500, with proceeds to be used for working capital purposes and is collateralized by all the Company’s assets. On June 12, 2020, the Company received these funds from the SBA. Interest accrued at the rate of 3.75% per annum. Installment payments, including principal and interest, were originally due monthly beginning March 26, 2021 (twelve months from the date of the promissory note) in the amount of $2. In March 2021, the SBA deferred payments on the EIDL loans by an additional 12 months. The balance of principal and interest was payable over the next thirty years from the date of the promissory note. There are no penalties for prepayment. Based upon guidance issued by the SBA on June 19, 2020, the EIDL Loan was not required to be refinanced by the PPP loan. On September 30, 2021, the Company repaid this loan.

Note 1110
Stock-based Compensation:

On October 27, 2016, theThe Company’s stockholders approved the Company’s adoption of the new 2016 Omnibus Incentive Stock Plan (“2016 Plan”) having 2,058,880 shares available for issuance in respect of awards made thereunder. The Company terminated the 2013 Stock Incentive Plan in October 2016. On May 29, 2018, the Company’s stockholders approved the Company’s amendment, as amended, has reserved up to the 2016 Plan to increase the number of the Company’s common stock available for grants under the plan by 3,134,365. On July 7, 2021, the shareholders approved an amendment to the 2016 Omnibus Incentive Plan to increase the number of7,832,651 shares of common stock for issuance by 2,700,000. Asfuture issuance. As of SeptemberJune 30, 2021,2022, there were 3,853,0383,283,167 shares of common stock remaining available for issuance for awards under the 2016 Plan.

The Company measures share‑stock‑based awards at their grant‑date fair value and records compensation expense on a straight‑line basis over the vestingrequisite service period of the awards. The Company recorded share‑stock‑based compensation expense of $320$452 and $1,563, $403$581 for the three months ended June 30, 2022 and 2021, respectively, and $820 and $1,243 for the three and ninesix months ended SeptemberJune 30, 2021,2022 and 2020,2021, respectively, and stock-based compensation was included within general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations.

19

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

The following table summarizes stock option activity for the ninesix months ended SeptemberJune 30, 2021:2022:

  
Number of
shares
  
Weighted
average
exercise
price
per share
  
Weighted
average
remaining
contractual
term (years)
 
Outstanding at January 1, 2021
  5,292,888  $1.87    
Granted
  2,043,714  $1.67    
Exercised
  (1,557,628) $1.12    
Forfeited/expired
  (1,815,085) $1.84    
Outstanding at September 30, 2021  3,963,889  $2.05   8.2 
Exercisable at September 30, 2021  1,236,841  $2.77   5.6 
  
Number of
shares
  
Weighted
average
exercise price
per share
  
Weighted
average
remaining
contractual
term (years)
 
Outstanding at January 1, 2022
  3,938,613  $1.90    
Granted
  970,000  $1.43    
Exercised
  (15,000) $1.29    
Forfeited and expired
  (348,899) $2.97    
Outstanding at June 30, 2022  4,544,714  $1.72   8.5 
Exercisable at June 30, 2022  1,532,912  $1.92   7.4 
Vested and expected to vest  4,544,714  $1.72   8.5 

The weighted‑average grant date fair value of options granted was $1.24$1.07 per share during the ninesix months ended SeptemberJune 30, 2021. There were 0 options granted during the nine months ended September 30, 2020.2022. As of SeptemberJune 30, 2021,2022, the total unrecognized compensation expense related to unvested stock option awards was $2,720,$3,090, which the Company expects to recognize over a weighted‑average period of approximately 2.42.5 years. TheThere was 0 aggregate intrinsic value of options outstanding and options exercisable at SeptemberJune 30, 2021 was $558 and $53, respectively.2022.

15
Table of Contents
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts and number of lasers)
(unaudited)
For the ninesix months ended SeptemberJune 30, 2021,2022, the fair value of each option was estimated on the date of grant using the weighted average assumptions in the table below:
Expected volatility89.6%
Risk‑free interest rate
2.5%
Expected term (in years)
6.1
Expected dividend yield
0.0%

Expected volatility  90.4%
Risk‑free interest rate
  1.0%
Expected life (in years)
  5.9 
Expected dividend yield
  0%
Fair value of common stock 
$
1.68
 

During the nine months ended September 30, 2021, there were 1,557,628 options that were exercised on a cashless basis at $1.12 per share resulting in the net issuance of 329,076 shares of common stock.

On February 28, 2021, in connection withMarch 30, 2022, the separationCompany granted 160,000 stock-based options to the Chief Executive Officer. The vesting of these awards is contingent upon meeting one or more financial goals (a performance condition) or a common 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 is not reversed, except for forfeitures, at the vesting date regardless of whether the market condition is met. Stock-based compensation expense for performance condition awards is re-evaluated at each reporting period based on the probability of the Company’s Chief Executive Officer, the Company accelerated the vesting of all unvested options to purchase shares of common stock and extended the period to exercise to August 22, 2021. This acceleration and the extensionachievement of the period to vest met the modification criteria for accounting purposes. For these modifications, the Company calculated and recorded the additional compensation expense of $173.goal

Restricted Stock Units

Restricted stock unitunits have been issued to certain board members. Restricted stock units unvested are summarized in the following table:

 
Number of
shares
  
Weighted
average
grant
date
fair value
  
Number of
shares
  
Weighted
average
grant
date
fair value
 
Unvested at January 1, 2021
  0  $0 
Unvested at January 1, 2022
  90,540  $1.45 
Granted
  290,861  $1.44   28,003  $1.13 
Vested
  (146,364) $1.42   (43,003) $1.24 
Unvested at September 30, 2021  144,497  $1.45 
Unvested at June 30, 2022  75,540  $1.45 

As of SeptemberJune 30, 2021,2022, the total unrecognized compensation expense related to unvested restricted stock option awardsunits was $167,$6, which the Company expects to recognize over a weighted‑average period of approximately 0.8 years.less than one month.

20

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

Note 1211
Income Taxes:
 
The Company accounts for income taxes using the asset and liability 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.
NaN income tax expense was incurred for the three and six months ended June 30, 2022. Income tax expense of $4 and of $12, and $72 and $207$8 for the three and ninesix months ended SeptemberJune 30, 2021, and 2020, respectively, was comprised primarily of changes in deferred tax liability related to goodwill. Goodwill is an amortizing asset according to tax regulations.

The United States enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The CARES Act is an approximately $2 trillion emergency economic stimulus package in response to the COVID-19 outbreak, which among other things contains numerous income tax provisions. Some of these tax provisions are expected to be effective retroactively for years ending before the date of enactment. The Company analyzed the impact of the CARES Act and does not foresee a significant impact on its condensed consolidated financial position, results of operations, effective tax rate and cash flows. 16
Table of Contents
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts and number of lasers)
(unaudited)
The Company has experienced certain ownership changes, which under the provisions of Section 382 of the Internal Revenue Code of 1986, as amended, result in annual limitations on the Company's ability to utilize its net operating losses in the future. The February 2014, July 2014, June 2015 and May 2018 equity raises by the Company will limit the annual use of these net operating loss carryforwards. Although the Company has not performed a Section 382 study, any limitation of its pre-change net operating loss carryforwards that would result in a reduction of its deferred tax asset would also have an equal and offsetting adjustment to the valuation allowance.

Note 1312
Business Segments:
 
The Company has organized its business into 2 operating segments to presentbetter align its organization based upon the Company’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. The Dermatology Procedures Equipment segment generates revenues from the sale of equipment, such as lasers and lamp products. Management reviews financial information presented on an operating segment basis for the purposes of making certain operating decisions and assessing financial performance.
 
Unallocated operating expenses include costs that are not specific to a particular segment but are general to the group; included are expenses incurred for administrative and accounting staff, general liability and other insurance, professional fees and other similar corporate expenses. Interest expense and other financing income (expense), net, are also not allocated to the operating segments.

21

STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, and per share amounts and number of lasers)
(unaudited)
The following tables reflect results of operations from the Company’s business segments for the periods indicated below:

Three Months Ended SeptemberJune 30, 20212022

 
Dermatology
Recurring
Procedures
  
Dermatology
Procedures
Equipment
  TOTAL  
Dermatology
Recurring
Procedures
  
Dermatology
Procedures
Equipment
  TOTAL 
Revenues $5,710  $2,001  $7,711 
Revenues, net
 $5,582  $3,523  $9,105 
Costs of revenues  1,512   823   2,335   2,298   1,814   4,112 
Gross profit  4,198   1,178   5,376   3,284   1,709   4,993 
Gross profit %  73.5%  58.9%  69.7%  58.8%  48.5%  54.8%
                        
Allocated operating expenses:                        
Engineering and product development  333   38   371   133   76   209 
Selling and marketing  3,094   201   3,295   3,629   517   4,146 
Unallocated operating expenses  0   0   2,175   0   0   2,332 
  3,427   239   5,841   3,762   593   6,687 
Income (loss) from operations  771   939   (465)
Interest expense, net  0   0   (52)
Income (loss) before income taxes $771  $939  $(517)
(Loss) income from operations
  (478)  1,116   (1,694)
Interest expense
  0   0   (208)
Interest income
  0   0   10 
(Loss) income before income taxes
 $(478) $1,116  $(1,892)
                                                                                         
Nine Months Ended September 30, 2021

  
Dermatology
Recurring
Procedures
  
Dermatology
Procedures
Equipment
  TOTAL 
Revenues $15,841  $5,079  $20,920 
Costs of revenues  4,648   2,422   7,070 
Gross profit  11,193   2,657   13,850 
Gross profit %  70.7%
  52.3%
  66.2%
             
Allocated operating expenses:            
Engineering and product development  1,013   145   1,158 
Selling and marketing  8,805   582   9,387 
Unallocated operating expenses  0   0   7,085 
   9,818   727   17,630 
Income (loss) from operations  1,375   1,930   (3,780)
Gain on forgiveness of debt
  0   0   2,028 
Interest expense, net  0   0   (93)
Income (loss) before income taxes $1,375  $1,930  $(1,845)

2217
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Table of Contents
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts and number of lasers)
(unaudited)

STRATA SKIN SCIENCES, INC. AND SUBSIDIARYSix Months Ended June 30, 2022
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, and per share amounts and number of lasers)
(unaudited)
  
Dermatology
Recurring
Procedures
  
Dermatology
Procedures
Equipment
  TOTAL 
Revenues, net
 $10,649  $5,497  $16,146 
Costs 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 operating expenses:            
Engineering and product development  259   113   372 
Selling and marketing  6,929   833   7,762 
Unallocated operating expenses  0   0   4,984 
   7,188
   946
   13,118
 
(Loss) income from operations
  (869)  1,856
   (3,997)
Interest expense
  0   0   (407)
Interest income
  0   0   10 
(Loss) income before income taxes
 $(869) $1,856  $(4,394)

Three Months Ended SeptemberJune 30, 20202021

 
Dermatology
Recurring
Procedures
  
Dermatology
Procedures
Equipment
  TOTAL  
Dermatology
Recurring
Procedures
  
Dermatology
Procedures
Equipment
  TOTAL 
Revenues $3,835  $1,778  $5,613 
Revenues, net
 $5,452  $1,930  $7,382 
Costs of revenues  1,368   1,015   2,383   1,635   986   2,621 
Gross profit  2,467   763   3,230   3,817   944   4,761 
Gross profit %  64.3%  42.9%  57.5%  70.0%  48.9%  64.5%
                        
Allocated operating expenses:                        
Engineering and product development  329   82   411   319   84   403 
Selling and marketing  1,883   168   2,051   2,909   251   3,160 
Unallocated operating expenses  0   0   1,929   0   0   2,121 
  2,212   250   4,391   3,228   335   5,684 
Income (loss) from operations  255  513   (1,161)  589   609   (923)
Interest expense, net  0   0   (21)
Income (loss) before income taxes $255 $513  $(1,182)
Gain on debt extinguishment
  0   0   2,028 
Interest expense
  0   0   (26)
Interest income
  0   0   7 
Income before income taxes
 $589  $609  $1,086 

Nine
18
Table of Contents
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts and number of lasers)
(unaudited)
Six Months Ended SeptemberJune 30, 20202021

 
Dermatology
Recurring
Procedures
  
Dermatology
Procedures
Equipment
  TOTAL  
Dermatology
Recurring
Procedures
  
Dermatology
Procedures
Equipment
  TOTAL 
Revenues $12,332  $4,041  $16,373 
Revenues, net
 $10,131  $3,078  $13,209 
Costs of revenues  4,534   2,246   6,780   3,136   1,599   4,735 
Gross profit  7,798   1,795   9,593   6,995   1,479   8,474 
Gross profit %  63.2%  44.4%  58.6%  69.0%  48.1%  64.2%
                        
Allocated operating expenses:                        
Engineering and product development  828   122   950   680   107   787 
Selling and marketing  6,021   425   6,446   5,711   381   6,092 
Unallocated operating expenses  0   0   5,921   0   0   4,910 

  6,849   547   13,317   6,391   488   11,789 
Income (loss) from operations  949   1,248   (3,724)  604   991   (3,315)
Interest expense, net  0   0   (38)
Gain on debt extinguishment
  0   0   2,028 
Interest expense
  0   0   (56)
Interest income
  0   0   15 
Income (loss) before income taxes $949  $1,248  $(3,762) $604  $991  $(1,328)

The following tables present the Company’s revenue disaggregated by geographical region for the three and six months ended June 30, 2022 and 2021, respectively. Domestic refers to revenue from customers based in the United States, and foreign recurring revenue is derived from sales to the Company’s distributors, primarily in Asia.

Three Months Ended June 30, 2022

  Dermatology Recurring Procedures  Dermatology Procedures Equipment  TOTAL 
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

  Dermatology Recurring Procedures  Dermatology Procedures Equipment  TOTAL 
Domestic
 
$
9,866
  
$
1,242
  
$
11,108
 
Foreign
  
783
   
4,255
   
5,038
 
Total
 
$
10,649
  
$
5,497
  
$
16,146
 

Three Months Ended June 30, 2021

  Dermatology Recurring Procedures  Dermatology Procedures Equipment  TOTAL 
Domestic
 
$
5,127
  
$
336
  
$
5,463
 
Foreign
  
325
   
1,594
   
1,919
 
Total
 
$
5,452
  
$
1,930
  
$
7,382
 

19
Table of Contents
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts and number of lasers)
(unaudited)
Six Months Ended June 30, 2021

  Dermatology Recurring Procedures  Dermatology Procedures Equipment  TOTAL 
Domestic
 
$
9,553
  
$
594
  
$
10,147
 
Foreign
  
578
   
2,484
   
3,062
 
Total
 
$
10,131
  
$
3,078
  
$
13,209
 

The assets acquired from Theravant in January 2022 (see Note 4) will be primarily attributed to the dermatology recurring procedures business segment, resulting in a material increase in total assets for that segment at June 30, 2022 as compared to the 2021 Form 10-K.

Note 1413
Significant Customer Concentration:Concentrations:
 
For the three months ended SeptemberJune 30, 2022 and 2021, thererevenues from sales to one of the Company’s distributors were no customers representing more than 10% of revenues.$1,840, or 20.2%, and $797, or 10.8%, respectively. For the ninesix months ended SeptemberJune 30, 2022 and 2021, there wasrevenues from sales to two and one customer whose salesof the Company’s distributors were $2,220,$3,773, or 10.6% of total revenues for such period.  There was one other customer that represented 10.5% of accounts receivable as of September 30, 2021.23.4%, and $1,480, or 11.2%, respectively.

23

STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share, and per share amounts and number of lasers)
(unaudited)
For the three and nine months ended September 30, 2020, revenues from the sales to the Company’s international master distributor were $846 and $2,149, or 15.1% and 13.1%, respectively, of total revenues for such periods. For the three months ended September 30, 2020 revenues from another distributor were $632 or 11.3% of total revenue for the period. No other distributor or customer represented more than 10% of total Company revenues for the three and ninesix months ended SeptemberJune 30, 2020.2022 and 2021.

NaN customer represented more than 10% of total accounts receivable as of June 30, 2022 or December 31, 2021.

Note 1514
Commitments:
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 twelve12 months. The Company adopted the short-term accounting election for leases with a duration of less than one year. The Company leases its facilities and certain IT and office equipment under non-cancellable operating leases. All of the Company's leasing arrangements are classified as operating leases with remaining lease terms ranging from 1one to 4three years, and one facility lease has a renewal option for two years. Renewal options have been excluded from the determination of the lease term as they are not reasonably certain of exercise. On May 1, 2019, the Company entered into an addendum with FR National Life, LLC for the Carlsbad, California facility for five years which began on October 1, 2019. Included in cash flows provided by operations for the nine months ended September 30, 2021, and 2020, there was amortization of right-of-use assets of $261 and $242, respectively.
 
Operating lease costs were $108$99 and $331, and $112 and $336$107 for the three and nine months ended SeptemberJune 30, 2022 and 2021, respectively. Operating lease costs were $212 and 2020,$223 for the six months ended June 30, 2022 and 2021, respectively. Cash paid for amounts included in the measurement of operating lease liabilities was $113$114 and $344$115 for the three and nine months ended SeptemberJune 30, 2022 and 2021, respectively. Cash paid for amounts included in the measurement of operating lease liabilities was $227 and 2020,$231 for the six months ended June 30, 2022 and 2021, respectively. As of SeptemberJune 30, 2021,2022, the incremental borrowing rate was 9.76% and the weighted average remaining lease term was 2.42.2 years. 

The following table summarizes the Company’s operating lease maturities as of SeptemberJune 30, 2021:2022:
 
For the year ending December 31,
 Amount 
Remaining 2021
 
$
122
 
2022  
371
 

 Amount 
Remaining 2022 
$
144
 
2023  
242
   
242
 
2024  
186
   
186
 
Total remaining lease payments  
921
   
572
 
Less: imputed interest  
(117
)
  
(59
)
Total lease liabilities 
$
804
  
$
513
 

Contingencies:
20
Table of Contents
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts and number of lasers)
(unaudited)
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 would not be exempt from sales tax in a particular state, the basis for measurement of the state sales and use tax is calculated in accordance with ASC 405, Liabilities, as a transaction tax. If and when the Company is successful in defending itself or in settling the sales tax obligation for a lesser amount, the reversal of this liability is to be recorded in the period the settlement is reached. However, the precise scope, timing and time period at issue, as well as the final outcome of any audit and actual settlement, remains uncertain.

In the ordinary course of business, the Company is, from time to time, subject to audits performed by state taxing authorities. These actions and proceedings are generally based on the position that the arrangements entered into by the Company are subject to sales and use tax rather than exempt from tax under applicable law. Several states have assessed the Company an aggregate of $2,375 including penalties and interest for the period from March 2014 through April 2020. An administrative state judge in the State of New York issued an opinion in January 2021 finding in favor of the 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 the State of New York Tax Appeals Tribunal (“Tribunal”) overturning the favorable sales tax determination of the administrative law judge. The Company has until September 6, 2022 to file an appeal of the Tribunal’s decision.

The Company is also in another jurisdiction’s administrative process of appeal with respect to the remaining $891 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 the Company’s recurring revenue model is not exempt from sales taxes and is not a prescription medicine, or the Company does not have other defenses where the Company prevails, the Company may be subject to sales taxes in those particular states for previous years and in the future, plus potential interest and penalties.

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 entered into a Development Agreement (the “Development Agreement”) with Theravant Corporation (“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 3 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 defendantsa defendant in or partiesparty to pending and threatened legal actions and proceedings, including actions brought on behalf of various classes of claimants. These actions and proceedings are generally based on alleged violations of employment, contract and other laws. In some of these actions and proceedings, claims for substantial monetary damages are asserted against the Company. In the ordinary course of business, the Company is also subject to regulatory and governmental examinations, information gathering requests, inquiries, investigations, and threatened legal actions and proceedings. In connection with formal and informal inquiries by federal, state, local and foreign agencies, the Company receives numerous requests, subpoenas and orders for documents, testimony and information in connection with various aspects of its activities.
Note 16
Subsequent Events:

In October 2021, the Company entered into an equity distribution agreement under which the Company may sell up to $11.0 million of its shares of common stock in registered “at-the-market” offerings. If the Company chooses, the shares will be offered at prevailing market prices, and the Company will pay commissions of up to 3.0% of the gross proceeds from the sale of shares sold through the Company’s agent, which may act as an agent and/or principal. The Company has no obligation to sell any shares under this agreement and may, at any time, suspend solicitations under this agreement.

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STRATA Skin Sciences, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts and number of lasers)
(unaudited)
On 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 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 resolution at a mediation scheduled for February 23, 2023. On July 7, 2022, the Company and the Co-Defendant each filed its respective Notice of Appearance that each intended to defend against the claims. No amount has been accrued for this matter as of June 30, 2022, as the likelihood of a loss has not been deemed probable nor is the amount of any loss estimable.
22
Table of Contents
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 (this “Report”). This discussion contains forward-looking statements that involve risks and uncertainties. These forward-looking statements include, but are not limited to, statements about the plans, objectives, expectations and intentions of STRATA Skin Sciences, Inc., a Delaware corporation (referred to in this Report as “we,” “us,” “our,” “STRATA,” “STRATA Skin Sciences” or “registrant”) and other statements contained in this Report that are not historical facts. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that characterize our business including the scope and duration of the COVID-19 outbreak and its impact on global economic systems. In particular, we encourage you to review the risks and uncertainties described in Part II-Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020.2021. 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, speak only as of their date (unless another date is indicated), and we undertake no obligation to update or revise these statements in light of future developments.

The following financial data, in this narrative, are expressed in thousands, except for the earnings per share and prices per treatment.

Introduction, Outlook, and Overview of Business Operations and Recent Developments

STRATA Skin Sciences, Inc. is a medical technology company in dermatology dedicated to developing, commercializing and marketing innovative products for the treatment of dermatologic conditions. Its products include the XTRAC® and now Pharos® excimer lasers and VTRAC® lamp systems utilized in the treatment of psoriasis, vitiligo and various other skin conditions. Its products also include the TheraClear® Acne Clearing System utilized in the treatment of mild to moderate inflammatory, comedonal and pustular acne.

The XTRAC ultraviolet light excimer laser system is utilized to treat psoriasis, vitiligo and other skin diseases. The XTRAC excimer laser system received clearance from the United States Food and Drug Administration in 2000 and has since become a widely recognized treatment among dermatologists. The system delivers targeted 308nm ultraviolet light to affected areas of skin, leading to psoriasis clearing and vitiligo repigmentation, following a series of treatments. As of SeptemberJune 30, 2021,2022, there were 880915 XTRAC systems placed in dermatologists’ offices in the United States under our dermatology recurring procedureprocedures model, an increase from 832890 at the end of December 31, 2020.2021. Under the dermatology recurring procedureprocedures model, the XTRAC system is placed in a physician'sphysician’s office and fees are charged on a per procedure basis or a fee is charged on a periodic basis not to exceed an agreed upon number of procedures. The XTRAC system’s use for psoriasis is covered by nearly all major insurance companies, including Medicare. The VTRAC Excimer Lamp system, offered internationally in addition to the XTRAC, provides targeted therapeutic efficacy demonstrated by excimer technology with the simplicity of design and reliability of a lamp system. We believe there are approximately 7.5 million people in the United States and up to 125 million people worldwide suffering from psoriasis, and 1% to 2% of the world’s population suffers from vitiligo.

In September 2020, we signed a direct distribution agreement with our Japanese distributor for a combination of direct capital sales and recurring revenue for the country of Japan.

In February 2021, we signed an agreement with our Chinese distributor for a combination of direct capital sales and recurring revenues for the country of China.

The Pharos excimer laser system holds FDA clearance to treat chronic skin diseases, including psoriasis, vitiligo, atopic dermatitis and leukoderma.

25The TheraClear® Acne Clearing 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.
In late 2019, there was an outbreak of a new strain of coronavirus (“COVID-19”) which became a global pandemic.The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains constrained work force participation and created significant volatility and disruption of financial markets. In addition, the pandemic leadled to the suspension of elective procedures in the U.S. and to the temporary closure of many physician practices which are our primary customers. We do not know the extent of the impact on our customers including their potential for permanent closure. While many offices have reopened, some physician practices closed and never reopened, and the impact of the ongoing COVID-19 pandemic and its variants on our operational and financial performance, including itsour ability to execute itsour business strategies and initiatives in the expected time frames, will depend on future developments, including the duration and ongoing spread of the COVID-19 outbreak and its variants, continued or renewed restrictions on business operations and transport,transportation, any governmental and societal responses thereto, including legislative or regulatory as well as the distributionpercentage of vaccinesthe populace vaccinated and effectiveness of COVID-19 vaccines and the continued impact on worldwide economic and geopolitical conditions and inflation, all of which are uncertain and cannot be predicted.
23
Domestically, as the procedures in which our devices are used are elective in nature;nature and as social distancing, travel restrictions, quarantines and other restrictions became prevalent in the United States, this had a negative impact on our recurring revenue model and itsour financial position and cash flow. The virus has disrupted the supply chain from China and other countrieschains world-wide that we depend upon to provide a steady source of components to manufacture and repair our devices.

To mitigate the impact of COVID-19, we have taken a variety of measures to ensure the availability and functioning of our critical infrastructure by implementing business continuity plans to promote the safety and security of our employees, while complying with various government mandates, including work-from-home arrangements and social-distancing initiatives to reduce the transmission of COVID-19, we are providing face masks for employeesand complying with federal and local regulations at facilities significantly impacted and requiring on-site body temperature monitoring before enteringour facilities. The Company implemented a policy whereby all Company employees are required to be vaccinated or complete weekly COVID-19 testing. In addition, we created and executed programs utilizing our direct to consumerdirect-to-consumer advertising and call center to contact patients and partner clinics to restart our partners’ businesses.

In the event our own employees are impacted through direct or ancillary contact with a person who has the virus, we may need to devise other methods of transacting business in our offices by working from home and or potentially ceasing operations for a period of time.

Supply chain disruptions which began during the pandemic have continued and may continue for the foreseeable future. While the Company’s operations have not been materially impacted by the general trends in supply chain problems, the Company continues to monitor and assess potential risks.

The ongoing COVID-19 pandemic has had a negative impact on our results of operations and financial performance forthrough the first three-quarterssecond quarter of fiscal 2021,2022. We experienced a significant number of cases of a COVID-19 variant among our employees in January 2022 and we expect it will continue to have a negative impact on revenues, earnings and cash flows in fiscal 2021. Somesome physician offices continue to experience staffing issues, and we believe these shortages of trained personnel have negatively impacted our business. Accordingly, current results and financial conditions discussed herein may not be indicative of future operating results and trends.

26In August 2021, we acquired certain assets and assumed certain liabilities related to the Pharos U.S. dermatology business of Ra Medical Systems, Inc. (“Ra Medical”) for an upfront cash payment of $3,700. The Pharos asset acquisition provides us with the opportunity to market our full business solutions to Ra Medical’s existing customer base of 400 dermatology practices and increase our recurring revenue base. The Pharos transaction also provides a potentially synergistic path to gain additional placements for our XTRAC excimer laser system.

TableIn January 2022, we acquired certain assets of ContentsTheraClear Devices from Theravant Corporation (“Theravant”). The TheraClear asset acquisition will allow us 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 additional indications. We made an upfront cash payment of $500 in connection with the asset acquisition. In addition, Theravant received 358,367 shares of our common stock with an aggregate value of $500 as of the closing date and 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 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 $1,000 in future milestone payments upon the achievement of certain development and commercialization related targets.

In January 2022, we 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.

Key Technology


•
XTRAC® Excimer Laser. XTRAC received FDA clearance in 2000 and has since become a widely recognized treatment among dermatologists for psoriasis and other skin diseases. The XTRAC System delivers ultra-narrowband ultraviolet B (“UVB”) light to affected areas of skin. Following a series of treatments typically performed twice weekly, psoriasis remission can be achieved, and vitiligo patches can be re-pigmented. XTRAC is endorsed by the National Psoriasis Foundation, and its use for psoriasis is covered by nearly all major insurance companies, including Medicare. We estimate that more than half of all major insurance companies now offer reimbursement for vitiligo as well, a figure that is increasing. In February 2022, we announced the commercial launch, with the first installation in the U.S. market, of our next generation excimer laser system, XTRAC MomentumTM  1.0
24
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.


•
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.


•
TheraClear Acne Treatment Device. The TheraClear® Acne Clearing 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.
Recent Developments

Acquisition of the U.S. dermatology Pharos net assets of Ra Medical Systems
On August 16, 2021, we acquired certain net assets of Pharos dermatology from Ra Medical Systems, Inc. for a cash payment of $3,757, inclusive of transaction costs of $57, for certain assets and the assumption of estimated existing customer warranty and service agreement liabilities and certain other assumed liabilities. We also signed a services agreement under which Ra Medical Systems will provide certain services for the Company as it integrates the acquired assets into the Company. Ra Medical’s Pharos excimer laser system holds FDA clearance to treat chronic skin diseases, including psoriasis, vitiligo, atopic dermatitis and leukoderma. The acquisition of these assets and liabilities allows the Company to market its full business solutions to Ra Medical’s existing customer base comprised of 400 dermatology practices offering opportunities to increase its recurring revenue base and a pathway to gain additional placements for the Company’s XTRAC excimer laser system.

Senior Term Facility with MidCap Financial Trust
On September 30, 2021, we entered into a credit and security agreement with MidCap Financial Trust, also acting as the administrative agent, and the lenders identified therein and borrowed $8.0 million in the form of a senior term loan. The term loan bears interest at LIBOR (with a LIBOR floor rate of 0.50%) plus 7.50% and matures on September 1, 2026, unless terminated earlier. We are obligated to make monthly interest-only payments through September 30, 2024. From October 1, 2024 to the date of maturity, we will make 24 equal monthly principal payments plus interest and all borrowings are secured by substantially all of our assets.

We may, at our option, prepay the outstanding term loan, with such prepayment at least $5.0 million, at any time upon 30 days’ written notice. Upon prepayment, we will be required to pay a prepayment fee equal to (i) 4.00% of the outstanding principal prepaid or required to be prepaid (whichever is greater), if the prepayment is made within twelve months of September 30, 2021, (ii) 3.00% of the outstanding principal prepaid or required to be prepaid (whichever is greater), if the prepayment is made between twelve months and twenty-four months after September 30, 2021, (iii) 2.00% of the outstanding principal prepaid or required to be prepaid (whichever is greater), if the prepayment is made between twenty-four months and thirty-six months after September 30, 2021, or (iv) 1.00% of the outstanding principal prepaid or required to be prepaid (whichever is greater), if the prepayment is made after thirty-six months after September 30, 2021 and prior to the maturity date.

We are subject to customary affirmative and negative covenant requirements and also subject to a trailing twelve-month net revenue financial covenant requirement. In the event of default, including covenant violations, the lenders could request that all principal and unpaid interest and penalties be due upon demand.

27
In connection with entering into the credit facility, the Company issued an affiliate of MidCap a warrant to purchase 373,626 shares of the Company's common stock for an exercise price of $1.82. The warrant is exercisable at any time on or prior to the tenth anniversary of its issue date.

Paycheck Protection Program
On April 22, 2020, we closed on a loan of $2.0 million (the “PPP loan”) from a commercial bank, pursuant to the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief and Economic Security Act (the “Cares Act”). The PPP loan would have matured on May 1, 2022 and bore an interest rate of 1% per annum. Payments of principal and interest of any unforgiven balance was scheduled to commence December 1, 2020, but was deferred until the SBA approves of the forgiveness amount.

In the second quarter of 2021, we received notification the PPP loan had been forgiven and recorded a gain on forgiveness of debt in the amount of the loan of $2,028.

Economic Injury Disaster Loan
On May 22, 2020, we executed the standard loan documents required for securing a loan (the “EIDL Loan”) from the SBA under its Economic Injury Disaster Loan (“EIDL”) assistance program in light of the impact of the COVID-19 pandemic on our business. The principal amount of the EIDL Loan is up to $500, with proceeds to be used for working capital purposes and is collateralized by all of our assets. On June 12, 2020, we received these funds from the SBA. Interest accrues at the rate of 3.75% per annum. Installment payments, including principal and interest, were originally due monthly beginning March 26, 2021 (twelve months from the date of the promissory note) in the amount of $2. In March 2021, the SBA deferred payments on the EIDL loans by an additional 12 months. The balance of principal and interest was payable over the next thirty years from the date of the promissory note. There are no penalties for prepayment. Based upon guidance issued by the SBA on June 19, 2020, the EIDL Loan was not required to be refinanced by the PPP loan. On September 30, 2021, we repaid the loan.

Note Payable
On December 30, 2020, the Company had renewed its $7,275 loan with a commercial bank pursuant to a one-year Fixed Rate – Term Promissory Note (the “Note”). On September 30, 2021, we repaid our $7,275 loan with a commercial bank with the proceeds from with the proceeds of a pledged time deposit held by this commercial bank.

Equity Distribution Agreement
In October 2021, we entered into an equity distribution agreement under which we may sell up to $11.0 million of our shares of common stock in registered “at-the-market” offerings. The shares will be offered at prevailing market prices, and we will pay commissions of up to 3.0% of the gross proceeds from the sale of shares sold through our agent, which may act as an agent and/or principal. We have no obligation to sell any shares under this agreement and may, at any time, suspend solicitations under this agreement.

Critical Accounting Policies and Estimates

There have been no changes to our critical accounting policies in the ninesix months ended SeptemberJune 30, 2021.2022 except for contingent consideration as described below. Critical accounting policies and the significant estimates made in accordance with such policies are regularly discussed with our Audit Committee. Those policies are discussed under “Critical Accounting Policies” in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7, as well as in our consolidated financial statements and the footnotes thereto for the fiscal year ended December 31, 2020,2021 of our Annual Report on Form 10-K as filed with the SEC on March 25, 2021.21, 2022.

Contingent Consideration
The purchase price for certain assets acquired related to TheraClear Devices during January 2022 includes earnout payments, or contingent consideration. Estimates that involve a significant level of estimation uncertainty include the valuation of contingent consideration, which was determined using forecasted financial information available at the acquisition date, a discount rate and various other assumptions as described in more detail in Note 4 to our condensed consolidated financial statements. 28Due to uncertainties associated with the development of a new product line and the use of estimates and assumptions to determine the fair value of the contingent consideration, the amount ultimately paid in connection with the earnout may differ from the estimated fair value at the acquisition date. A revaluation of the contingent consideration would only be required if there is a significant change to 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 adjustment to the technology intangible asset.
Results of Operations

Revenues
The following table presents revenues from our segments for the periods indicated below:
  
For the Three Months Ended
June 30,
 
  2022  2021 
Dermatology Recurring Procedures 
$
5,582
  
$
5,452
 
Dermatology Procedures Equipment  
3,523
   
1,930
 
Total Revenues 
$
9,105
  
$
7,382
 

  
For the Three Months Ended
September 30,
  
For the Nine Months Ended
September 30,
 
  2021  2020  2021  2020 
Dermatology Recurring Procedures 
$
5,710
  
$
3,835
  
$
15,841
  
$
12,332
 
Dermatology Procedures Equipment  
2,001
   
1,778
   
5,079
   
4,041
 
Total Revenues 
$
7,711
  
$
5,613
  
$
20,920
  
$
16,373
 
25
  
For the Six Months Ended
June 30,
 
  2022  2021 
Dermatology Recurring Procedures 
$
10,649
  
$
10,131
 
Dermatology Procedures Equipment 
$
5,497
   
3,078
 
Total Revenues 
$
16,146
  
$
13,209
 

Dermatology Recurring Procedures
The ongoing COVID-19 pandemic has had a negative impact on our results forduring 2021 and through the thirdfirst quarter of 2021 and 2020, and we expect it will have a negative impact on its revenue for as long as the pandemic continues.2022 Recognized recurring treatment revenue for the three months ended SeptemberJune 30, 2021,2022 was $5,710,$5,582, which we estimate is approximately 81,00086,000 treatments with prices between $65 to $95 per treatment, compared to recognized recurring treatment revenue for the three months ended SeptemberJune 30, 20202021 of $3,835,$5,452, which we estimate is approximately 55,00078,000 treatments, with prices between $65 to $95 per treatment. Recognized recurring treatment revenue for the six months ended June 30, 2022 was $10,649, which we estimate is approximately 157,000 treatments with prices between $65 to $95 per treatment, compared to recognized recurring treatment revenue for the six months ended June 30, 2021 of $10,131, which we estimate is approximately 145,000 treatments, with prices between $65 to $95 per treatment.

Recognized treatment revenue for the nine months ending September 30, 2021, was $15,841, which we estimate is approximately 226,000 treatments with prices between $65 and $95 per treatment compared to recognized treatment revenue for the nine months ended September 30, 2020, of $12,332, which is approximately 177,000 treatments with prices between $65 and $95 per treatment.

Increases in procedures are dependent upon building market acceptance through marketing programs with our physician partners and their patients to show that the XTRAC procedures will be of clinical benefit and will be generally reimbursed by insurers. We believe that several factors have an impact on the prescribed use of XTRAC treatments for psoriasis and vitiligo patients. Specifically, we believe that there is a lack of awareness of the positive effects of XTRAC treatments among both sufferers and providers; and the treatment regimen, which can sometimes require up to 12 or more treatments, has limited XTRAC use to certain patient populations. Therefore, our strategy is to continue to execute a direct-to-patient program for XTRAC advertising in the United States, targeting psoriasis and vitiligo patients through a variety of media including television and radio; and through our use of social media such as Facebook and Twitter. We monitor the results of our advertising expenditures in this area to reach the more than 10 million patients in the United States we believe are afflicted with these diseases. During 2020, we reduced our direct to consumer advertising spend, however as the country began to adapt to COVID-19 and vaccines became available during 2021,Furthermore, we increased spending inour presence at trade shows throughout the direct-to-patient programs to drive patients toUnited States during the first and second quarters of 2022, and we held our partner clinics to increase recurring revenue and increase spend in marketing activities as well. The increase in spending on these programs usually precedesnational sales meeting for the recurring revenue in our past experience as there is a lag between our advertising and patients then receiving treatment, which we estimate to be three to nine months. Subject to governmental responses to variantsfirst time since the onset of the COVID-19 we may curtail spending again in certain areas or redirect spending to less impacted areas.pandemic during the second quarter of 2022.
Revenues from Dermatology Recurring Proceduresdermatology recurring procedures are recognized as revenue over the estimated usage period of the agreed upon number of treatments, as the treatments are being used. As of SeptemberJune 30, 2021,2022 and 2020,2021, we deferred net revenues of $2,107$2,501 and $1,391,$1,897 respectively, which will be recognized as revenue over the remaining usage period for domestic placements. LowerHigher deferred revenue from the fourth quarter 2020 negativelyof 2021 favorably impacted the first half of 20212022 as compared to the first half of 20202021, when higherlower deferred revenue favorablefrom the fourth quarter of 2020 negatively impacted that period.

We have recently signed direct distribution contracts with our international distributors for a combination of direct capital sales and recurring revenue. If the recurring model is accepted in these countries and the business model can be executed by these distributors, these agreements are expected to increase recurring revenue over time, but will have an initial impact of reducing sales of dermatology procedures equipment.

29
Dermatology Procedures Equipment
The ongoing COVID-19 pandemic has had a negative impact on our results for the first nine months of 2021 and 2020, and we expect it will have a negative impact on its revenue for as long as the pandemic continues. For the three and six months ended SeptemberJune 30, 2021,2022, dermatology procedures equipment revenues were $2,001.$3,523 and $5,497, respectively. Internationally, we sold 1135 systems (3(30 XTRAC and 5 VTRAC) and 49 systems (41 XTRAC and 8 VTRAC)., respectively, during the three and six months ended June 30, 2022. Domestically, there was one XTRAC system sold during the three and six months ended June 30, 2022. In addition to equipment sales, we recognized approximately $220 and $620, respectively, of deferred service revenue associated with assumed service contracts from Ra Medical during the three and six months ended June 30, 2022.
For the three and six months ended June 30, 2021, dermatology procedures equipment revenues were $1,930 and $3,078, respectively. Internationally, we sold 14 and 16 XTRAC systems, respectively, during the three and six months ended June 30, 2021.  Domestically, there were nofive XTRAC systems sold during the three and six months ended SeptemberJune 30, 2021.

For the three months ended September 30, 2020, dermatology equipment revenues were $1,778. Internationally, we sold 19 systems (8 XTRAC and 11 VTRAC). Domestically, we sold one XTRAC system during the three months ended September 30, 2020.
26
For the nine months ended September 30, 2021, dermatology equipment revenues were $5,079. Internationally, we sold 27 systems (19 XTRAC and 8 VTRAC). Domestically, we sold 5 XTRAC systems during the nine months ended September 30, 2021.

For the nine months ended September 30, 2020, dermatology equipment revenues were $4,041. Internationally, we sold 29 systems (10 XTRAC and 19 VTRAC). Domestically, we sold 2 XTRAC systems for the nine months ended September 30, 2020.

Cost of Revenues
The following table illustrates cost of revenues from our two business segments for the periods listed below:
  
For the Three Months Ended
June 30,
 
  2022  2021 
Dermatology Recurring Procedures 
$
2,298
  
$
1,635
 
Dermatology Procedures Equipment  
1,814
   
986
 
Total Cost of Revenues 
$
4,112
  
$
2,621
 

 
For the Three Months Ended
September 30,
  
For the Nine Months Ended
September 30,
  
For the Six Months Ended
June 30,
 
 2021  2020  2021  2020  2022  2021 
Dermatology Recurring Procedures 
$
1,512
  
$
1,368
  
$
4,648
  
$
4,534
  
$
4,330
  
$
3,136
 
Dermatology Procedures Equipment  
823
   
1,015
   
2,422
   
2,246
   
2,695
   
1,599
 
Total Cost of Revenues 
$
2,335
  
$
2,383
  
$
7,070
  
$
6,780
  
$
7,025
  
$
4,735
 

Gross Profit Analysis
The following tables present changes in our gross marginprofit for the periods presented below:
Company Profit Analysis 
For the Three Months Ended
June 30,
 
  2022  2021 
Revenues
 
$
9,105
  
$
7,382
 
Cost of revenues
  
4,112
   
2,621
 
Gross profit 
$
4,993
  
$
4,761
 
Gross profit percentage  
54.8
%
  
64.5
%

Company Profit Analysis 
For the Three Months Ended
September 30,
  
For the Nine Months Ended
September 30,
  
For the Six Months Ended
June 30,
 
 2021  2020  2021  2020   
2022
   
2021
 
Revenues 
$
7,711
  
$
5,613
  
$
20,920
  
$
16,373
  
$
16,146
  
$
13,209
 
Cost of revenues  
2,335
   
2,383
   
7,070
   
6,780
   
7,025
   
4,735
 
Gross profit 
$
5,376
  
$
3,230
  
$
13,850
  
$
9,593
  
$
9,121
  
$
8,474
 
Gross profit percentage 
69.7
%
 
57.5
%
 
66.2
%
 
58.6
%
 
56.5
%
 
64.2
%

Gross profit increased to $5,376$4,993 for the three months ended SeptemberJune 30, 20212022 from $3,230$4,761 during the same period in 2020.2021. As a percent of revenue,revenues, the gross marginprofit was 69.7%54.8% for the three months ended SeptemberJune 30, 2021,2022, as compared to 57.5%64.5% for the same period in 2020.2021. The decrease in gross profit percentage was primarily the result of an increase in amortization of intangible assets due to the Pharos and TheraClear asset acquisitions and a change in product mix with higher sales of dermatology procedures equipment, which has a lower margin than dermatology recurring procedures.

Gross profit increased to $13,850$9,121 for the ninesix months ended SeptemberJune 30, 20212022 from $9,593$8,474 during the same period in 2020.2021. As a percent of revenue,revenues, the gross marginprofit was 66.2%56.5% for the ninesix months ended SeptemberJune 30, 2021,2022, as compared to 58.6%64.2% for the same period in 2020 and the increase2021. The decrease in gross profit percentage was primarily the result of an increase in amortization of intangible assets due to the Pharos and TheraClear asset acquisitions and a change in product mix with higher sales due toof dermatology procedures equipment, which has a reduction of cases in the COVID-19 pandemic as well as the recognition of deferred service contract revenue assumed in connection with the asset acquisition of RA Medical.lower margin than dermatology recurring procedures.

3027
The following tables present changes in our gross margin,profit, by segment, for the periods presented below:
Dermatology Recurring Procedures 
For the Three Months Ended
June 30,
 
  2022  2021 
Revenues 
$
5,582
  
$
5,452
 
Cost of revenues
  
2,298
   
1,635
 
Gross profit
 
$
3,284
  
$
3,817
 
Gross profit percentage  
58.8
%
  
70.0
%

Dermatology Recurring Procedures 
For the Three Months Ended
September 30,
  
For the Nine Months Ended
September 30,
  
For the Six Months Ended
June 30,
 
 2021

2020

2021

2020  2022  2021 
Revenues 
$
5,710
  
$
3,835
  
$
15,841
  
$
12,332
  
$
10,649
  
$
10,131
 
Cost of revenues  
1,512
   
1,368
   
4,648
   
4,534
   
4,330
   
3,136
 
Gross profit 
$
4,198
  
$
2,467
  
$
11,193
  
$
7,798
  
$
6,319
  
$
6,995
 
Gross profit percentage 
73.5
%
 
64.3
%
 
70.7
%
 
63.2
%
 
59.3
%
 
69.0
%

The primary reasons for the increase inthat gross profit percentage decreased for the three and nine months ended SeptemberJune 30, 2021 was the result of higher sales, partially offset by higher depreciation expenses in the third quarter of 2021 and partially offset by an unfavorable impact of deferred revenue in 2021 as compared to 2020.

Dermatology Procedures Equipment 
For the Three Months Ended
September 30,
  
For the Nine Months Ended
September 30,
 
  2021

2020

2021

2020 
Revenues 
$
2,001
  
$
1,778
  
$
5,079
  
$
4,041
 
Cost of revenues  
823
   
1,015
   
2,422
   
2,246
 
Gross profit 
$
1,178
  
$
763
  
$
2,657
  
$
1,795
 
Gross profit  percentage  
58.9
%
  
42.9
%
  
52.3
%
  
44.4
%

The primary reason for the change in gross margin percent for the three and nine months ended September 30, 20212022 as compared to the same period in 2020 was2021 were higher amortization of intangible assets due to the resultPharos and TheraClear asset acquisitions and higher depreciation expenses and labor costs in 2022 compared to the same period of 2021, partially offset by higher recurring procedures sales.

The primary reasons that gross profit percentage decreased for the six months ended June 30, 2022 as compared to the same period in 2021 were higher amortization of intangible assets due to the Pharos and TheraClear asset acquisitions and higher depreciation expenses and labor costs in 2022 compared to the same period of 2021, partially offset by higher recurring procedures sales.

Dermatology Procedures Equipment 
For the Three Months Ended
June 30,
 
  2022  2021 
Revenues 
$
3,523
  
$
1,930
 
Cost of revenues
  
1,814
   
986
 
Gross profit
 
$
1,709
  
$
944
 
Gross profit percentage  
48.5
%
  
48.9
%

Dermatology Procedures Equipment 
For the Six Months Ended
June 30,
 
  2022  2021 
Revenues 
$
5,497
  
$
3,078
 
Cost of revenues
  
2,695
   
1,599
 
Gross profit
 
$
2,802
  
$
1,479
 
Gross profit percentage  
51.0
%
  
48.1
%

The primary reasons for the decrease in gross profit percentage for the three months ended June 30, 2022 as compared to the same period in 2021 were higher amortization of intangible assets due to the Pharos and TheraClear asset acquisitions, partially offset by a change in product mix andresulting in greater sales of equipment with higher sales margins and the recognition of deferred service revenue associated with assumed service contracts from RARa Medical.

The primary reasons for the increase in gross profit percentage for the six months ended June 30, 2022 as compared to the same period in 2021 were a change in product mix resulting in greater sales of equipment with higher sales margins and the absorption of acquired inventories and recognition of deferred service revenue associated with assumed service contracts from Ra Medical, partially offset by higher amortization of intangible assets due to the Pharos and TheraClear asset acquisitions.

28
Engineering and Product Development
For the three months ended SeptemberJune 30, 2021,2022, engineering and product development expenses were $371$209 as compared to $411$403 for the three months ended SeptemberJune 30, 2020. Engineering2021. For the six months ended June 30, 2022, engineering and product development costsexpenses were $372 as compared to $787 for the nine months ending September 30, 2021 were $1,158, compared to $950 for the ninesix months ended SeptemberJune 30, 2020.2021. Engineering and product development costs during the nine-month periodthree and six-month periods in 2022 were higherlower primarily as a result of consultingreduction of costs associatedincurred in connection with certain development projects.developing XTRAC MomentumTM  1.0, our next generation excimer laser system that was commercially launched in February 2022.

Selling and Marketing Expenses
As of September 30, 2021, our sales and marketing personnel consisted of 61 full-time positions, inclusive of a vice president of sales, direct sales organization as well as an in-house call center staffed with patient advocates and a reimbursement group that provides necessary insurance information to our physician partners and their patients.

For the three months ended SeptemberJune 30, 2021,2022, selling and marketing expenses were $3,295$4,146 as compared to $2,051$3,160 for the three months ended SeptemberJune 30, 2020. For the nine months ended September 30, 2021 selling and marketing costs were $9,387 as compared to $6,446 for the nine months ended September 30, 2020.2021. Sales and marketing expenses for the three and nine months ended SeptemberJune 30, 20212022 were higher as compared to the same periodsperiod in 2020, as2021 primarily due to investments we made investments in sales and marketing and directdirect-to-consumer and dermatologists advertising, as well as increased head count and employee-related expenses in the first half of 2022. Increased spending in the second quarter of 2022 compared to consumer advertising, whilethe same period in 2020 we managed2021 also consisted of our costsnational sales meeting and increased attendance at trade shows.
For the six months ended June 30, 2022, selling and marketing expenses were $7,762 as compared to $6,092 for the six months ended June 30, 2021. Sales and marketing expenses for the six months ended June 30, 2022 were higher as compared to the same period in 2021 primarily due to the downturninvestments we made in business as a result of the COVID-19 pandemic, with lower tradeshow costs, compensation costs, commissions, travelsales and marketing and direct-to-consumer and dermatologists advertising, costs.as well as increased head count and employee-related expenses, in the first quarter of 2022. Increased spending in the first half of 2022 compared to the same period in 2021 also consisted of our national sales meeting, held in the second quarter of 2022, and increased attendance at trade shows.

General and Administrative Expenses
For the three months ended SeptemberJune 30, 2021,2022, general and administrative expenses increased to $2,175$2,332 from $1,929$2,121 for the three months ended SeptemberJune 30, 2020. For the nine months ended September 30, 2021 general and administration costs were $7,085 compared to $5,921 for the nine months ended September 30, 2020.2021. General and administrative expenses were higher for the three and nine months ended SeptemberJune 30, 2021,2022 as compared to the same periodsperiod in 2020.  The increase is2021, primarily due to higher accounting and legal fees.
For the six months ended June 30, 2022, general and administrative expenses increased to $4,984 from $4,910 for the six months ended June 30, 2021. General and administrative expenses were consistent with the six months ended June 30, 2022 as compared to the same period in 2021, primarily due to higher compensation, severance and stock option costsrecruiting expenses incurred in the first quarter of 2021 as a result of the CEO transition, offset by higher accounting and legal fees in the first quarterhalf of 2021.2022.

31
Gain on Forgiveness of Debt Extinguishment
During the nine months ended September 30,second quarter of 2021, we received notification that our PPP loan had been forgiven and we recorded a gain on forgivenessdebt extinguishment of debt of $2,028.$2,028 for the three and six months ended June 30, 2021.

Interest Expense net
Interest expense is primarily attributable to our debt obligations offset by the interest income we receive on our cash, cash equivalents and restricted cash held with financial institutions.obligations. Interest expense net of interest income, was not material during the three and nine months ended September 30, 2021, and 2020.

Income Taxes
We recognized income tax expense of $4increased to $208 for the three months ended SeptemberJune 30, 2021 as compared to $722022 from $26 for the three months ended SeptemberJune 30, 2020, all2021. Interest expense increased to $407 for the six months ended June 30, 2022 from $56 for the six months ended June 30, 2021. The increases were primarily the result of which were comprised primarily of changes in deferred tax liability related to goodwill. There are no federal and state taxesa higher interest rate on the PPP loan forgiveness so therefore there was no impact on our income taxes. We recognized an income tax expense of $12 for the nine months endedSenior Term Facility entered into in September 30, 2021 as compared to $207 for the nine months ended September 30, 2020 all of which were comprised primarily of changes in deferred tax liability related to goodwill.2021.

29
Non-GAAP adjusted EBITDAFinancial Measures
We have determined to supplement our condensed consolidated financial statements, prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), presented elsewhere within this report,Report, 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, “Earnings Before Interest, Taxes, Depreciation, and Amortization.”

ThisThese non-GAAP disclosure hasdisclosures 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'sCompany’s results as reported under U.S. GAAP, nor is itare 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’ overall understanding of our current financial performance and to provide further information for comparative purposes. This supplemental presentation should not be construed as an inference that the Company'sCompany’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
June 30,
 
  2022  2021 
       
Gross profit $4,993  $4,761 
Amortization of acquired intangible assets  532   138 
Non-GAAP gross profit $5,525  $4,899 
Gross profit percentage  54.8%  64.5%
Non-GAAP gross profit percentage  60.7%  66.4%

  For the Three Months Ended September 30,  For the Nine Months Ended September 30, 
  2021  2020  2021  2020 
             
Net loss $(521) $(1,254) $(1,857) $(3,969)
                 
Adjustments:                
Depreciation and amortization  983   807   2,689   2,793 
Amortization of right-of-use-asset  87   83   261   242 
Loss (gain) on disposal of property and equipment  10   4   73   23 
Income taxes  4   72   12   207 
Gain on forgiveness of debt  -   -   (2,028)  - 
Interest expense, net  52   21   93   38 
Non-GAAP EBITDA  615   (267)  (757)  (666)
Stock compensation  320   403   1,563   1,243 
Non-GAAP adjusted EBITDA $935  $136  $806  $577 
  
For the Six Months Ended
June 30,
 
  2022  2021 
       
Gross profit $9,121  $8,474 
Amortization of acquired intangible assets  1,016   284 
Non-GAAP gross profit $10,137  $8,758 
Gross profit percentage  56.5%  64.2%
Non-GAAP gross profit percentage  62.8%  66.3%

3230
  
For the Three Months Ended
June 30,
 
  2022  2021 
       
Net (loss) income $(1,892) $1,082 
         
Adjustments:        
Depreciation and amortization  1,339   873 
Amortization of right-of-use asset  92   88 
Loss on disposal of property and equipment  18   63 
Income tax expense  -   4 
Gain on debt extinguishment  -   (2,028)
Interest expense, net  198   19 
Non-GAAP EBITDA  (245)  101 
Stock-based compensation  452   581 
Non-GAAP adjusted EBITDA $207  $682 

  
For the Six Months Ended
June 30,
 
  2022  2021 
       
Net loss $(4,394) $(1,336)
         
Adjustments:        
Depreciation and amortization  2,660   1,706 
Amortization of right-of-use asset  181   174 
Loss on disposal of property and equipment  35   63 
Income tax expense  -   8 
Gain on debt extinguishment  -   (2,028)
Interest expense, net  397   41 
Non-GAAP EBITDA  (1,121)  (1,372)
Stock-based compensation  820   1,243 
Non-GAAP adjusted EBITDA $(301) $(129)

Liquidity and Capital Resources
As of SeptemberJune 30, 2021,2022, we had $7,892$4,266 of working capital compared to $5,993$7,168 as of December 31, 2020.2021. The change in working capital was primarily the result of an increasedecreases in cash and cash equivalents and the settlement of current debt obligations that wereaccounts receivable and an increase in accounts payable, offset by increasesan increase in other accrued liabilities and deferred revenue assumedinventories, as we invested in connection with ourcapital assets, completed the asset acquisition with RA Medical.of TheraClear, and bolstered inventories to avoid supply chain disruptions. Cash and cash equivalents and restricted cash were $13,047$10,036 as of SeptemberJune 30, 2021,2022, as compared to $18,112$12,586 as of December 31, 2020.2021.

On April 22, 2020, we closed on the PPP loan of $2.0 million from a commercial bank, pursuant to the Paycheck Protection Program of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The PPP loan would have matured on May 1, 2022 and bore an interest rate of 1% per annum. Payments of principal and interest of any unforgiven balance was scheduled to commence December 1, 2020, but was deferred until the SBA approves of the forgiveness amount.

In the second quarter of 2021, we received notification the PPP loan had been forgiven. We recorded a gain on forgiveness of debt in the amount of the loan of $2,028.

In June 2020, we obtained an EIDL loan with principal amount of $500. Interest accrues at the rate of 3.75% per annum. Installment payments, including principal and interest, were originally due monthly beginning March 26, 2021 (twelve months from the date of the promissory note) in the amount of $2. In March of 2021, the SBA deferred payments on the EIDL loans by an additional 12 months. The balance of principal and interest is payable over the next thirty years from the date of the promissory note. There are no penalties for prepayment. Based upon guidance issued by the SBA on June 19, 2020, the EIDL Loan was not required to be refinanced by the PPP loan. On September 30, 2021, we repaid the loan.

On September 30, 2021, we repaid our $7,275 loan with a commercial bank with the proceeds from the pledged time deposit held by this commercial bank.

Senior Term Facility with MidCap Financial Trust
In September 2021, we entered into a credit and security agreement with MidCap Financial Trust, also acting as the administrative agent, and the lenders identified therein and borrowed $8.0 million$8,000 in the form of a senior term loan. The term loan bears interest at LIBOR (with a LIBOR floor rate of 0.50%) plus 7.50% per year and matures on September 1, 2026, unless terminated earlier. We are obligated to make monthly interest-only payments through September 30, 2024. From October 1, 2024 to the date of maturity, we will make 24 equal monthly principal payments plus interest, and all borrowings are secured by substantially all of our assets.

We may, at our option, prepay the outstanding term loan, with such prepayment at least $5.0 million, at any time upon 30 days’ written notice. Upon prepayment, we will be required to pay a prepayment fee equal to (i) 4.00% of the outstanding principal prepaid or required to be prepaid (whichever is greater), if the prepayment is made within twelve months of September 30, 2021, (ii) 3.00% of the outstanding principal prepaid or required to be prepaid (whichever is greater), if the prepayment is made between twelve months and twenty-four months after September 30, 2021, (iii) 2.00% of the outstanding principal prepaid or required to be prepaid (whichever is greater), if the prepayment is made between twenty-four months and thirty-six months after September 30, 2021, or (iv) 1.00% of the outstanding principal prepaid or required to be prepaid (whichever is greater), if the prepayment is made after thirty-six months after September 30, 2021 and prior to the maturity date.

We are subject to customary affirmative and negative covenant requirements and also subject to a trailing twelve-month net revenue financial covenant requirement. In the event of default, including covenant violations, the lenders could request that all principal and unpaid interest and penalties be due upon demand.

COVID-19

We have been negatively impacted by the ongoing COVID-19 pandemic, have historically experienced recurring losses and have been dependent on raising capital from the sale of securities in order to continue to operate and meet our obligations in the ordinary course of business. During the COVID-19 pandemic, we received cash proceeds from the PPP loan, which was forgiven, and the EIDL loan which has been repaid. Additionally, in October 2021, the Companywe entered into an equity distribution agreement with an investment bank under which the Companywe may sell up to $11,000 of itsour shares of common stock in registered “at-the-market” offerings. Management believesThe shares will be offered at prevailing market prices, and we will pay commissions of up to 3.00% of the gross proceeds from the sale of shares sold through our agent, which may act as an agent and/or principal. We have no obligation to sell any shares under this agreement and may, at any time, suspend solicitations under this agreement. No shares of our common stock have been sold under this distribution agreement through June 30, 2022.

31
We cannot predict our revenues and expenses in the short term as a result of the COVID-19 pandemic and related governmental responses. Based on our current business plan, we believe that the Company’sour cash and cash equivalents, combined with the anticipated revenues from the sale or use of the Company’sour products, will be sufficient to satisfy our working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with its existing operations throughfor at least the next 12 months following the date of the issuance of these unaudited interim condensed consolidated financial statements.  However, the negative impactif 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 the ongoing COVID-19 outbreakthird-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 its variants on the financial marketsany new equity securities could interfere withhave 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 accessincur 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 terms.

33to 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 and restricted cash provided byused in operating activities was $839$409 for the ninesix months ended SeptemberJune 30, 2021,2022, compared to net cash provided by operating activities of $1,750$387 for the ninesix months ended SeptemberJune 30, 2020.2021. The decrease in cash flows provided by operating activities for the ninesix months ended SeptemberJune 30, 20212022 was primarily the result of no gain on debt extinguishment, an increase in net loss, a lower changereduction in ourstock-based compensation related to the CEO transition in the first quarter of 2021 and net movements in asset and liability accounts, offset by increased depreciation and amortization expense primarily related to intangible assets acquired through the Ra Medical and TheraClear asset acquisitions. The decrease in cash flows from asset and liability accounts was primarily driven by an increase in inventories to avoid supply chain disruptions, a decrease in accrued compensation and the recognition of $992 and primarily attributable to COVID-19 and its impact on billings and delayed vendor payments.deferred service revenue associated with assumed service contracts from Ra Medical, offset by an increase in accounts payable.

Net cash and cash equivalents and restricted cash used in investing activities was $5,996$2,141 for the ninesix months ended SeptemberJune 30, 2021,2022, compared to net cash used in investing activities of $1,447$1,466 for the ninesix months ended SeptemberJune 30, 2020.2021. The increase is primarily the result of the cost of lasers placed in service in 2021 as compared to 2020, and the asset purchase of Ra Medical.TheraClear.

DuringThere were no cash flows from financing activities for the ninesix months ended SeptemberJune 30, 2021, we received net proceeds of $7,867 from our senior term facility with MidCap offset by debt repayments of $7,775 associated with our note payable2022 and EIDL loan. For the nine months ended September 30, 2020, we received $2,528 in proceeds from borrowings under our PPP loan and EIDL loan.2021.

Commitments and Contingencies
There were no items, except as described above with respect to the potential future earnout payments related to the TheraClear asset acquisition and Development Agreement, that significantly impacted our commitments and contingencies as discussed in the notes to our 20202021 annual financial statements included in our Annual Report on Form 10-K.

Off-Balance Sheet Arrangements
At September 30, 2021, we had no off-balance sheet arrangements.

ITEM 3.Quantitative and Qualitative Disclosure about Market Risk

Not applicable.

ITEM 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"“Exchange Act”)), as of SeptemberJune 30, 2021.2022. Based on that evaluation, management has concluded that, as of such date, our disclosure controls and procedures were effective.
32
Limitations on the Effectiveness of Controls
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within an organization have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report,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.

34
PART II - Other Information

ITEM 1.Legal Proceedings
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 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 resolution at a mediation scheduled for February 23, 2023. On July 7, 2022, the Company and the Co-Defendant each filed its respective Notice of Appearance that each intended to defend against the claims.

FromIn the ordinary course of business, the Company is, from time to time, subject to audits performed by state taxing authorities. These actions and proceedings are generally based on the position that the arrangements entered into by the Company are subject to sales and use tax rather than exempt from tax under applicable law. Several states have assessed the Company an aggregate of $2.4 million including penalties and interest for the period from March 2014 through April 2020. An administrative state judge in the State of New York issued an opinion in January 2021 finding in favor of the 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 $1.5 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, the Company received a written decision from the State of New York Tax Appeals Tribunal (“Tribunal”) overturning the favorable sales tax determination of the administrative law judge. The Company has until September 6, 2022 to file an appeal of the Tribunal’s decision.

Additionally, from time to time in the ordinary course of our business, we may be a party to certain legal proceedings, incidental to the normal course of our business. These may include controversies relating to contract claims and employment related matters, some of which claims may be material, in which case, we will make separate disclosure as required.

ITEM 1A.Risk Factors

A description of the risks associated with our business, financial conditions and results of operations is set forth in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020,2021, and filed with the SEC on March 25, 2021.21, 2022.

ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds

None
33
ITEM 3.Defaults Upon Senior Securities.

None.

ITEM 4.Mine Safety Disclosures

None.

ITEM 5.Other Information

None.
35
ITEM 6.Exhibits

3.1
Fifth Amended and Restated Certificate of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 contained in our Registration Statement on Form S-3 (File No. 333-258814), as filed on August 13, 2021).31.1
3.2
Fourth Amended and Restated Bylaws of the Company (Incorporated by reference to Exhibit 3.2 contained in our Current Report on Form 8-K as filed on January 8, 2016).
10.1
Asset Purchase Agreement, dated as of August 16, 2021, between STRATA Skin Sciences, Inc. and Ra Medical Systems, Inc. (Incorporated by reference to Exhibit 10.1 contained in our Current Report on Form 8-K as filed on August 17, 2021).
10.2
Credit and Security Agreement, dated as of September 30, 2021, among STRATA Skin Sciences, Inc., MidCap Financial Trust, as administrative agent, and the lenders identified therein (Incorporated by reference to Exhibit 10.1 contained in our Current Report on Form 8-K as filed on October 4, 2021).
10.3
Intellectual Property Security Agreement, dated as of September 30, 2021, between STRATA Skin Sciences, Inc. and MidCap Financial Trust (Incorporated by reference to Exhibit 10.2 contained in our Current Report on Form 8-K as filed on October 4, 2021).
10.4
Warrant Agreement to Purchase Shares of the Common Stock of STRATA Skin Sciences, Inc., dated as of September 30, 2021, between STRATA Skin Sciences, Inc. and MidCap Funding XXVII Trust (Incorporated by reference to Exhibit 10.3 contained in our Current Report on Form 8-K as filed on October 4, 2021).
10.5
Registration Rights Agreement, dated as of September 30, 2021, between STRATA Skin Sciences, Inc. and MidCap Funding XXVII Trust (Incorporated by reference to Exhibit 10.4 contained in our Current Report on Form 8-K as filed on October 4, 2021).
10.6
Form of Management Change in Control Agreement
31.1
Rule 13a-14(a) Certificate of Chief Executive Officer
(attached hereto)
31.2
Rule 13a-14(a) Certificate of Chief Financial Officer
(attached hereto)
32.1*
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(attached hereto)
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Schema
101.CALXBRL Taxonomy Calculation Linkbase
101.DEFXBRL Taxonomy Definition Linkbase
101.LABXBRL Taxonomy Label Linkbase
101.PREXBRL Taxonomy Presentation Linkbase

*
The certifications attached as Exhibit 32.1 accompany this Quarterly Report on Form 10-Q pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

3634
SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 STRATA SKIN SCIENCES, INC.

Date   November 12, 2021August 10, 2022
By:
/s/ Robert J. Moccia
 
  
Name
Robert J. Moccia 
  
Title
President & Chief Executive Officer 

Date   November 12, 2021August 10, 2022
By:
/s/ Christopher Lesovitz
 
  
Name
 Christopher Lesovitz 
  
Title
 Chief Financial Officer 


3735