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 September 30, 2022March 31, 2023

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’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 ☐

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 ☐

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’s common stock as of November 4, 2022May 12, 2023 was 34,723,04634,881,453 shares.

STRATA SKIN SCIENCES, INC.

TABLE OF CONTENTS

Part I. Financial Information:PAGE
    
 ITEM 1.  Financial Statements: 
 a.
Condensed Consolidated Balance Sheets as of September 30, 2022March 31, 2023 (unaudited) and December 31, 20212022
1
    
 b.
Condensed Consolidated Statements of Operations for the Three Months Ended September 30,March 31, 2023 and 2022 and 2021 (unaudited)
2
    
 c.
Condensed Consolidated Statements of OperationsChanges in Stockholders’ Equity for the NineThree Months Ended September 30,March 31, 2023 and 2022 and 2021 (unaudited)
3
    
 d.
Condensed Consolidated Statements of Changes in Stockholders’ EquityCash Flows for the NineThree Months Ended September 30,March 31, 2023 and 2022 and 2021 (unaudited)
4
    
 e.
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 (unaudited)
5
f.
Notes to Unaudited Condensed Consolidated Financial Statements
65
    
 
ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
2419
    
 
ITEM 3.  Quantitative and Qualitative Disclosure about Market Risk
3325
    
 
ITEM 4.  Controls and Procedures
3325
    
Part II. Other Information:
 
    
 
ITEM 1.  Legal Proceedings
3426
    
 
ITEM 1A.  Risk Factors
3426
    
 
ITEM 2.  Unregistered Sales of Equity Securities and Use of Proceeds
3526
    
 
ITEM 3.  Defaults Upon Senior Securities
3526
    
 
ITEM 4.  Mine Safety Disclosures
3526
    
 
ITEM 5.  Other Information
3526
   ��
 
ITEM 6.  Exhibits
3527
    
  
Signatures
3628
    
  
Certifications
E-31.1


Table of Contents
PART I – Financial Information

ITEM 1. 
ITEM 1.Financial Statements

STRATA Skin Sciences, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)

 March 31, 2023  December 31, 2022 
 September 30, 2022  December 31, 2021   (unaudited)    
Assets (unaudited)     
    
Current assets:            
Cash and cash equivalents 
$
7,454
  
$
12,586
  
$
2,825
  
$
5,434
 
Restricted cash
  1,361   -   1,361   1,361 
Accounts receivable, net of allowance for doubtful accounts of $299 and $275 at September 30, 2022 and December 31, 2021, respectively
  
3,655
   
3,433
 
Accounts receivable, net of allowance for doubtful accounts of $242 and $382 at March 31, 2023 and December 31, 2022, respectively
  
3,940
   
4,471
 
Inventories  
5,662
   
3,489
   
5,695
   
5,547
 
Prepaid expenses and other current assets  
621
   
462
   
691
   
691
 
Total current assets  
18,753
   
19,970
   
14,512
   
17,504
 
                
Property and equipment, net  
6,566
   
6,883
   
8,182
   
7,498
 
Operating lease right-of-use assets
  
836
   
638
   
870
   
975
 
Intangible assets, net  
18,110
   
10,083
   
16,674
   
17,394
 
Goodwill  
8,803
   
8,803
   
8,803
   
8,803
 
Other assets  
167
   
216
   
82
   
98
 
Total assets 
$
53,235
  
$
46,593
  
$
49,123
  
$
52,272
 
                
Liabilities and Stockholders’ Equity                
Current liabilities:                
Accounts payable 
$
4,369
  
$
2,822
  
$
3,099
  
$
3,425
 
Accrued expenses and other current liabilities  
6,075
   
6,377
   
6,549
   
6,555
 
Deferred revenues  2,968
   3,285
   2,548
   2,778
 
Current portion of operating lease liabilities  
246
   
318
   
381
   
355
 
Current portion of contingent consideration
  
500
   
-
   
481
   
313
 
Total current liabilities  
14,158
   
12,802
   
13,058
   
13,426
 
                
Long-term debt
  
7,435
   
7,319
 
Long-term debt, net
  
7,517
   
7,476
 
Deferred revenues and other liabilities
  280
   400
   305
   314
 
Deferred tax liability  
266
   
266
   
306
   
306
 
Operating lease liabilities net of current portion
  
674
   
392
 
Operating lease liabilities, net of current portion
  
489
   
610
 
Contingent consideration, net of current portion
  
8,622
   
-
   
8,127
   
8,309
 
Total liabilities  
31,435
   
21,179
   
29,802
   
30,441
 
                
Commitments and contingencies (Note 14)            
  
   
         
Stockholders’ equity:                
Series C convertible preferred stock, $0.10 par value; 10,000,000 shares authorized; no shares issued and outstanding
  
-
   
-
 
Common stock, $0.001 par value, 150,000,000 shares authorized; 34,723,046 and 34,364,679 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively
  
35
   
34
 
Series C convertible preferred stock, $0.10 par value; 10,000,000 shares authorized; no shares issued and outstanding  —
   —
 
Common stock, $0.001 par value; 150,000,000 shares authorized; 34,881,453 and 34,723,046 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively
  
35
   
35
 
Additional paid-in capital  
248,833
   
247,059
   
249,349
   
249,024
 
Accumulated deficit  
(227,068
)
  
(221,679
)
  
(230,063
)
  
(227,228
)
Total stockholders’ equity  
21,800
   
25,414
   
19,321
   
21,831
 
Total liabilities and stockholders’ equity 
$
53,235
  
$
46,593
  
$
49,123
  
$
52,272
 

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

1
STRATA Skin Sciences, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
(in thousands, except share and per share amounts)
(unaudited)

  
Three Months Ended
March 31,
 
  2023
  2022
 
Revenues, net 
$
7,567
  
$
7,041
 
Cost of revenues
  
3,179
   
2,913
 
Gross profit
  4,388   4,128 
         
Operating expenses:
        
Engineering and product development  
315
   
163
 
Selling and marketing  
3,742
   
3,616
 
General and administrative  
2,917
   
2,652
 
   
6,974
   
6,431
 

        
Loss from operations  
(2,586
)
  
(2,303
)
         
Other (expense) income:        
Interest expense
  (286)  (199)
Interest income
  37   — 

  
(249
)
  
(199
)
Net loss 
$
(2,835
)
 
$
(2,502
)
         
Net loss per share of common stock, basic and diluted 
$
(0.08
)
 
$
(0.07
)
Weighted average shares of common stock outstanding, basic and diluted  
34,862,092
   
34,679,246
 

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

2
Table of Contents
STRATA Skin Sciences, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
Changes in Stockholders’ Equity
For The Three Months Ended March 31, 2023 and 2022
(in thousands, except share and per share amounts)
(unaudited)
      Additional
      Total
 
  Common Stock  Paid-In  Accumulated   Stockholders’
 
  Shares  Amount  Capital  Deficit  Equity 
Balance at January 1, 2023  34,723,046  $35  $
249,024  $
(227,228) $21,831 
Stock-based compensation expense  —   —   325   —   325 
Issuance of restricted stock  158,407   —   —   —   — 
Net loss  —   —   —   (2,835)  (2,835)
Balance at March 31, 2023  34,881,453  $35  $
249,349  $
(230,063) $19,321 

  
For the Three Months Ended
September 30,
 
  2022
  2021
 
Revenues, net 
$
9,413
  
$
7,711
 
Cost of revenues  
3,614
   
2,335
 
Gross profit  
5,799
   
5,376
 
         
Operating expenses:        
Engineering and product development  
216
   
371
 
Selling and marketing  
3,754
   
3,295
 
General and administrative  
2,615
   
2,175
 
   
6,585
   
5,841
 
         
Loss from operations  
(786
)
  
(465
)
Other income (expense):        
Interest expense
  
(244
)
  
(53
)
Interest income
  35   1 
   (209)  (52)
Loss before income taxes  
(995
)
  
(517
)
Income tax expense  
-
   
(4
)
Net loss
 
$
(995
)
 
$
(521
)
         
Net loss per share of common stock, basic and diluted $(0.03) $(0.02)
         
Weighted average shares of common stock outstanding, basic and diluted
  34,723,046   34,150,438 
     Additional     Total
 
  Common Stock  Paid-In  Accumulated   Stockholders’
 
  Shares  Amount  Capital  Deficit  Equity 
Balance at January 1, 2022  34,364,679  $34  $247,059  $(221,679) $25,414 
Stock-based compensation expense  —   —   368   —   368 
Issuance of common stock for acquisition  358,367   1   499   —   500 
Net loss  —   —   —   (2,502)  (2,502)
Balance at March 31, 2022  34,723,046  $35  $247,926  $(224,181) $23,780 

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

3
STRATA Skin Sciences, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

  For the Three Months Ended March 31, 
  2023
  2022
 
Cash flows from operating activities:      
Net loss 
$
(2,835
)
 
$
(2,502
)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation and amortization  
1,397
   
1,321
 
Amortization of operating lease right-of-use assets  
105
   
89
 
Amortization of deferred financing costs and debt discount  41   37 
(Recoveries of) provision for doubtful accounts  
(95
)
  
13
 
Stock-based compensation expense  
325
   
368
 
Loss on disposal of property and equipment
  —   17 
Changes in operating assets and liabilities:        
Accounts receivable  
626
   
448
 
Inventories  
(103
)
  
(1,198
)
Prepaid expenses and other assets  
16
   
85
 
Accounts payable  
(326
)
  
1,148
 
Accrued expenses and other liabilities  
(12
)
  
175
 
Deferred revenues  
(247
)
  
(257
)
Operating lease liabilities  
(95
)
  
(97
)
Net cash used in operating activities  
(1,203
)
  
(353
)
         
Cash flows from investing activities:        
Purchase of property and equipment  (1,406)  (679)
Cash paid in connection with TheraClear asset acquisition  —   (631)
Net cash used in investing activities  (1,406)  (1,310)
Net decrease in cash, cash equivalents and restricted cash  
(2,609
)
  
(1,663
)
Cash, cash equivalents and restricted cash, beginning of period  
6,795
   
12,586
 
Cash, cash equivalents and restricted cash, end of period 
$
4,186
  
$
10,923
 
         
Cash and cash equivalents 
$
2,825
  
$
10,923
 
Restricted cash  
1,361
   
—
 
  
$
4,186
  
$
10,923
 
Supplemental disclosure of cash flow information:        
Cash paid for interest 
$
241
  
$
160
 
         
Supplemental disclosure of non-cash operating, investing and financing activities:        
Inventories acquired in connection with TheraClear asset acquisition $—  $71 
Intangible assets acquired in connection with TheraClear asset acquisition $—  $10,182 
Contingent consideration issued in connection with TheraClear asset acquisition $—  $9,122 
Common stock issued in connection with TheraClear asset acquisition $—  $500 
Transfer of property and equipment to inventories $45  $— 
Accrued payment of contingent consideration $14  $— 

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

24
STRATA Skin Sciences, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
(In thousands, except share and per share amounts)
(unaudited)

  
For the Nine Months Ended
September 30,
 
  2022
  2021
 
Revenues, net 
$
25,559
  
$
20,920
 
Cost of revenues  
10,639
   
7,070
 
Gross profit  
14,920
   
13,850
 
         
Operating expenses:        
Engineering and product development  
588
   
1,158
 
Selling and marketing  
11,516
   9,387 
General and administrative  
7,599
   
7,085
 
   
19,703
   
17,630
 
         
Loss from operations  
(4,783
)
  
(3,780
)
         
Other income (expense):        
Gain on debt extinguishment  -   2,028 
Interest expense  (651)  (109)
Interest income  45   16 
   (606)  1,935 
         
Loss before income taxes  
(5,389
)
  
(1,845
)
Income tax expense  
-
   
(12
)
Net loss 
$
(5,389
)
 
$
(1,857
)
         
Net loss per share of common stock, basic and diluted
 $(0.16) $(0.05)
         
 Weighted average shares of common stock outstanding, basic and diluted  34,708,606
   33,944,321
 

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

3
STRATA Skin Sciences, Inc. and Subsidiary
Condensed Consolidated Statements of Changes in Stockholders’ Equity
For the Nine Months Ended September 30, 2022 and 2021
(in thousands, except share amounts)
(unaudited)
  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  
-
   
-
   
368
   
-
   
368
 
Issuance of common stock for acquisition  
358,367
   
1
   499
   -
   
500
 
Net loss  
-
   
-
   
-
   
(2,502
)
  
(2,502
)
Balance at March 31, 2022
  
34,723,046
   
35
   
247,926
   
(224,181
)
  
23,780
 
Stock-based compensation  -
   -
   
452
   
-
   
452
 
Net loss  
-
   
-
   
-
   
(1,892
)
  
(1,892
)
Balance at June 30, 2022
  
34,723,046
  

35
  

248,378
  

(226,073
)
 

22,340
 
Stock-based compensation
  -   -   455   -   455 
Net loss
  -   -   -   (995)  (995)
Balance at September 30, 2022  34,723,046  $35  $248,833  $(227,068) $21,800 

  Common Stock  Additional Paid-In  Accumulated  Total Stockholders’ 
  Shares  Amount  Capital  Deficit  Equity 
Balance at January 1, 2021
  
33,801,045
  
$
34
  
$
244,831
  
$
(218,973
)
 
$
25,892
 
Stock-based compensation  
-
   
-
   
662
   
-
   
662
 
Issuance of restricted stock  
16,260
   
-
   
-
   
-
   
-
 
Net loss  
-
   
-
   
-
   
(2,418
)
  
(2,418
)
Balance at March 31, 2021
  
33,817,305
   
34
   
245,493
   
(221,391
)
  
24,136
 
Stock-based compensation  
-
   
-
   
581
   -   
581
 
Issuance of restricted stock  
71,934
   
-
   
-
   -   
-
 
Net income  
-
   
-
   
-
   
1,082
   
1,082
 
Balance at June 30, 2021
  
33,889,239
  

34
  

246,074
  

(220,309
)
 

25,799
 
Stock-based compensation
  -   -   320   -   320 
Exercise of stock options
  329,076   -   -   -   - 
Issuance of restricted stock
  146,364   -   -   -   - 
Issuance of warrants
  -   -   585   -   585 
Net loss
  -   -   -   (521)  (521)
Balance at September 30, 2021  34,364,679  $34  $246,979  $(220,830) $26,183 

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

4
STRATA Skin Sciences, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

  
For the Nine Months Ended
September 30,
 
  2022
  2021
 
Cash flows from operating activities:      
Net loss 
$
(5,389
)
 
$
(1,857
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:        
Amortization of intangible assets
  
2,155
   
1,113
 
Amortization of operating lease right-of-use assets  
248
   
261
 
Depreciation and amortization
  1,816   1,576 
Amortization of deferred financing costs and debt discount
  116   - 
Provision (recoveries) for doubtful accounts  
24
   
(26
)
Stock-based compensation  
1,275
   
1,563
 
Loss on disposal of property and equipment
  52   73 
Gain on debt extinguishment  -   (2,028)
Deferred taxes  
-
   
12
 
Changes in operating assets and liabilities:        
Accounts receivable  
(246
)
  
(181
)
Inventories  
(1,616
)
  
219
 
Prepaid expenses and other assets  
(110
)
  
(243
)
Accounts payable  
1,547
   
(284
)
Accrued expenses and other liabilities  
(267
)
  
858
 
Deferred revenues
  
(472
)
  
58
 
Operating lease liabilities  
(236
)
  
(275
)
Net cash (used in) provided by operating activities  
(1,103
)
  
839
 
         
Cash flows from investing activities:        
Purchase of property and equipment  (2,037)  (2,523)
Cash paid in connection with TheraClear asset acquisition  (631)  - 
Cash paid in connection with Ra Medical asset acquisition
  -   (3,473)
Net cash used in investing activities  (2,668)  (5,996)
         
Cash flows from financing activities:        
Proceeds from  long-term debt
  -   8,000 
Payment of deferred financing costs  -   (133)
Repayment of note payable  -   (7,275)
Repayment of long-term debt  -   (500)
Net cash provided by financing activities  -   92 
         
Net decrease in cash, cash equivalents and restricted cash  
(3,771
)
  
(5,065
)
Cash, cash equivalents and restricted cash, beginning of period  
12,586
   
18,112
 
         
Cash, cash equivalents and restricted cash, end of period 
$
8,815
  
$
13,047
 
         
Cash and cash equivalents 
$
7,454
  
$
13,047
 
Restricted cash  
1,361
   
-
 
  
$
8,815
  
$
13,047
 
Supplemental disclosure of cash flow information:        
Cash paid for interest 
$
523
  
$
109
 
Supplemental disclosure of non-cash operating, investing and financing activities:        
Change in operating lease right-of-use assets and liability due to amended lease
 $446  $- 
Inventories acquired in connection with TheraClear asset acquisition $71  $- 
Intangible assets acquired in connection with TheraClear asset acquisition $10,182  $- 
Contingent consideration issued in connection with TheraClear asset acquisition $9,122  $- 
Common stock issued in connection with TheraClear asset acquisition
 $500  $- 
Transfer of property and equipment to inventories $486  $- 
Fair value of warrants issued in connection with debt $-  $585 
Assumed deferred revenue in connection with Ra Medical asset acquisition $-  $1,841 

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

5
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 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 DeviceTherapy System to broaden its opportunities with expansion potential in the acne care market. The Company markets the device under the brand name TheraClear® X.X.

The XTRAC is an ultraviolet light excimer laser system utilized to treat psoriasis, vitiligo and other skin diseases. The XTRAC excimer laser system received clearance from the United States Food and Drug Administration (the “FDA”) in 2000. As of September 30, 2022,March 31, 2023, there were 899916 XTRAC systems placed in dermatologists’dermatologists’ offices in the United States and 3938 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.

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

The TheraClear® Acne ClearingTherapy 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 has been transitioning its international dermatology procedures equipment sales through its master distributor to a direct distribution model for equipment sales and recurring revenue on a country-by-country basis, primarily inbasis. In January 2022, the Middle EastCompany’s agreement with its master distributor expired. The Company has signed distributor contracts by year as follows: 2019 – Korea, 2020 – Japan, 2021 – China, Israel, Saudi Arabia, Kuwait, Oman, Qatar, Bahrain, UAE, Jordan, Iraq and Asia.
2023 – Mexico.

COVID-19 Pandemic
In late 2019, there was an outbreak of a new strain of coronavirus (“COVID-19”) which became a global pandemic. TheSince March 2020, the COVID-19 pandemic has negatively impacted business conditions in the global economy,industry in which the Company operates, disrupted global supply chains, constrained workforce participation and created significant volatility and disruption of financial markets. In addition, theThe pandemic led to the suspension of elective procedures in the U.S. and to the temporary closure of many physician practices, which are ourthe Company’s primary customers. While manymost offices have reopened, some physician 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 restrictionsbut not limited to, impact on business operations, supply chains and transportation, anytransport, and governmental and societal responses, thereto, including legislative or regulatory changes as well as the percentage 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, and other restrictions became prevalent in the United States, thisThe COVID-19 pandemic has had a negative impact on the Company’s recurring revenue modelresults of operations and its financial positionperformance through the first quarter of 2023, and the Company expects it will continue to have a negative impact on revenues, earnings and cash flow. The virus has disruptedflows until such time as its customers adjust to the supply chains world-wide whichpandemic’s ramifications. Some physician offices continue to experience staffing issues, and the Company depends upon to provide a steady sourcebelieves these shortages of components to manufacturetrained personnel have negatively impacted its business. Accordingly, current results and repair the Company’s devices. To mitigate the impactfinancial conditions discussed herein may not be indicative of COVID-19, the Company took a variety of measures to ensure the availabilityfuture operating results 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 is complying with federal and local regulations at its facilities. In addition, the Company created and executed programs utilizing its direct-to-consumer advertising and call center to contact patients and partner clinics to restart the Company’s partners’ businesses. In October 2021, the Company implemented a policy whereby all Company employees are required to be vaccinated or complete weekly COVID-19 testing.trends.

See Note 2, Liquidity for discussion on Company liquidity.

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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)
Russia-Ukraine War  
Prior to the outbreak of the Russia-Ukraine War, Ukraine was the largest exporter of noble gases including neon, krypton, and xenon. Historically, Ukraine has been the source of a significant amount of gas supplied to the Company by its contract suppliers. Neon gas is essential to the proper functioning of the Company’s lasers. The Company’s suppliers have been resourceful in continuing to supply gases to the Company but cannot assure it that the supply will not remain uninterrupted. The reduced supply and war have raised the price of gas significantly worldwide. Additionally, the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 has led to a further tightening of rare gas supplies as semiconductor chip manufacturers reconfigure their supply chains to address the need to secure their own supplies of rare gases for use in the manufacture of computer chips, while struggling with the disruptions caused by this war.

See Note 2, Liquidity for discussion on Company liquidity.
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.

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, 20212022 has been derived from the audited consolidated financial statements at that date. Operating results and cash flows for the three and nine months ended September 30, 2022March 31, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 20222023 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”) have been condensed or omitted in accordance with the rules and regulations for interim reporting of the SEC. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20212022 (the “2021“2022 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 dataamounts 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 condensed consolidated 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 20212022 Form 10-K, and there have been no changes to the Company’s significant accounting policies during the ninethree months ended September 30, 2022.March 31, 2023.

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 the reported amounts reported of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amountamounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The Company’s significant estimates and be based on events different from those assumptions. As of September 30, 2022, the more significant estimatesjudgments include revenue recognition with respect to deferred revenues and the contract term and valuation allowances of accounts receivable, inputs used when evaluating goodwill for impairment, inputs used in the valuation of acquired intangible assets,contingent consideration, state sales and use tax accruals, the estimated useful lives of intangible assets, and the valuation allowance related to deferred tax assets.

Restricted Cash
As discussed more fully in Note 14, 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. 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 filed an appeal of the Tribunal’s decision, and posted the required appellate bond requiring the posting of cash collateral, with the New York State Appellate Division, and is awaiting for the appellate court to set a briefing and oral argument schedule. The cash collateral is recorded as restricted cash on the condensed consolidated balance sheet. As of September 30, 2022, the Company had a restricted cash balance of $1,361.

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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)
Fair Value Measurements
The Company measures financial assets and liabilities at fair value at each reporting period using a fair value hierarchy that requires the use of observable inputs and minimizes the use of unobservable inputs. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value 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 – quoted market prices in active markets for identical assets or liabilities.
 •
Level 2 – observable inputs 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 observable or can be corroborated by observable market 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 the asset or liability.
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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)
The fair values of cash and cash equivalents and restricted cash are based on their respective demand values, which are equal to the carrying values. The carrying values of all short-term monetary assets and liabilities are estimated to approximate their fair values due to the short-term nature of these instruments. As of September 30, 2022March 31, 2023 and December 31, 2021,2022, the carrying value of the Company’s long-term debt approximated its fair value due to its variable interest rate.

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. The activity in the warranty accrual during the three months ended March 31, 2023 and 2022 is summarized as follows:

  Three Months Ended March 31, 
  2023  2022 
Balance, beginning of period $207  $79 
Additions  27   34 
Expirations and claims satisfied  (5)  (14)
Total  229   99 
Less current portion within accrued expenses and other current liabilities  (152)  (66)
Balance within deferred revenues and other liabilities $77  $33 
Net Loss Per Share
Basic net loss per share of common stock is computed by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during each period. Diluted loss per share of 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 common stock which would result in the issuance of incremental shares of common stock. For diluted net loss per share, the weighted-average number of shares of common stock 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 following potentially dilutive securities have been excluded from the computation of diluted weighted-average shares of common stock outstanding, as of September 30, 2022 and 2021, as they would be anti-dilutive:
  September 30,
 
  2022  2021 
Restricted stock units
  278,004   144,497 
Stock options
  4,544,714   3,963,889 
Common stock warrants  373,626   373,626 
Total  5,196,344   4,482,012 

  March 31, 
 
 2023
  2022
 
Restricted stock units
  119,597   89,681 
Stock options
  4,464,714   4,434,714 
Common stock warrants  373,626   373,626 
Total
  4,957,937
   4,898,021 

Accounting Pronouncements Recently Adopted
In May 2021,June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting StandardsStandard 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, 2021. The adoption of this guidance on January 1, 2022 did not have a material effect on the 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)
Recent Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13,2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended subsequently by ASUs 2018-19,2019-04,2019-05,2019-10,2019-112018-19, 2019-04, 2019-05, 2019-10, 2019-11 and 2020-03.2020-03. 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 2022. The adoption is permitted. The Company doesof this guidance on January 1, 2023 did not believe this will have a material effect on itsthe 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)
In March 2020, the FASB issued ASU 2020-04,2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting aandnd in January 2021, the FASB issued ASU 2021-01,2021-01, 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. 2024, as further amended by ASU 2022-06. The Company continues to evaluate the temporary expedients and options available underadoption of this guidance andis not expected to have a material effect on the effects of these pronouncements and,condensed consolidated financial statements as the Company does not have any hedging activities, does not believe this will have a material effect on its condensed consolidated financial statements.
activities.

Recent Accounting Pronouncements Not Yet Adopted
In August 2020, the FASB issued ASU 2020-06,2020-06, 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 for annual periods, including interim periods, beginning after December 15,2023 and early adoption is permitted. The Company does not currently engage in contracts covered by this guidance and does not believe it will have a material effect on the Company’s condensed consolidated financial statements, but it could in the future.

Note 2
Liquidity:
 
The Company has been negatively impacted by the ongoing COVID-19 pandemic, has historically experienced recurring losses, and has been dependent on raising capital from the sale of securities in order to continue to operate was requiredand to restrict cash for potential sales tax liabilities (see Notes 1Note 14, Commitments and 14) and refinanced its debt at a lower interest rate. During the COVID-19 pandemic, the Company received cash proceeds from a Paycheck Protection Program (“PPP”Contingencies) loan, which was forgiven, and an Economic Injury Disaster Loan (the “EIDL loan”) that was repaid at the time the Senior Term Facility was entered into with MidCap Financial Trust in September 2021 (Note 9). Additionally, inIn 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. Management believes that the Company’s cash and cash equivalents, combined with the anticipated revenues from the sale or use of its products and operating expense management, will be sufficient to satisfy the Company’s working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with its existing operations for at least the next 12 months following 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 outbreakpandemic and the Russia-Ukraine War on the financial markets, supply chain disruptions and rising interest rates, could interfere with the Company’s ability to access financing and on favorable terms.

Note 3
Revenue Recognition:

Revenues from the Company’s dermatology recurring procedures customers are earned by providing physicians with its laser productsdermatology devices and charging the physicians a fee for a fixed number of treatment sessions or a fixed fee for a specified period of time not to exceed an agreed upon number of treatments; if that number is exceeded additional fees will have to be paid. The placement of the laser productsdermatology devices at physician locations represents embedded leases which are accounted for as operating leases. For the lasersdermatology devices placed-in service under these arrangements, the terms of the domestic arrangements are generally up to 36 months with automatic one-year renewals and include a termination clause that can be effected at any time by either party with 30 to 60 day notice. Amounts paid are generally non-refundable. Sales of access codes for a fixed number of treatment sessions are considered variable treatment code payments and are recognized as revenue over the estimated usage period of the agreed upon number of treatments. Sales of access codes for a specified period of time and monthly rental fees are recognized as revenue on a straight-line basis as the lasersdermatology devices are being used over the term period specified in the agreement. Variable treatment code payments that will be paid only if the customer exceeds the agreed upon number of treatments are recognized only when such treatments are being exceeded and used. Internationally, the Company generally sells access codes for a fixed amount on a monthly basis to its distributors and the terms are generally 48 months, with termination in the event of the customers’ failure to remit payments timely and include a potential buy-out at the end of the term of the contract. Currently, this is the only foreign recurring revenue. Prepaid amounts recorded in deferred revenuerevenues and customer deposits recorded in accounts payable are recognized as revenue over the lease term in the patterns described above. Pricing is fixed with the customer. With respect to lease and non-lease components, the Company adopted the practical expedient to account for the arrangement as a single lease component.

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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)
Revenues from the 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 determines revenue recognition through the following steps:

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

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

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

The following table summarizes the Company’s expected future undiscounted fixed treatment code payments from internationaldermatology recurring revenue customersprocedures as of September 30, 2022 :March 31, 2023:

Remaining 2022
 
$
313
 
2023
  
1,193
 
Remaining 2023
 
$
914
 
2024
  
835
   
975
 
2025
  
218
   
384
 
2026
  
4
   
166
 
2027
  
4
 
Total 
$
2,563
  
$
2,443
 


Remaining performance obligations related to Accounting 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 exclude any equipment accounted for as leases. As of September 30, 2022,March 31, 2023, the aggregate amount of the transaction price allocated to remaining performance obligations was $583$524, and the Company expects to recognize $358$295 of the remaining performance obligations within one year and the balance over one to three years. Contract assets primarily relate to the Company’s rights to consideration for work completed in relation to its services performed but not billed at the reporting date. The contract assets are transferred to receivables when the rights become unconditional. Currently, the Company does not have any contract assets which have not transferred to a receivable.

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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)
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 September 30, 2022,March 31, 2023, the $358$295 of short-term contract liabilities is presented as deferred revenues and the $225$229 of long-term contract liabilities is presented within deferred revenues and other liabilities on the condensed consolidated balance sheet. For the three months ended September 30,March 31, 2023 and 2022, and 2021, the Company recognized $152$132 and $19, $428, respectively, as revenue from amounts classified as contract liabilities (e.g.(i.e. deferred revenues) as of December 31, 2021 and 2020. For the nine months ended September 30, 2022 and 2021, the Company recognized $790 and $73, respectively, as revenue from amounts classified as contract liabilities (e.g. deferred revenues) as of December 31, 2021 and 2020.2021.

With respect to contract acquisition costs, the Company appliesapplied the practical expedient and expenses these costs immediately.

Note 4
Acquisitions:

TheraClear Asset Acquisition:

In January 2022, the Company acquired certain assets related to the TheraClear Devicesdevices from Theravant Corporation (“Theravant”). The TheraClear asset acquisition will allow the Company to further develop, commercialize and market the TheraClear Devicesdevices 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.

The Company made an upfront cash payment of $500 and issued to Theravant 358,367 shares of common stock with an aggregate value of $500 as of the closing date in connection with the TheraClear asset acquisition. During the fourth quarter of 2022, the Company also made a $500 milestone payment upon the launch of the TheraClear Acne Therapy System, one of the development-related targets. 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 subsequent four-year period, and up to $1,000$500 in future milestone payments upon the achievement of certain development and commercialization related targets. The Company owes Theravant $14 based on gross profit from domestic and international sales during the three months ended March 31, 2023, which is included in accrued expenses and other current liabilities as of March 31, 2023.

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

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

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

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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)
The technology intangible asset is being amortized on a straight-line basis over a period of ten years, to be updated for subsequent changes in the contingent consideration that is allocated to its carrying value. The intangible asset was valued using the relief from royalty method. Significant assumptions used in the relief from royalty method include a 14.5% weighted average cost of capital and 15.0% of 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%, revenue volatility of 45.0%, and a cost of equity of 10.5%. Due 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. Contingent consideration expected to be paid within the next year which consists of $500 paid in October 2022, is classified as current on the condensed consolidated balance sheet.

Pharos Asset Acquisition
In August 2021, the Company acquired certain assets and liabilities related to the U.S. dermatology Pharos business from Ra Medical Systems, Inc. (“Ra Medical”). 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.

The purchase price of $3,700 was paid in cash at the time of acquisition. In addition, the Company assumed certain extended warranty service contracts associated with acquired laser system products. Concurrent with the purchase of the net assets, the Company 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. The Company determined this transaction represented an asset acquisition as substantially all of the value was in the acquired customer list intangible asset as defined by ASC 805. The purchase price was allocated, on a relative fair basis, to the acquired inventories, customer lists and deferred revenue as follows:

Consideration:   
Cash payment $3,700 
Transaction costs  57 
Total consideration $3,757 
     
Assets acquired:    
Inventories $284 
Customer lists intangible asset  5,314 
Total assets acquired 
5,598 
     
Liabilities assumed:    
Deferred revenues – service contracts 
1,841 
Total liabilities assumed 
1,841 
     
Net assets acquired $3,757 



The customer lists intangible asset is being amortized on a straight-line basis over a period of 12 years. As the transaction was accounted for as an asset acquisition, the Company allocated consideration paid to the inventories acquired and the deferred revenues assumed with the remaining consideration paid allocated to the customer lists intangible asset, which also equals its estimated fair value. The intangible asset was valued using an excess earnings model. Significant assumptions used in the excess earnings model include estimated customer sales growth, customer attrition, and weighted average cost of capital of 3%, 5% and 17%, respectively.

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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)
Note 5
Inventories:
 
Inventories consist of the following:
 
 September 30, 2022 December 31, 2021  March 31, 2023 December 31, 2022 
Raw materials and work-in-process 
$
5,426
  
$
3,201
  
$
5,295
  
$
5,418
 
Finished goods  
236
   
288
   
400
   
129
 
Total inventories 
$
5,662
  
$
3,489
  
$
5,695
  
$
5,547
 

Work-in-process is immaterial, given the Company’s typically short manufacturing cycle and therefore, is included with raw materials.
 
Note 6
Property and Equipment, net:
 
Property and equipment consist of the following:
 
 September 30, 2022  December 31, 2021  March 31, 2023  December 31, 2022 
Lasers placed-in-service 
$
27,360  $25,949 
Dermatology devices placed-in-service 
$
29,988  $28,790 
Equipment, computer hardware and software  293   238   293   293 
Furniture and fixtures  235   213   235   235 
Leasehold improvements  80   254   115   136 
  27,968   26,654   30,631   29,454 
Accumulated depreciation and amortization  (21,402
)
  (19,771
)
  (22,449
)
  (21,956
)
Property and equipment, net 
$
6,566  $6,883  
$
8,182  $7,498 

Depreciation and amortization expense was $592$677 and $575$625 for the three months ended September 30,March 31, 2023 and 2022, and 2021, respectively. Depreciation and amortization expense was $1,816 and $1,576 for the nine months ended September 30, 2022 and 2021, respectively.
 
Note 7
Intangible Assets, net:
Intangible assets consist of the following as of March 31, 2023 and December 31, 2022:
  Balance  
Accumulated
Amortization
  
Intangible
Assets, net
 
March 31, 2023         
Core technology $5,700  $(4,418) $1,282 
Product technology  12,182   (3,273)  8,909 
Customer relationships  6,900   (5,348)  1,552 
Tradenames  1,500   (1,163)  337 
Pharos customer lists  5,314   (720)  4,594 
  $31,596  $(14,922) $16,674 
             
December 31, 2022            
Core technology $5,700  $(4,275) $1,425 
Product technology  12,182   (3,018)  9,164 
Customer relationships  6,900   (5,175)  1,725 
Tradenames  1,500   (1,125)  375 
Pharos customer lists  5,314   (609)  4,705 
  $31,596  $(14,202) $17,394 


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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)
Note 7
Intangible Assets, net:
Intangible assets consist of the following as of September 30, 2022:
  Balance  
Accumulated
Amortization
  
Intangible
Assets, net
 
Core technology
 
$
5,700
  
$
(4,133
)
 
$
1,567
 
Product technology
  
12,182
   
(2,764
)
  
9,418
 
Customer relationships
  
6,900
   
(5,003
)
  
1,897
 
Tradenames
  
1,500
   
(1,088
)
  
412
 
Pharos customer lists  5,314
   (498)  4,816
 
  
$
31,596
  
$
(13,486
)
 
$
18,110
 

Intangible assets consist of the following as of December 31, 2021:

  Balance  
Accumulated
Amortization
  
Intangible
Assets, net
 
Core technology
 
$
5,700
  
$
(3,705
)
 
$
1,995
 
Product technology
  
2,000
   
(2,000
)
  
-
 
Customer relationships
  
6,900
   
(4,485
)
  
2,415
 
Tradenames
  
1,500
   
(975
)
  
525
 
Pharos customer lists
  5,314
   (166)  5,148
 
  
$
21,414
  
$
(11,331
)
 
$
10,083
 

Amortization expense was $719$720 and $408$696 for the three months ended September 30,March 31, 2023 and 2022, and 2021, respectively. Amortization expense was $2,155 and $1,113 for the nine months ended September 30, 2022 and 2021, respectively.
 
Finite-lived intangible assets are tested for impairment when events or changes in circumstances indicate that the carrying value of the asset group may not be recoverable. The Company recognizes an impairment loss when and to the extent that the recoverable amount of an asset group is less than its carrying value. There were no impairment charges for the three and nine months ended September 30, 2022March 31, 2023 or 2021.2022.

The following table summarizes the estimated future amortization expense for the above intangible assets for the next five years:
 
Remaining 2022
 
$
717
 
2023
  
2,871
 
Remaining 2023
 
$
2,151
 
2024
  
2,871
   
2,871
 
2025
  
2,166
   
2,166
 
2026
  
1,461
   
1,461
 
2027
  
1,461
 

14
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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)
Note 8
Accrued Expenses and Other Current Liabilities:

Accrued expenses and other current liabilities consist of the following:

 September 30, 2022  December 31, 2021 
       March 31, 2023  December 31, 2022 
Warranty obligations $118  $59  $152  $136 
Compensation and related benefits  1,379   2,052   2,165   1,997 
State sales, use and other taxes  3,742   3,697   4,043   3,986 
Professional fees and other  836   569   189   436 
Total accrued expenses and other current liabilities $6,075  $6,377  $6,549  $6,555 

Note 9
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 $8,000$8.0 million senior term loan that was drawn upon by the Company upon executing the agreement. Borrowings under the Senior Term Facility bear interest at LIBOR (with a LIBOR floor rate of 0.50%) plus 7.50% per year and mature 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 permitprovide MidCap Financial Trust’s consent to the acquisition of TheraClear Devices (Note 4). In September 2022, the Company amended the facility to transition, upon the cessation of LIBOR, to one-month Secured Overnight Financing Rate (“SOFR”), or such other applicable period, plus 0.10%, with a floor of 0.50%.

The Company may voluntarily prepay the outstanding term loan, with such prepayment at least $5,000,$5.0 million, 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 12 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 12 months and 24 months after September 30, 2021, (iii)(ii) 2.00% of the outstanding principal prepaid or required to be prepaid (whichever is greater), if the prepayment is made between 24 months and 36 months after September 30, 2021, or (iv)(iii) 1.00% of the outstanding principal prepaid or required to be prepaid (whichever is greater), if the prepayment is made after 36 months after September 30, 2021 and prior to the maturity date.

12
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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)
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 have a specified minimum amount of net revenue for the trailing 12-month period, with compliance measured on the last day of each fiscal quarter beginning on September 30, 2021. At September 30, 2022,March 31, 2023, the minimum net revenue threshold was $27,000.$28,500. The minimum net revenue threshold will increase to $30,000 by December 31, 2023. At September 30, 2022,March 31, 2023, the Company was in compliance with all financial and nonfinancial covenants within the Senior Term Facility.

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)(vi) change of control, (vii) bankruptcy and insolvency, (viii) impairment of security, (xi)(ix) regulatory matters, (xii)(x) failure to remain a publicly traded company, and (xiii)(xi) 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 September 30, 2022,At March 31, 2023, no event of default had occurred, and the Company believed that events or conditions having a material adverse effect, giving rise to an acceleration of any amounts outstanding under the Senior Term Facility, had not occurred and was remote.

15
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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)
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’s common stock at an initial exercise price of $1.82 per share. The warrants arewarrant is equity classified and areis exercisable at any time on or prior to the tenth anniversary of theirits issue date. The estimated fair value of the warrantswarrant was $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 1.50% and (iv) no estimated dividend yield. In addition, the Company incurred third party costs and lender fees of $133. The proceeds were allocated on a basis that approximates the relative fair value method. The fair valuevalues of the warrantswarrant and fees incurred were recorded as a debt discount and are being recognized as interest expense over the lifeterm of the Senior Term Facility using the effective-interest method. The unamortized debt discount was $565$483 as of September 30, 2022.March 31, 2023. The Company recognized interest expense of $244 and $651$286 during the three and nine months ended September 30, 2022,March 31, 2023, of which $40 and $116$41 was related to the amortization of the debt discount fordiscount. The Company recognized interest expense of $199 during the three and nine months ended September 30, 2022.March 31, 2022, of which $37 thousand was related to the amortization of the debt discount.


Future minimum principal payments at September 30, 2022March 31, 2023 are as follows:

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

Note 10
Stock-based Compensation:

The Company’s 2016 Omnibus Incentive Stock Plan (“2016 Plan”), as amended, has reserved up to 7,832,651 shares of common stock for future issuance. As of September 30, 2022,March 31, 2023, there were 3,123,7063,203,706 shares of common stock remaining available for issuance for awards under the 2016 Plan.
 
The Company measures stock‑based awards at their grant‑date fair value and records compensation expense on a straight‑line basis over the requisite service period of the awards. The Company recorded stock‑based compensation expense of $455$282 and $320$368 for the three months ended September 30,March 31, 2023 and 2022, and 2021, respectively, and $1,275 and $1,563 for the nine months ended September 30, 2022 and 2021, respectively, and stock-based compensation was included within general and administrative expenses in the accompanying condensed consolidated statements of operations. During the three months ended March 31, 2023, the Company also recorded share-based compensation expense of $43 within selling and marketing expenses in the accompanying condensed consolidated statement of operations.
Stock Options

The following table summarizes stock option activity for the nine months ended September 30, 2022:

  
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 September 30, 2022  4,544,714  $1.72   8.3 
Exercisable at September 30, 2022  1,771,742  $1.88   7.4 
Vested and expected to vest  4,544,714  $1.72   8.3 

The weighted‑average grant date fair value of options granted was $1.07 per share during the nine months ended September 30, 2022. As of September 30, 2022, the total unrecognized compensation expense related to unvested stock option awards was $2,678, which the Company expects to recognize over a weighted‑average period of approximately 2.2 years. There was no aggregate intrinsic value of options outstanding and options exercisable at September 30, 2022.

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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)
For the nine months ended September 30, 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%

On March 30, 2022, the Company 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. The market condition was not met and 60,000 of the stock-based options were forfeited during 2022. Stock-based compensation expense for performance condition awards is re-evaluated at each reporting period based on the probability of the achievement of the goal.
DuringStock Options

The following table summarizes stock option activity for the ninethree months ended September 30, 2021, there were 1,557,628 options that were exercised on a cashless basis at $1.12 per share, resulting inMarch 31, 2023:

  
Number of
Shares
  
Weighted Average
Exercise Price
per Share
  
Weighted Average
Remaining
Contractual Term
(in years)
 
Outstanding at January 1, 2023
  4,474,714  $1.72    
Granted
  —  $—    
Exercised
  — $—    
Forfeited and expired
  (10,000) $1.45    
Outstanding at March 31, 2023  4,464,714  $1.72   7.8 
Exercisable at March 31, 2023  2,623,841  $1.82   7.3 
Vested and expected to vest  4,464,714  $1.72   7.8 

As of March 31, 2023, the net issuance of 329,076 shares of common stock.
On February 28, 2021, in connection with the separation of the Company’s Chief Executive Officer,total unrecognized compensation expense related to unvested stock option awards was $1,639, which the Company accelerated the vestingexpects to recognize over a weighted‑average period of all unvestedapproximately 2.1 years. The aggregate intrinsic value of options to purchase sharesoutstanding at March 31, 2023 was $4. There was no aggregate intrinsic value of common stock and extended the period to exercise to August 22, 2021. This acceleration and the extension of the period to vest met the modification criteria for accounting purposes. For these modifications, the Company calculated and recorded additional compensation expense of $173.
options exercisable at March 31, 2023.

Restricted Stock Units

Restricted stock units 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, 2022
  90,540  $1.45 
Unvested at January 1, 2023
  119,597  $0.93 
Granted
  187,464  $0.96   —  $— 
Vested
  (118,543) $1.37   (39,866) $0.93 
Unvested at September 30, 2022  159,461  $0.93 
Unvested at March 31, 2023  79,731  $0.93 

As of September 30, 2022,March 31, 2023, the total unrecognized compensation expense related to unvested restricted stock units was $111,$37, which the Company expects to recognize over a weighted‑average period of 0.75approximately 0.3 years.

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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)
Note 11
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.
No income tax expense was incurred for the three and nine months ended September 30,March 31, 2023 and 2022. Income tax expense of $4 and $12 for the three and nine months ended September 30, 2021, respectively, was comprised primarily of changes in deferred tax liability related to goodwill. Goodwill is an amortizing asset according to tax regulations.
17
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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)
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.

On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022 (“IRA”). The IRA contains certain tax measures, including a corporate alternative minimum tax of 15% on some large corporations and an excise tax of 1% on corporate stock repurchases. The Company is currently evaluating the various provisions of the IRA and does not anticipate a material impact on its condensed consolidated financial statements.

Note 12
Business Segments:

The Company has organized its business into two operating segments to better align its organization based upon the Company’s management structure, products and services offered, markets served and types of customers, as follows. The Dermatology Recurring Procedures segment derives its revenues from the usage of its equipment by dermatologists to perform XTRAC and TheraClear Acne Therapy System procedures. The Dermatology Procedures Equipment segment generates revenues from the sale of equipment, such as lasers, lamp products and lamp products.TheraClear devices. 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) are also not allocated to the operating segments.

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


 Dermatology Recurring Procedures  Dermatology Procedures Equipment  TOTAL 
Three Months Ended March 31, 2023         
Revenues, net
 $5,209  $2,358  $7,567 
Cost of revenues
  2,020   1,159   3,179 
Gross profit
  3,189   1,199   4,388 
Gross profit %
  61.2%  50.8%  58.0%
             
Allocated expenses:            
Engineering and product development  245   70   315 
Selling and marketing  3,353   389   3,742 
Unallocated expenses  —   —   2,917 
   3,598   459   6,974 
(Loss) income from operations  (409)  740   (2,586)
Interest expense  —   —   (286)
Interest income
  —   —   37 
Net (loss) income
 $(409) $740  $(2,835)
Three Months Ended September 30, 2022

  
Dermatology
Recurring
Procedures
  
Dermatology
Procedures
Equipment
  TOTAL 
Revenues, net
 $5,847  $3,566  $9,413 
Costs of revenues  2,057   1,557   3,614 
Gross profit  3,790   2,009   5,799 
Gross profit %  64.8%  56.3%  61.6%
             
Allocated operating expenses:            
Engineering and product development  139   77   216 
Selling and marketing  3,296   458   3,754 
Unallocated operating expenses  -   -   2,615 
   3,435   535   6,585 
Income (loss) from operations
  355  1,474   (786)
Interest expense
  -   -   (244)
Interest income
  -   -   35 
Income (loss) before income taxes
 $355 $1,474  $(995)
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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)
  Dermatology Recurring Procedures  Dermatology Procedures Equipment  TOTAL 
Three Months Ended March 31, 2022
         
Revenues, net $5,067  $1,974  $7,041 
Cost of revenues  2,032   881   2,913 
Gross profit  3,035   1,093   4,128 
Gross profit %  59.9%  55.4%  58.6%
             
Allocated expenses:            
Engineering and product development  126   37   163 
Selling and marketing  3,300   316   3,616 
Unallocated expenses  —   —   2,652 
   3,426   353   6,431 
(Loss) income from operations  (391)  740   (2,303)
Interest expense  —   —   (199)
Net (loss) income
 $(391) $740  $(2,502)
Nine Months Ended September 30, 2022
For the three months ended March 31, 2023 and 2022, depreciation and amortization by reportable segment were as follows:

  
Dermatology
Recurring
Procedures
  
Dermatology
Procedures
Equipment
  TOTAL 
Revenues, net
 $16,496  $9,063  $25,559 
Costs of revenues  6,387   4,252   10,639 
Gross profit  10,109   4,811   14,920 
Gross profit %  61.3%  53.1%  58.4%
             
Allocated operating expenses:            
Engineering and product development  398   190   588 
Selling and marketing  10,225   1,291   11,516 
Unallocated operating expenses  -   -   7,599 
   10,623
   1,481
   19,703
 
(Loss) income from operations
  (514)  3,330
   (4,783)
Interest expense
  -   -   (651)
Interest income
  -   -   45 
(Loss) income before income taxes
 $(514) $3,330  $(5,389)

Three Months Ended September 30, 2021
  Three Months Ended March 31, 
  
2023
  
2022
 
Dermatology recurring procedures 
$
1,213
  
$
1,152
 
Dermatology procedures equipment  
180
   
165
 
Unallocated expenses  
4
   
4
 
Consolidated total 
$
1,397
  
$
1,321
 

  
Dermatology
Recurring
Procedures
  
Dermatology
Procedures
Equipment
  TOTAL 
Revenues, net
 $5,710  $2,001  $7,711 
Costs of revenues  1,512   823   2,335 
Gross profit  4,198   1,178   5,376 
Gross profit %  73.5%  58.9%  69.7%
             
Allocated operating expenses:            
Engineering and product development  333   38   371 
Selling and marketing  3,094   201   3,295 
Unallocated operating expenses  -   -   2,175 
   3,427   239   5,841 
Income (loss) from operations  771   939   (465)
Interest expense
  -   -   (53)
Interest income
  -   -   1 
Income (loss) before income taxes
 $771  $939  $(517)
The following tables present the Company’s revenue disaggregated by geographical region for the three months ended March 31, 2023 and 2022, 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.

  Dermatology Recurring Procedures  Dermatology Procedures Equipment  TOTAL 
Three Months Ended March 31, 2023
         
Domestic $4,847  $496  $5,343 
Foreign  362   1,862   2,224 
Total $5,209  $2,358  $7,567 

Three Months Ended March 31, 2022
         
Domestic $4,689  $695  $5,384 
Foreign  378   1,279   1,657 
Total $5,067  $1,974  $7,041 

Note 13
Significant Customer Concentrations:

For the three months ended March 31, 2023, the Company did not have any customers which accounted for more than 10% of the Company’s revenues. For the three months ended March 31, 2022, the Company had one customer, an international distributor from which it earns dermatology recurring procedures and dermatology procedures equipment revenues, which accounted for more than 10% of the Company’s revenues. Revenues from this customer were $810, or 11.5%, of total net revenues during the three months ended March 31, 2022.

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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)
Nine Months Ended September 30, 2021

  
Dermatology
Recurring
Procedures
  
Dermatology
Procedures
Equipment
  TOTAL 
Revenues, net
 $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  -   -   7,085 

  9,818   727   17,630 
Income (loss) from operations  1,375   1,930   (3,780)
Gain on debt extinguishment
  -   -   2,028 
Interest expense
  -   -   (109)
Interest income
  -   -   16 
Income (loss) before income taxes $1,375  $1,930  $(1,845)

The following tables present the Company’s revenue disaggregated by geographical region for the three and nine months ended September 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 September 30, 2022

  Dermatology Recurring Procedures  Dermatology Procedures Equipment  TOTAL 
Domestic
 
$
5,527
  
$
572
  
$
6,099
 
Foreign
  
320
   
2,994
   
3,314
 
Total
 
$
5,847
  
$
3,566
  
$
9,413
 

Nine Months Ended September 30, 2022

  Dermatology Recurring Procedures  Dermatology Procedures Equipment  TOTAL 
Domestic
 
$
15,393
  
$
1,814
  
$
17,207
 
Foreign
  
1,103
   
7,249
   
8,352
 
Total
 
$
16,496
  
$
9,063
  
$
25,559
 

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
 

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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)
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
 

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 September 30, 2022 as compared to the 2021 Form 10-K.

Note 13
Significant Customer Concentrations:
For the three months ended September 30, 2022 revenues from sales to two of the Company’s distributors were $2,280, or 24.2%, of total revenues for such period. For the three months ended September 30, 2021, there were no customers representing more than 10% of revenues. For the nine months ended September 30, 2022 and 2021, revenues from sales to two and one of the Company’s distributors were $6,053, or 23.7%, and $2,220, or 10.6%, respectively, of total revenues for such periods.

No customer represented more than 10% of totalnet accounts receivable as of September 30, 2022 orMarch 31, 2023. One customer represented 11% of net accounts receivable as of December 31, 2021.2022.

Note 14
Commitments and Contingencies:
 
Leases
The Company recognizes right-of-use assets (“ROU assets”) and operating lease liabilities when it obtains the right to control an asset under a leasing arrangement with an initial term greater than 12 months. The Company 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 one to four years, and one facility lease had a renewal option for two years. The renewal option was initially excluded from the determination of the lease term as it was not reasonably certain of exercise. In August 2022, the Company exercised the renewal option and amended the terms of the option, which has been accounted for as a lease modification. The ROU assets and operating lease liability were remeasured at the modification date, resulting in an increase to both balances of $446 during the nine months ended September 30, 2022. There were no lease modifications during the nine months ended September 30, 2021.


Operating lease costs were $86$106 and $108$113 for the three months ended September 30,March 31, 2023 and 2022, and 2021, respectively. Operating lease costs were $298 and $331 for the nine months ended September 30, 2022 and 2021, respectively. Cash paid for amounts included in the measurement of operating lease liabilities was $93$96 and $113 for the three months ended September 30,March 31, 2023 and 2022, and 2021, respectively. Cash paid for amounts included in the measurement of operating lease liabilities was $320 and $344 for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022,March 31, 2023, the weighted average incremental borrowing rate was 8.91%8.75% and the weighted average remaining lease term was 3.02.6 years. 

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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)
The following table summarizes the Company’s operating lease maturities as of September 30, 2022:
March 31, 2023:


 Amount 
Remaining 2022 
$
98
 
2023  
369
 
Remaining 2023 
$
330
 
2024  
328
   
386
 
2025  146   
195
 
2026  76   55 
Total remaining lease payments  
1,017
  
$
966
 
Less: imputed interest  
(97
)
  
(96
)
Total lease liabilities 
$
920
  
$
870
 

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. AnThe Company received notification that 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 filed an appeal of the Tribunal’s decision and posted the required appellate bond requiring posting cash collateral, with the New York State Appellate Division, and is awaiting for the appellate court to set a briefing andschedule for oral argument schedule.argument.

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

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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)
Legal Matters
In the ordinary course of business, the Company is routinely a defendant in or party to pending and threatened legal actions and proceedings, including actions brought on behalf of various 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.

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 athrough mediation. The mediation scheduled forwas held on February 23, 2023. Litigation, including discovery matters, has been stayed pending2023, and the outcomematter was settled on terms agreeable to the Company. The settlement, which requires the Company to pay $106, is subject to the right of individual class members to opt out of the mediation. No amountsettlement and proceed on their own. As of March 31, 2023, $106 has been accrued for this matter as of September 30, 2022, as the likelihood of a loss has not been deemed probable nor is the amount of any loss estimable.
matter.
Note 15
Subsequent Events:

On October 26, 2022, the Company received written notification (the “Notice”) from The NASDAQ Stock Market (“NASDAQ”) that the closing bid price of its common stock had been below the minimum $1.00 per share for the previous 30 consecutive business days and that the Company, therefore, is not in compliance with the requirements for continued listing on the NASDAQ Capital Market. The Notice provides the Company with an initial period of 180 calendar days, or until April 24, 2023, to regain compliance with the listing rules. The Company will regain compliance if the closing bid price of its common stock is $1.00 per share or higher for a minimum period of ten consecutive business days during this compliance period.

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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, 2021.2022. These risks and uncertainties could cause actual results to differ materially from those projected in forward-looking statements contained in this Report or implied by past results and trends. Forward-looking statements are statements that attempt to forecast or anticipate future developments in our business, financial condition or results of operations and statements 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 andnumber of shares, prices per treatment.treatment, number of treatments and number of devices.
 
Introduction, Outlook, 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 includeconditions, as well as the TheraClear® X Acne ClearingTherapy System utilized in the treatment of mild to moderate inflammatory, comedonal and pustular acne.acne-related skin conditions.
 
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 September 30, 2022,March 31, 2023, there were 899916 XTRAC systems placed in dermatologists’ offices in the United States under our dermatology recurring procedures model, an increase from 890 at the end909 as of December 31, 2021.2022. Under the dermatology recurring procedures model, the XTRAC system is placed in a physician’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. The Pharos excimer laser system holds FDA clearance to treat chronic skin diseases, including psoriasis, vitiligo, atopic dermatitis, and leukoderma.We believe there are approximately 7.58 million people in the United States and up to 125 million people worldwide suffering from psoriasis, and 1% to 2% of the world’s population suffers from vitiligo.

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

The TheraClear® X Acne ClearingTherapy System combines intense pulse light with vacuum (suction) for the treatment of mild to moderate inflammatory acne (including acne vulgaris), comedonal acne and pustular acne. The TheraClear device was cleared by the FDA through the 510(k) process. Currently, there is little insurance reimbursement coverage for acne treatments, such as those provided by TheraClear. Since its official launch in January 2023, over 3,000 TheraClear® X treatments have been sold.

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

COVID-19 Pandemic
 
In late 2019, there was an outbreak of a new strain of coronavirus (“COVID-19”) which became a global pandemic. TheSince March 2020, the COVID-19 pandemic has negatively impacted business conditions in the global economy,industry in which we operate, disrupted global supply chains, constrained workforce participation, and created significant volatility and disruption of financial markets. In addition, theThe pandemic led to the suspension of elective procedures in the U.S. and to the temporary closure of many physician practices, which are our primary customers. While manymost 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 our ability to execute our 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 restrictionsbut not limited to, impact on business operations, supply chains and transportation, anytransport, and governmental and societal responses, thereto, including legislative or regulatory as well as the percentage of the 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.

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Domestically, as the procedures in which our devices are used are elective in nature and as social distancing, travel restrictions, and other restrictions became prevalent in the United States, this had a negative impact on our recurring revenue model and our financial position and cash flow. The virus has disrupted the supply chains 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, and complying with federal and local regulations at our 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-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 COVID-19 pandemic has had ana negative impact on our results of operations and financial performance through fiscal 2022. We experiencedthe first quarter of 2023, and we expect it will continue to have a significant number of cases of a COVID-19 variant amongnegative impact on revenues, earnings, and cash flows until such time as our employees in January 2022 and somecustomers adjust to the pandemic’s ramifications. Some 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.

In August 2021, we acquired certain assets and assumed certain liabilities related
Russia-Ukraine War
Prior to the Pharos U.S. dermatology businessoutbreak of Ra Medical Systems, Inc. (“Ra Medical”)the Russia-Ukraine War, Ukraine was the largest exporter of noble gases including neon, krypton, and xenon. Historically, Ukraine has been the source of a significant amount of gas supplied to us by our contract suppliers. Neon gas is essential to the proper functioning of our lasers. Our supporters have been resourceful in continuing to supply gases to us but cannot assure us that the supply will not remain uninterrupted. The reduced supply and war have raised the price of gas significantly worldwide. Additionally, the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 has led to a further tightening of rare gas supplies as chip manufacturers reconfigure their supply chains to address the need to secure their own supplies of rare gases for an upfront cash paymentuse in the manufacture of $3,700. The Pharos asset acquisition provides uscomputer chips, while struggling 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.disruptions caused by this war.

In January 2022, we acquired certain assets of TheraClear 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 TechnologyTechnologies


•
XTRAC® Excimer Laser. XTRAC received FDA clearance in 2000 and has since become a widely recognized treatment among dermatologists for psoriasis and other skin diseases. The XTRAC System delivers ultra-narrowband ultraviolet B (“UVB”) 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.

25
In the third quarter of 2018, we announced the FDA granted clearance for our Multi Micro Dose (MMD) tip for our XTRAC excimer laser. The MMD Tip accessory is indicated for use in conjunction with the XTRAC laser system to filter the Narrow Band UVB (“NB-UVB”) light at delivery in order to calculate and individualize the maximum non-blistering dose for a particular patient.

In January 2020, we announced the FDA granted clearance of our XTRAC Momentum Excimer Laser Platform.

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


•
VTRAC® Lamp. VTRAC received FDA clearance in 2005 and provides targeted therapeutic efficacy demonstrated by excimer technology with the simplicity of design and reliability of a lamp system.


•
TheraClear® X Acne Treatment Device. The TheraClear® Acne ClearingTherapy System was cleared by the FDA through the 510(k) process and 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

We officially launched our TheraClear® X Acne Therapy System in January 2023, with 44 devices placed in the first quarter of 2023 and over 3,000 TheraClear® X treatments sold.

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Table of Contents
Critical Accounting Policies and Estimates
 
There have been no changes to our critical accounting policies in the ninethree months ended September 30, 2022 except for contingent consideration as described below.March 31, 2023. Critical accounting policies and the significant estimates made in accordance with such policies are regularly discussed with our Audit Committee. Those policies are discussed under “Critical Accounting Policies and Estimates” in our “Management’s 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, 20212022 of our Annual Report on Form 10-K as filed with the SEC on March 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. Due 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.31, 2023.
 
Results of Operations
 
Revenues
The following table presents revenues from our segments for the periods indicated below:
 
  
For the Three Months Ended
September 30,
 
  2022  2021 
Dermatology Recurring Procedures 
$
5,847
  
$
5,710
 
Dermatology Procedures Equipment  
3,566
   
2,001
 
Total Revenues 
$
9,413
  
$
7,711
 

26

 
For the Nine Months Ended
September 30,
 
  2022  2021 
Dermatology Recurring Procedures 
$
16,496
  
$
15,841
 
Dermatology Procedures Equipment  
9,063
   
5,079
 
Total Revenues 
$
25,559
  
$
20,920
 

 For the Three Months Ended March 31, 

 2023  2022 
Dermatology recurring procedures 
$
5,209
  
$
5,067
 
Dermatology procedures equipment  
2,358
   
1,974
 
Total revenues 
$
7,567
  
$
7,041
 

Dermatology Recurring Procedures
The COVID-19 pandemic has had ana negative impact on our results, during 2021 and through fiscal 2022.we expect it will have a negative impact on our revenue given the change in the behavior of our customers and the ultimate consumer of our products and services as a result of the pandemic. Recognized recurring treatment revenue for the three months ended September 30, 2022March 31, 2023 was $5,847,$5,209, which we estimate is approximately 90,00068,000 XTRAC treatments with prices between $65 to $95 per treatment, compared to recognized recurring treatment revenue for the three months ended September 30, 2021March 31, 2022 of $5,710,$5,067, which we estimate is approximately 81,00071,000 XTRAC treatments, with prices between $65 to $95 per treatment. RecognizedIn connection with the launch of the TheraClear Acne Therapy System, there were 58 TheraClear devices placed in dermatologists’ offices in the United States under our recurring treatmentprocedures model as of March 31, 2023, which includes devices placed during the soft launch in the fourth quarter of 2022. Nominal revenue forwas earned from these devices during the ninethree months ended September 30, 2022 was $16,496, which we estimate is approximately 254,000 treatments with prices between $65 to $95 per treatment, compared to recognized recurring treatment revenue for the nine months ended September 30, 2021 of $15,841, which we estimate is approximately 226,000 treatments, with prices between $65 to $95 per treatment.March 31, 2023.
 
Increases in procedures are dependent upon building market acceptance through marketing programs with our physician partners and their patients to show that the XTRAC procedures will be of clinical benefit and will be generally reimbursed by insurers. We believe that several factors have 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. Furthermore, we increased our presence at trade shows throughout the United States during 2022, and we held our national sales meeting for the first time since the onset of the COVID-19 pandemic during the second quarter of 2022.
 
Revenues from dermatology recurring procedures are recognized over the estimated usage period of the agreed upon number of treatments, as the treatments are being used. As of September 30,March 31, 2023 and 2022, and 2021, we deferred net revenues of $2,310$2,103 and $2,107$1,971, respectively, which will be recognized as revenue over the remaining usage period for domestic placements. Higher deferred revenue from the secondfourth quarter of 2022 favorably impacted the thirdfirst quarter of 20222023 as compared to the same period in 2021.first quarter of 2022 when lower deferred revenue negatively impacted that period.
 
Dermatology Procedures Equipment
For the three and nine months ended September 30, 2022,March 31, 2023, dermatology procedures equipment revenues were $3,566 and $9,063, respectively.$2,358. Internationally, we sold 2716 systems (25(12 XTRAC and 24 VTRAC) and 76 systems (66 XTRAC and 10 VTRAC), respectively, during the three and nine months ended September 30, 2022.. Domestically, there were 2 and 3 XTRAC systems sold during the three and nine months ended September 30, 2022, respectively.March 31, 2023. In addition to equipment sales, we recognized approximately $152 and $772, respectively,$80 of deferred service revenue associated with assumed service contracts from Ra Medical during the three and nine months ended September 30, 2022.March 31, 2023.
 
For the three and nine months ended September 30, 2021,March 31, 2022, dermatology procedures equipment revenues were $2,001 and $5,079, respectively.$1,974. Internationally, we sold 1114 systems (3(11 XTRAC and 83 VTRAC) and 27 systems (19 XTRAC and 8 VTRAC), respectively, during the three and nine months ended September 30, 2021.. Domestically, there were zero and 5 XTRACno systems sold during the three and nine months ended September 30, 2021.March 31, 2022. In addition to equipment sales, we recognized approximately $400 of deferred service revenue associated with assumed service contracts from Ra Medical during the three months ended March 31, 2022.

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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
September 30,
 
  2022  2021 
Dermatology Recurring Procedures 
$
2,057
  
$
1,512
 
Dermatology Procedures Equipment  
1,557
   
823
 
Total Cost of Revenues 
$
3,614
  
$
2,335
 

 For the Three Months Ended March 31, 

 2023  2022 
Dermatology recurring procedures 
$
2,020
  
$
2,032
 
Dermatology procedures equipment  
1,159
   
881
 
Total cost of revenues 
$
3,179
  
$
2,913
 


 
For the Nine Months Ended
September 30,
 
  2022  2021 
Dermatology Recurring Procedures 
$
6,387
  
$
4,648
 
Dermatology Procedures Equipment  
4,252
   
2,422
 
Total Cost of Revenues 
$
10,639
  
$
7,070
 
Gross Profit Analysis
The following tables presenttable presents changes in our gross profit for the periods presented below:

Company Profit Analysis 
For the Three Months Ended
September 30,
 
  2022  2021 
Revenues 
$
9,413
  
$
7,711
 
Cost of revenues  
3,614
   
2,335
 
Gross profit 
$
5,799
  
$
5,376
 
Gross profit percentage  
61.6
%
  
69.7
%

Company Profit Analysis
Company Profit Analysis 
For the Nine Months Ended
September 30,
 
  2022  2021 
Revenues 
$
25,559
  
$
20,920
 
Cost of revenues  
10,639
   
7,070
 
Gross profit 
$
14,920
  
$
13,850
 
Gross profit percentage  
58.4
%
  
66.2
%

 For the Three Months Ended March 31, 

 2023  2022 
Revenues 
$
7,567
  
$
7,041
 
Cost of revenues  
3,179
   
2,913
 
Gross profit 
$
4,388
  
$
4,128
 
Gross profit percentage  
58.0
%
  
58.6
%
 
Gross profit increased to $5,799$4,388 for the three months ended September 30, 2022March 31, 2023 from $5,376$4,128 during the same period in 2021.2022. As a percent of revenues, the gross profit was 61.6%58.0% for the three months ended September 30, 2022,March 31, 2023, as compared to 69.7%58.6% for the same period in 2021.2022. 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 $14,920 forprocedures, and higher material costs during the ninethree months ended September 30, 2022 from $13,850 during the same period in 2021. As a percent of revenues, the gross profit was 58.4% for the nine months ended September 30, 2022, as compared to 66.2% for the same period in 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.March 31, 2023.

28
The following tables present changes in our gross profit, by segment, for the periods presented below:
 
Dermatology Recurring Procedures 
For the Three Months Ended
September 30,
 
  2022  2021 
Revenues 
$
5,847
  
$
5,710
 
Cost of revenues  
2,057
   
1,512
 
Gross profit 
$
3,790
  
$
4,198
 
Gross profit percentage  
64.8
%
  
73.5
%

Dermatology Recurring Procedures
Dermatology Recurring Procedures 
For the Nine Months Ended
September 30,
 
  2022  2021 
Revenues 
$
16,496
  
$
15,841
 
Cost of revenues  
6,387
   
4,648
 
Gross profit 
$
10,109
  
$
11,193
 
Gross profit percentage  
61.3
%
  
70.7
%


 For the Three Months Ended March 31, 

 2023  2022 
Revenues 
$
5,209
  
$
5,067
 
Cost of revenues  
2,020
   
2,032
 
Gross profit 
$
3,189
  
$
3,035
 
Gross profit percentage  
61.2
%
  
59.9
%
The primary reasonsreason that gross profit percentage decreasedincreased for the three and nine months ended September 30, 2022March 31, 2023 as compared to the same periods in 2021 were higher amortization of intangible assets due to the Pharos and TheraClear asset acquisitions and higher depreciation expenses and labor costsperiod in 2022 compared to the same periodswas higher absorption of 2021, partiallyoverhead costs, offset by higher recurring procedures sales.depreciation costs due to more XTRAC lasers and new TheraClear devices placed into service.

Dermatology Procedures Equipment 
For the Three Months Ended
September 30,
 
  2022  2021 
Revenues 
$
3,566
  
$
2,001
 
Cost of revenues  
1,557
   
823
 
Gross profit 
$
2,009
  
$
1,178
 
Gross profit percentage  
56.3
%
  
58.9
%

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

 For the Three Months Ended March 31, 
 2022  2021  2023  2022 
Revenues 
$
9,063
  
$
5,079
  
$
2,358
  
$
1,974
 
Cost of revenues  
4,252
   
2,422
   
1,159
   
881
 
Gross profit 
$
4,811
  
$
2,657
  
$
1,199
  
$
1,093
 
Gross profit percentage 
53.1
%
 
52.3
%
  
50.8
%
  
55.4
%

The primary reasonsreason for the decrease in gross profit percentage for the three months ended September 30, 2022March 31, 2023 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 resulting in greater sales of equipment with higher sales margins and the recognition of deferred service revenue associated with assumed service contracts from Ra Medical. The amount of deferred service revenue associated with assumed service contracts from Ra Medical recognized during the third quarter of 2022 compared to the first half of 2022 has decreased as the related service contracts have expired.

The primary reasons for the increase in gross profit percentage for the nine months ended September 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 andwas lower recognition of deferred service revenue associated with assumed service contracts from Ra Medical, partially offset by higher amortization of intangible assets due towhich is decreasing as the Pharos and TheraClear asset acquisitions.
related service contracts expire.

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Engineering and Product Development
For the three months ended September 30, 2022,March 31, 2023, engineering and product development expenses were $216$315 as compared to $371$163 for the three months ended September 30, 2021. For the nine months ended September 30, 2022, engineering and product development expenses were $588 as compared to $1,158 for the nine months ended September 30, 2021.March 31, 2022. Engineering and product development costs during the three and nine-month periodsthree-month period in 20222023 were lowerhigher primarily as a result of reductionan increase in consulting expenses related to future enhancements of costs incurred in connection with developing XTRAC MomentumTM 1.0, our next generation excimer laser system that was commercially launched in February 2022.devices.
 
Selling and Marketing Expenses
For the three months ended September 30, 2022,March 31, 2023, selling and marketing expenses were $3,754$3,742 as compared to $3,295$3,616 for the three months ended September 30, 2021.March 31, 2022. Sales and marketing expenses for the three months ended September 30, 2022March 31, 2023 were higher as compared to the same period in 20212022 primarily due to investments we madean increase in sales and marketing and direct-to-consumer and dermatologists advertising, as well as increased head count and employee-related expenses.
For the nine months ended September 30, 2022, selling and marketing expenses were $11,516 as compared to $9,387 for the nine months ended September 30, 2021. Sales and marketing expenses for the nine months ended September 30, 2022 were higher as comparedcommission rates related to the same period in 2021 primarily due to investments we made in saleslaunch of the TheraClear Acne Therapy System and marketing and direct-to-consumer and dermatologists advertising, as well as increased head count and employee-related expenses. Increased spendinga change in the first nine months of 2022 compared to the same period in 2021 also consistedtiming of our national sales meeting, partially offset by a decrease in advertising costs. Our national sales meeting was held in the first quarter of 2023, compared to the second quarter of 2022, and increased attendance at trade shows.2022.
 
General and Administrative Expenses
For the three months ended September 30, 2022,March 31, 2023, general and administrative expenses increased to $2,615$2,917 from $2,175$2,652 for the three months ended September 30, 2021.March 31, 2022. General and administrative expenses were higher for the three months ended September 30, 2022March 31, 2023 as compared to the same period in 2021,2022 primarily due to higher consulting services.legal and accounting costs.
 
For the nine months ended September 30, 2022, general and administrative expenses increased to $7,599 from $7,085 for the nine months ended September 30, 2021. General and administrative expenses increased during the nine months ended September 30, 2022 as compared to the same period in 2021, primarily due to higher consulting services, offset by higher compensation, severance and recruiting expenses incurred during the first quarter of 2021 as a result of the CEO transition.
Gain on Debt Extinguishment
During the second quarter of 2021, we received notification that our PPP loan had been forgiven and we recorded a gain on debt extinguishment of $2,028 for the nine months ended September 30, 2021.

Interest Expense
Interest expense is primarily attributable to our debt obligations. Interest expense increased to $244$286 for the three months ended September 30, 2022March 31, 2023 from $53$199 for the three months ended September 30, 2021. Interest expense increased to $651 for the nine months ended September 30, 2022 from $109 for the nine months ended September 30, 2021.March 31, 2022. The increases wereincrease was primarily the result of a higher interest rate on theour variable rate Senior Term Facility entered into in September 2021.

30
Non-GAAP Financial Measuresadjusted EBITDA
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, 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.”
 
These non-GAAP disclosures have limitations as an analytical tool, should not be viewed as a substitute for Gross Profit or Net Earnings (Loss) determined in accordance with U.S. GAAP, and should not be considered in isolation or as a substitute for analysis of the Company’s results as reported under U.S. GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. We consider these non-GAAP measures in addition to our results prepared under current accounting standards, but they are not a substitute for, nor superior to, U.S. GAAP measures. These non-GAAP measures are provided to enhance readers’ overall understanding of our current financial performance and to provide further information for comparative purposes. This supplemental presentation should not be construed as an inference that the Company’s future results will be unaffected by similar adjustments to 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 Report is as follows:
 

 
For the Three Months Ended
September 30,
 
  2022  2021 
       
Gross profit $5,799  $5,376 
Amortization of acquired intangible assets  507   144 
Non-GAAP gross profit $6,306  $5,520 
Gross profit percentage  61.6%  69.7%
Non-GAAP gross profit percentage  67.0%  71.6%


 
For the Nine Months Ended
September 30,
 

 2022  2021  For the Three Months Ended March 31, 

       2023  2022 
Gross profit $14,920 $13,850  
$
4,388
  
$
4,128
 
Amortization of acquired intangible assets  1,523   428   
508
   
484
 
Non-GAAP gross profit $16,443 $14,278  
$
4,896
  
$
4,612
 
Gross profit percentage 58.4% 66.2%  
58.0
%
  
58.6
%
Non-GAAP gross profit percentage 64.3% 68.3%  
64.7
%
  
65.5
%

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For the Three Months Ended
September 30,
 

 2022  2021  For the Three Months Ended March 31, 

       2023  2022 
Net loss $(995) $(521) 
$
(2,835
)
 
$
(2,502
)
              
Adjustments:             
Depreciation and amortization 1,311  983   
1,397
   
1,321
 
Amortization of right-of-use asset 67  87 
Amortization of operating lease right-of-use asset  
105
   
89
 
Loss on disposal of property and equipment 17  10   
—
   
17
 
Income tax expense -  4 
Interest expense, net  209   52   
249
   
199
 
Non-GAAP EBITDA 609 615   
(1,084
)
  
(876
)
Stock-based compensation  455   320 
Stock-based compensation expense  
325
   
368
 
Non-GAAP adjusted EBITDA $1,064  $935  
$
(759
)
 
$
(508
)


 
For the Nine Months Ended
September 30,
 

 2022  2021 

      
Net loss $(5,389) $(1,857)
         
Adjustments:        
Depreciation and amortization  3,971   2,689 
Amortization of right-of-use asset  248   261 
Loss on disposal of property and equipment  52   73 
Income tax expense  -   12 
Gain on debt extinguishment  -   (2,028)
Interest expense, net  606   93 
Non-GAAP EBITDA  (512)  (757)
Stock-based compensation  1,275   1,563 
Non-GAAP adjusted EBITDA $763  $806 
Liquidity and Capital Resources
As of September 30, 2022,March 31, 2023, we had $4,595$1,454 of working capital compared to $7,168$4,078 as of December 31, 2021.2022. The change in working capital was primarily the result of a decrease in cash and cash equivalents from both operations and an increase in accounts payable, offset by an increase in inventories, as we investedinvestment in capital assets completedfor the asset acquisitionlaunch of the TheraClear Acne Therapy System. Cash, cash equivalents and bolstered inventories to avoid supply chain disruptions. Cash, restricted cash and cash equivalents were $8,815$4,186 as of September 30, 2022,March 31, 2023, as compared to $12,586$6,795 as of December 31, 2021.2022.

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 $8,000 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. In September 2022, we amended the facility to transition, upon the cessation of LIBOR, to one-month Secured Overnight Financing Rate (“SOFR”), or such other applicable period, plus 0.10%, with a floor of 0.50%.

In January 2022, we acquired certain assets related to the TheraClear devices from Theravant Corporation (“Theravant”). Theravant is eligible to receive up to $3,000 in future earnout payments upon the achievement of certain annual net revenue milestones, up to $20,000 in future royalty payments based upon a percentage of gross profit from future domestic sales ranging from 10-20%, 25% of gross profit from international sales over the subsequent four-year period, and up to $500 in future milestone payments upon the achievement of certain development and commercialization related targets. We owe Theravant $14 based on gross profit from domestic and international sales during the three months ended March 31, 2023

In October 2021, we entered into an equity distribution agreement with an investment bank under which we may sell up to $11,000 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 3.00% 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 September 30, 2022.March 31, 2023.

32
We cannot predict our revenues and expenses in the short term as a result of the COVID-19 pandemic and related governmental responses. responses by our customers and our ultimate consumers as a result thereof. Based on our current business plan, we believe that our cash and cash equivalents, combined with the anticipated revenues from the sale or use of our products and operating expense management, will be sufficient to satisfy our working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with itsour existing operations for at least the next 12 months following the date of the issuance of these unaudited interim condensed consolidated financial statements.  However, if these sources are insufficient to satisfy our liquidity requirements, we may seek to sell additional debt or equity securities or enter into a new credit facility or another form of third-party funding or seek other debt financing. If we raise additional funds by issuing equity or equity-linked securities, our stockholders would experience dilution and any new equity securities could have rights, preferences, and privileges superior to those of holders of our common stock. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. We cannot be assured that additional equity, equity-linked or debt financing will be available on terms favorable to us or our stockholders, or at all. It is also possible that we may allocate significant amounts of capital towards products or technologies for which market demand is lower than expected and, as a result, abandon such efforts. If we are unable to maintain our current financing or obtain adequate additional financing when we require it, or if we obtain financing on terms which are not favorable to us, or if we expend capital on products or technologies that are unsuccessful, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, or we may be required to delay the development, commercialization and marketing of our products.
 
24
Table of Contents
Net cash, cash equivalents and restricted cash used in operating activities was $1,103$1,203 for the ninethree months ended September 30, 2022,March 31, 2023, compared to net cash, provided bycash equivalents and restricted cash used in operating activities of $839$353 for the ninethree months ended September 30, 2021.March 31, 2022. The decreaseincrease in cash flows fromused in operating activities for the ninethree months ended September 30, 2022March 31, 2023 was primarily driven bythe result of an increase in the net loss and a decrease in accounts payable, net of inventories, as we had increased our inventories during 2022 to avoid supply chain disruptions and a decrease in accrued compensation, offset by an increase in accounts payable.disruptions.
 
Net cash, cash equivalents and restricted cash used in investing activities was $2,668$1,406 for the ninethree months ended September 30, 2022,March 31, 2023, compared to net cash used in investing activities of $5,996$1,310 for the ninethree months ended September 30, 2021.March 31, 2022. The decreaseincrease is primarily the result of an increase in capital assets as a result of the asset purchaselaunch of Ra in 2021, offset by the asset purchase of TheraClear in 2022.Acne Therapy System.
 
During the nine months ended September 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 payable and EIDL loan. There were no cash flows from financing activities infor the three months ended March 31, 2023 or 2022.

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 20212022 annual financial statements included in our Annual Report on Form 10-K.

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”)), as of September 30, 2022.March 31, 2023. Based on that evaluation, management has concluded that, as of such date, our disclosure controls and procedures were effective.
 
33
Limitations on the Effectiveness of Controls
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within an organization have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this Report, that our disclosure controls and procedures were effective to provide reasonable assurance that the objectives of our disclosure control system were met.
 
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting in our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

25
Table of Contents
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 Companyus with temporary employees. The complaint alleges various violations of the California Labor Code, including California’s wage and hour laws, relating to certain of our current and former non-exempt employees of the Company.employees. The complaint seeks class status and payments for allegedly unpaid compensation and attorney’s fees. In a related matter, the attorneys in this matter and the proposed class representative, in a letter dated March 12, 2022, to the California Labor & Workforce Development Agency made nearly identical claims seeking the right to pursue a PAGA action against the Companyus 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 athrough mediation. The mediation scheduled forwas held on February 23, 2023. Litigation, including discovery matters, has been stayed pending2023, and the outcomematter was settled on terms agreeable to us. The settlement, which requires us to pay $106, is subject to the right of individual class members to reject the mediation.settlement and proceed on their own.

In the ordinary course of business, the Company is,we are, from time to time, subject to audits performed by state taxing authorities. These actions and proceedings are generally based on the position that the arrangements entered into by the Companyus are subject to sales and use tax rather than exempt from tax under applicable law. Several states have assessed the Companyus an aggregate of $2,375 including penalties and interest for the period from March 2014 through April 2020. AnWe received notification that an administrative state judge in the State of New York issued an opinion in January 2021 finding in favor of the Companyus 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 Companywe 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 CompanyWe filed an appeal of the Tribunal’s decision, and posted the required appellate bond requiring posting cash collateral, with the New York State Appellate Division, and isare awaiting for the appellate court to set a briefingschedule for oral argument.

We are also in another jurisdiction’s administrative process of appeal with respect to the remaining $891 of assessments, and oral argument schedule.the timing of the process has been impacted by the COVID-19 pandemic. If there is a determination that the true object of our recurring revenue model is not exempt from sales taxes and is not a prescription medicine, or we do not have other defenses where we prevail, we may be subject to sales taxes in those particular states for previous years and in the future, plus potential interest and penalties.

Additionally, from time to time in the ordinary course of our business, we may be 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, 2021,2022 and filed with the SEC on March 21, 2022.31, 2023.
 
34
ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds
 
None
 
ITEM 3.Defaults Upon Senior Securities.
 
None.
 
ITEM 4.Mine Safety Disclosures
 
None.
 
ITEM 5.Other Information
 
None.
 
26
Table of Contents
ITEM 6.Exhibits

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)
32.132.1**
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.

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Table of Contents
SIGNATURES

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


STRATA SKIN SCIENCES, INC.




Date   November 9, 2022May 15, 2023
By:
/s/ Robert J. Moccia


 
Name  Name:
Robert J. Moccia

 
Title    Title:
President & Chief Executive Officer

Date   May 15, 2023
By:
/s/ Christopher Lesovitz


 
Name:

Date   November 9, 2022By:/s/ Christopher Lesovitz

 Name  Christopher Lesovitz
Title:

Title    Chief Financial Officer


3628