ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations provides information about our results of operations, financial condition, liquidity and asset quality. This information is intended to facilitate your understanding and assessment of significant changes and trends related to our financial condition and results of operations. This discussion should be read in conjunction with our financial information in our Annual Report on Form 10-K for the year ended December 31, 2023 (“2023 10-K”), and the unaudited 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 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” or “STRATA Skin Sciences”) and can be identified by terminology such as the words “may,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “will,” “could,” “project,” “target,” “potential,” “continue” and similar expressions, and are intended to identify forward-looking statements, as such term is defined in the Private Securities Litigation Reform Act of 1995, and other statements contained in this Report that are not historical facts. Factors that could cause results to differ from those expressed in these forward-looking statements include, but are not limited to, the risks and uncertainties described or referenced in Part I, Item 1A. “Risk Factors,” in the 2023 10-K and in other of our public filings with the SEC, as well as the following:
| • | forecasts of future business performance, consumer trends and macro-economic conditions; |
| • | descriptions of market, competitive conditions, and competitive product introductions; |
| • | descriptions of plans or objectives of management for future operations, products or services; |
| • | actions by the U.S. Food and Drug Administration (“FDA”) or other regulatory agencies with respect to our products or product candidates; |
| • | changes to third-party reimbursement of laser treatments using our devices; |
| • | our estimates regarding the sufficiency of our cash resources, expenses, capital requirements and needs for additional financing and our ability to obtain additional financing; |
| • | our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others; |
| • | anticipated results of existing or future litigation or government actions; |
| • | health emergencies, the spread of infectious disease or pandemics, such as the COVID-19 outbreak; and |
| • | descriptions or assumptions underlying or related to any of the above items. |
Although we believe that the expectations reflected in forward-looking statements are reasonable, such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by forward-looking 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 number of shares, prices per treatment, number of treatments and number of devices.
Introduction, Outlook and Overview of Business Operations
STRATA Skin Sciences 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, as well as the TheraClear® X Acne Therapy System utilized in the treatment of 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 FDA 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, 2024, there were 873 XTRAC systems placed in dermatologists’ offices in the United States under our dermatology recurring procedures model, a decrease from 923 as of December 31, 2023. 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 8 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 TheraClear® X Acne Therapy System combines intense pulse light with vacuum (suction) for the treatment of mild to moderate inflammatory acne (including acne vulgaris), comedonal acne and pustular acne. The TheraClear device was cleared by the FDA through the 510(k) process. Currently, there is little insurance reimbursement coverage for acne treatments, such as those provided by TheraClear.
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.
Post-COVID-19 Pandemic
In late 2019, there was an outbreak of a new strain of coronavirus (“COVID-19”) which became a global pandemic. Since March 2020, the COVID-19 pandemic has negatively impacted business conditions in the industry in which we operate, disrupted global supply chains, constrained workforce participation, and created significant volatility and disruption of financial markets. The pandemic led to the suspension of elective procedures in the U.S. and to the temporary closure of many physician practices, which are our primary customers. While most physician offices have reopened, some of our partner physician practices closed permanently, and the impact of the COVID-19 pandemic and its variants on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frames is ongoing. We will continue to identify and plan around potential future pandemics and disruptions to our business.
Impact of 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 and has historically 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 suppliers have been resourceful in continuing to supply gases to us but cannot assure us that the supply will not remain uninterrupted. The reduced supply and ongoing conflict have also impacted the price of gas 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.
Impact of Middle East Conflict
We have not seen an impact on our distributors’ businesses in the Middle East due to the Middle East conflict, but cannot predict the impact should the conflict continue or develop into a larger war.
Key Technologies
| • | XTRAC® Excimer Laser. XTRAC received FDA clearance in 2000 and has since become a widely recognized treatment among dermatologists for psoriasis and other skin diseases. The XTRAC System delivers ultra-narrowband ultraviolet B (“UVB”) light to affected areas of skin. Following a series of treatments typically performed twice weekly, psoriasis remission can be achieved, and vitiligo patches can be re-pigmented. XTRAC is endorsed by the National Psoriasis Foundation, and its use for psoriasis is covered by nearly all major insurance companies, including Medicare. We estimate that more than half of all major insurance companies now offer reimbursement for vitiligo as well, a figure that is increasing. |
| • | In the third quarter of 2018, we announced the FDA granted clearance for our Multi Micro Dose (MMD) tip for our XTRAC excimer laser. The MMD Tip accessory is indicated for use in conjunction with the XTRAC laser system to filter the Narrow Band UVB (“NB-UVB”) light at delivery in order to calculate and individualize the maximum non-blistering dose for a particular patient. |
| • | In January 2020, we announced the FDA granted clearance of our XTRAC Momentum Excimer Laser Platform. In February 2022, we announced the commercial launch, with the first installation in the U.S. market, of our next generation excimer laser system, XTRAC Momentum® 1.0. |
| • | VTRAC® Lamp. VTRAC received FDA clearance in 2005 and provides targeted therapeutic efficacy demonstrated by excimer technology with the simplicity of design and reliability of a lamp system. |
| • | TheraClear® X Acne Treatment Device. The TheraClear® Acne Therapy System (“TheraClear”) combines intense pulse light with vacuum (suction) for the treatment of mild to moderate inflammatory acne (including acne vulgaris), comedonal acne and pustular acne. |
Critical Accounting Policies and Estimates
There have been no changes to our critical accounting policies in the three months ended September 30, 2024. 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,” as well as in our consolidated financial statements and the footnotes thereto, included in the 2023 10-K.
Revenues
The following table presents revenues from our segments for the periods indicated below:
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2024 | | | 2023 | | | 2024 | | | 2023 | |
| | | | | | | | | | | | |
Dermatology recurring procedures | | $ | 5,381 | | | $ | 5,280 | | | $ | 15,416 | | | $ | 15,945 | |
Dermatology procedures equipment | | | 3,416 | | | | 3,572 | | | | 8,570 | | | | 8,724 | |
Total revenues | | $ | 8,797 | | | $ | 8,852 | | | $ | 23,986 | | | $ | 24,669 | |
Dermatology Recurring Procedures
Recognized recurring treatment revenue for the three months ended September 30, 2024 was $5,381, which we estimate is approximately 64,000 XTRAC treatments with prices between $65 to $95 per treatment, compared to recognized recurring treatment revenue for the three months ended September 30, 2023 of $5,280, which we estimate is approximately 70,000 XTRAC treatments with prices between $65 to $95 per treatment. Recognized recurring treatment revenue for the nine months ended September 30, 2024 was $15,416, which we estimate is approximately 188,000 XTRAC treatments with prices between $65 to $95 per treatment, compared to recognized recurring treatment revenue for the nine months ended September 30, 2023 of $15,945, which we estimate is approximately 210,000 XTRAC treatments with prices between $65 to $95 per treatment. In connection with the launch of TheraClear, there were 135 and 76 TheraClear devices placed in dermatologists’ offices in the United States under our recurring procedures model as of September 30, 2024 and 2023, respectively. Nominal revenue was earned from these devices during the three and nine months ended September 30, 2024 and 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. We reduced our direct-to-patient advertising over the course of 2023, which we believe contributed to a reduction in the number of XTRAC treatments compared to prior periods that continued into 2024. Therefore, our strategy going forward is to increase our direct-to-patient program for XTRAC advertising in the United States, targeting psoriasis and vitiligo patients through a variety of media and through our use of social media such as Facebook and X (formerly Twitter). We monitor the results of our advertising expenditures in this area in order to effectively reach the more than 10 million patients in the United States we believe are afflicted with these diseases.
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, 2024 and 2023, we deferred domestic net revenues of $1,943 and $1,947, respectively, which will be recognized as revenue over the remaining usage period for the related placements. Lower deferred revenue from the fourth quarter of 2023 negatively impacted the first quarter of 2024 as compared to the first quarter of 2023, when higher deferred revenue from the fourth quarter of 2022 positively impacted that period.
Dermatology Procedures Equipment
For the three and nine months ended September 30, 2024, dermatology procedures equipment revenues were $3,416 and $8,570, respectively. Internationally, we sold 20 systems (20 XTRAC and nil VTRAC) and 60 systems (56 XTRAC and 4 VTRAC), respectively, during the three and nine months ended September 30, 2024. Domestically, there were 7 and 12 XTRAC systems sold, respectively, during the three and nine months ended September 30, 2024. In addition to equipment sales, we recognized approximately $53 of previously deferred service revenue associated with assumed service contracts from Ra Medical during the nine months ended September 30, 2024.
For the three and nine months ended September 30, 2023, dermatology procedures equipment revenues were $3,572 and $8,724, respectively. Internationally, we sold 21 systems (19 XTRAC and 2 VTRAC) and 51 systems (44 XTRAC and 7 VTRAC), respectively, during the three and nine months ended September 30, 2023. Domestically, there were 6 and 20 XTRAC systems sold, respectively, during the three and nine months ended September 30, 2023. In addition to equipment sales, we recognized approximately $45 and $185 of previously deferred service revenue associated with assumed service contracts from Ra Medical during the three and nine months ended September 30, 2023, respectively.
Cost of Revenues
The following table presents cost of revenues from our two business segments for the periods listed below:
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2024 | | | 2023 | | | 2024 | | | 2023 | |
| | | | | | | | | | | | |
Dermatology recurring procedures | | $ | 1,847 | | | $ | 2,229 | | | $ | 5,896 | | | $ | 6,454 | |
Dermatology procedures equipment | | | 1,643 | | | | 1,669 | | | | 4,766 | | | | 4,555 | |
Total cost of revenues | | $ | 3,490 | | | $ | 3,898 | | | $ | 10,662 | | | $ | 11,009 | |
Gross Profit Analysis
The following table presents changes in our gross profit for the periods presented below:
Company Profit Analysis
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2024 | | | 2023 | | | 2024 | | | 2023 | |
| | | | | | | | | | | | |
Revenues, net | | $ | 8,797 | | | $ | 8,852 | | | $ | 23,986 | | | $ | 24,669 | |
Cost of revenues | | | 3,490 | | | | 3,898 | | | | 10,662 | | | | 11,009 | |
Gross profit | | $ | 5,307 | | | $ | 4,954 | | | $ | 13,324 | | | $ | 13,660 | |
Gross profit percentage | | | 60.3 | % | | | 56.0 | % | | | 55.5 | % | | | 55.4 | % |
Gross profit increased to $5,307 for the three months ended September 30, 2024 from $4,954 during the same period in 2023. As a percentage of revenues, gross profit was 60.3% for the three months ended September 30, 2024, as compared to 56.0% for the same period in 2023. The increase in gross profit percentage compared to the same period in the prior year was primarily the result of lower amortization costs due to the write-down of the technology intangible asset for the TheraClear devices in the fourth quarter of 2023 in connection with the revaluation of the contingent consideration related to the TheraClear asset acquisition and the sale of refurbished units that have a lower cost of revenues than building new units as part of our stated plan to remove devices from underperforming accounts, partially offset by increased maintenance costs largely driven by TheraClear devices placed into service.
Gross profit decreased to $13,324 for the nine months ended September 30, 2024 from $13,660 during the same period in 2023. As a percentage of revenues, gross profit was 55.5% for the nine months ended September 30, 2024, as compared to 55.4% for the same period in 2023. The increase in gross profit percentage compared to the same period in the prior year was primarily the result of lower amortization costs due to the write-down of the technology intangible asset for the TheraClear devices in the fourth quarter of 2023 in connection with the revaluation of the contingent consideration related to the TheraClear asset acquisition and a decrease in domestic sales with longer warranty periods, leading to a lower amount of deferred revenue for those sales, partially offset by the result of less deferred revenue from the fourth quarter of 2023 recognized in 2024 compared to higher deferred revenue from the fourth quarter of 2022 recognized in 2023, higher depreciation costs due to more XTRAC lasers and TheraClear devices placed into service, a reduction in service billings and the write-off of inventories related to Pharos laser system products that will no longer be needed for warranty purposes due to the expiration of the related warranty service contracts, and a discount on the sale of certain lasers to an international distributor.
The following table presents changes in our gross profit, by segment, for the periods presented below:
Dermatology Recurring Procedures
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2024 | | | 2023 | | | 2024 | | | 2023 | |
| | | | | | | | | | | | |
Revenues, net | | $ | 5,381 | | | $ | 5,280 | | | $ | 15,416 | | | $ | 15,945 | |
Cost of revenues | | | 1,847 | | | | 2,229 | | | | 5,896 | | | | 6,454 | |
Gross profit | | $ | 3,534 | | | $ | 3,051 | | | $ | 9,520 | | | $ | 9,491 | |
Gross profit percentage | | | 65.7 | % | | | 57.8 | % | | | 61.8 | % | | | 59.5 | % |
Gross profit increased to $3,534 for the three months ended September 30, 2024 from $3,051 during the same period in 2023. As a percentage of revenues, gross profit was 65.7% for the three months ended September 30, 2024, as compared to 57.8% for the same period in 2023. The increase in gross profit percentage compared to the same period in the prior year was primarily the result of lower amortization costs due to the write-down of the technology intangible asset for the TheraClear devices in the fourth quarter of 2023 in connection with the revaluation of the contingent consideration related to the TheraClear asset acquisition.
Gross profit increased to $9,520 for the nine months ended September 30, 2024 from $9,491 during the same period in 2023. As a percentage of revenues, gross profit was 61.8% for the nine months ended September 30, 2024, as compared to 59.5% for the same period in 2023. The increase in gross profit percentage compared to the same period in the prior year was primarily due to lower amortization costs due to the write-down of the technology intangible asset for the TheraClear devices in the fourth quarter of 2023 in connection with the revaluation of the contingent consideration related to the TheraClear asset acquisition, partially offset by the result of less deferred revenue from the fourth quarter of 2023 recognized in 2024 compared to higher deferred revenue from the fourth quarter of 2022 recognized in 2023 and higher depreciation costs due to more XTRAC lasers and TheraClear devices placed into service.
Dermatology Procedures Equipment
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2024 | | | 2023 | | | 2024 | | | 2023 | |
| | | | | | | | | | | | |
Revenues, net | | $ | 3,416 | | | $ | 3,572 | | | $ | 8,570 | | | $ | 8,724 | |
Cost of revenues | | | 1,643 | | | | 1,669 | | | | 4,766 | | | | 4,555 | |
Gross profit | | $ | 1,773 | | | $ | 1,903 | | | $ | 3,804 | | | $ | 4,169 | |
Gross profit percentage | | | 51.9 | % | | | 53.3 | % | | | 44.4 | % | | | 47.8 | % |
Gross profit decreased to $1,773 for the three months ended September 30, 2024 from $1,903 during the same period in 2023. As a percentage of revenues, gross profit was 51.9% for the three months ended September 30, 2024, as compared to 53.3% for the same period in 2023. The decrease in gross profit percentage compared to the same period in the prior year was primarily the result of increased maintenance costs largely driven by TheraClear devices placed into service and no recognition of previously deferred service revenue associated with assumed service contracts related to Pharos laser systems products, as the service contracts expired in the first quarter of 2024, partially offset by the sale of refurbished units that have a lower cost of revenues than building new units as part of our stated plan to remove devices from underperforming accounts.
Gross profit decreased to $3,804 for the nine months ended September 30, 2024 from $4,169 during the same period in 2023. As a percentage of revenues, gross profit was 44.4% for the nine months ended September 30, 2024, as compared to 47.8% for the same period in 2023. The decrease in gross profit percentage compared to the same period in the prior year was primarily the result of a reduction in service billings related to Pharos laser system products and the write-off of inventories related to Pharos laser system products that will no longer be needed for warranty purposes due to the expiration of the related warranty service contracts, and a discount on the sale of certain lasers to an international distributor, partially offset by a decrease in domestic sales with longer warranty periods, leading to a lower amount of deferred revenue for those sales.
Engineering and Product Development
For the three months ended September 30, 2024, engineering and product development expenses were $243 as compared to $248 for the three months ended September 30, 2023. Engineering and product development costs were lower during the three-month period in 2024 primarily as a result of a decrease in salaries and outside services.
For the nine months ended September 30, 2024, engineering and product development expenses were $683 as compared to $937 for the nine months ended September 30, 2023. Engineering and product development costs were lower during the nine-month period in 2024 primarily as a result of a decrease in salaries and outside services.
Selling and Marketing Expenses
For the three months ended September 30, 2024, selling and marketing expenses were $3,048 as compared to $3,038 for the three months ended September 30, 2023. Selling and marketing expenses were higher during the three-month period in 2024 primarily as a result of an increase in commissions in the same period, rehiring for certain positions that were previously terminated and our direct to patient advertising campaign aimed at motivating psoriasis and vitiligo patients to seek out XTRAC treatments from our physician partners, partially offset by a decrease in salaries and other employee related expenses due to the reduction in the size of the sales force.
For the nine months ended September 30, 2024, selling and marketing expenses were $9,080 as compared to $10,196 for the nine months ended September 30, 2023. Selling and marketing expenses were lower during the nine-month period in 2024 primarily as a result of a decrease in salaries and other employee related expenses due to the reduction in the size of the sales force, as well as a decrease in commissions due to the decrease in revenues, partially offset by an increase due to our direct to patient advertising campaign aimed at motivating psoriasis and vitiligo patients to seek out XTRAC treatments from our physician partners.
General and Administrative Expenses
For the three months ended September 30, 2024, general and administrative expenses were $3,669 as compared to $2,283 for the three months ended September 30, 2023. General and administrative expenses were higher during the three-month period in 2024 primarily as a result of an increase in our sales tax accrual (see Note 14, Commitments and Contingencies to the Notes to unaudited condensed consolidated financial statements), partially offset by lower stock-based compensation expense and a decrease in the allowance for credit losses.
For the nine months ended September 30, 2024, general and administrative expenses were $8,589 as compared to $7,690 for the nine months ended September 30, 2023. General and administrative expenses were higher during the nine-month period in 2024 primarily as a result of an increase in our sales tax accrual (see Note 14, Commitments and Contingencies to the Notes to unaudited condensed consolidated financial statements) and certain employee related expenses, partially offset by lower stock-based compensation expense, lower accounting and legal expenses and a decrease in the allowance for credit losses.
Loss on Debt Extinguishment
During the second quarter of 2023, we refinanced our Senior Term Facility with MidCap (see Note 8, Long-term Debt to the Notes to unaudited condensed consolidated financial statements) (the “Senior Term Facility”). The new loan was considered substantially different from the original loan and, as such, we recorded a loss on debt extinguishment of $909 during the nine months ended June 30, 2023. During the first quarter of 2024, we amended the Senior Term Facility, which has been accounted for as a debt modification, as the new loan is not considered substantially different from the existing loan. There was no debt extinguishment during the three and nine months ended September 30, 2024.
Interest Expense
For the three months ended September 30, 2024, interest expense was $537 as compared to $528 for the three months ended September 30, 2023. The increase was primarily the result of a higher effective interest rate on our variable rate Senior Term Facility.
For the nine months ended September 30, 2024, interest expense was $1,592 as compared to $1,112 for the nine months ended September 30, 2023. The increase was primarily the result of a higher effective interest rate on our variable rate Senior Term Facility and the additional $7,000 borrowed under our Senior Term Facility on June 30, 2023.
Other Income
During the nine months ended September 30, 2024 we received $864 from the Employee Retention Credit, a refundable tax credit available under the Coronavirus Aid, Relief, and Economic Securities Act (“CARES Act”) that was designed to keep employees on the payroll during the COVID-19 pandemic. There was no such credit received during the three months ended September 30, 2024 or the three and nine months ended September 30, 2023.
Non-GAAP adjusted 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 adjusted EBITDA, “Earnings Before Interest, Taxes, Depreciation, and Amortization.”
This non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for Net Earnings (Loss) determined in accordance with 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 is it necessarily comparable to non-GAAP performance measures that may be presented by other companies. We consider these non-GAAP measures in addition to our results prepared under current accounting standards, but they are not a substitute for, nor superior to, 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 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:
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2024 | | | 2023 | | | 2024 | | | 2023 | |
| | | | | | | | | | | | |
Net loss | | $ | (2,122 | ) | | $ | (1,053 | ) | | $ | (5,589 | ) | | $ | (7,036 | ) |
| | | | | | | | | | | | | | | | |
Adjustments: | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 1,239 | | | | 1,449 | | | | 3,738 | | | | 4,274 | |
Amortization of operating lease right-of-use assets | | | 81 | | | | 89 | | | | 255 | | | | 257 | |
Loss on disposal of property and equipment | | | 19 | | | | 31 | | | | 38 | | | | 55 | |
Interest expense, net | | | 469 | | | | 438 | | | | 1,425 | | | | 964 | |
Non-GAAP EBITDA | | | (314 | ) | | | 954 | | | | (133 | ) | | | (1,486 | ) |
Employee retention credit | | | — | | | | — | | | | (864 | ) | | | — | |
Stock-based compensation expense | | | 26 | | | | 337 | | | | 301 | | | | 1,014 | |
Inventory write-off | | | — | | | | — | | | | 141 | | | | — | |
Loss on debt extinguishment | | | — | | | | — | | | | — | | | | 909 | |
Non-GAAP adjusted EBITDA | | $ | (288 | ) | | $ | 1,291 | | | $ | (555 | ) | | $ | 437 | |
Liquidity and Capital Resources
As of September 30, 2024, we had working capital of $1,834 compared to working capital of $3,369 as of December 31, 2023. The change in working capital was primarily the result of an increase in cash and cash equivalents from proceeds received upon the issuance of common stock, offset by an increase in accrued expenses and other current liabilities and deferred revenues. Cash, cash equivalents and restricted cash were $8,396 as of September 30, 2024, as compared to $8,118 as of December 31, 2023.
In September 2021, we entered into the Senior Term Facility with MidCap, also acting as the administrative agent, and the lenders identified therein and borrowed $8,000 in the form of a senior term loan. The term loan bore interest at LIBOR (with a LIBOR floor rate of 0.50%) plus 7.50% per year. In September 2022, we amended the facility to transition, upon the cessation of LIBOR, to bear interest at one-month Secured Overnight Financing Rate (“SOFR”), or such other applicable period, plus 0.10%, with a floor of 0.50%. In June 2023, we amended the credit facility to: (i) refinance our existing $8,000 term loan, (ii) borrow an additional $7,000, and (iii) provide for an additional $5,000 tranche that can be drawn under certain conditions in 2024. The facility matures on June 1, 2028. Borrowings under the credit facility bear interest at a rate per annum equal to the sum of (a) the greater of (i) the sum of (A) 30-day forward-looking term rate of one month SOFR, as published by CME Group Benchmark Administration Limited, from time to time, plus (B) 0.10%, and (ii) the applicable floor rate of 3.50%, with such sum reset monthly, and (b) 7.50%. We are obligated to make interest-only payments through June 2026. From July 2026 to maturity, we will make principal payments in 24 equal installments. We also amended and restated the existing warrant to allow MidCap to purchase 80,000 shares of our common stock at an exercise price of $8.80 per share for a 10-year period ending June 30, 2033. The loan is senior to all other indebtedness and is secured by substantially all of our assets. We are subject to customary affirmative and negative covenants, including a financial covenant based on minimum net revenue thresholds. Upon an event of default, including a covenant violation, all principal and interest are due on demand.
In February 2024, the parties amended the credit and security agreement in order to, among other things, revise the applicable minimum net revenue threshold financial covenant. For the trailing 12-month periods ending March 31, 2024, June 30, 2024, September 30, 2024 and December 31, 2024, these amounts are set at $29,000, $29,250, $29,500 and $30,000, respectively, and increasing to $33,000 as set forth in such amendment for the trailing 12-month periods thereafter.
In January 2022, we acquired certain assets related to the TheraClear devices from Theravant. Theravant is eligible to receive up to $3,000 in future earnout payments upon the achievement of certain annual net revenue milestones ($1,000 of which is due upon the earlier of achieving a revenue target or July 2025), 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. Through September 30, 2024, we have incurred an aggregate of $122 of royalty and gross profit payments based on gross profit from domestic and international sales.
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. In July 2024, we sold 665,136 shares of our common stock for gross proceeds of approximately $2,100. As of September 30, 2024, we may sell up to an additional $8,900 shares of our common stock under this distribution agreement.
We cannot predict our revenues and expenses in the short term as a result of the COVID-19 pandemic, the ongoing Russia-Ukraine war, the Middle East conflict, supply chain disruptions, rising interest rates, and related responses by our customers and our ultimate consumers as a result thereof. Based on our current business plan, we believe that our cash 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 our existing operations for at least the next 12 months following the date of the issuance of these interim condensed consolidated financial statements. However, if these sources are insufficient to satisfy our liquidity requirements, we may seek to sell additional debt or equity securities or enter into a new credit facility or another form of third-party funding or seek other debt financing. If we raise additional funds by issuing equity or equity-linked securities, our stockholders would experience dilution and any new equity securities could have rights, preferences, and privileges superior to those of holders of our common stock. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. We cannot be assured that additional equity, equity-linked or debt financing will be available on terms favorable to us or our stockholders, or at all. It is also possible that we may allocate significant amounts of capital towards products or technologies for which market demand is lower than expected and, as a result, abandon such efforts. If we are unable to maintain our current financing or obtain adequate additional financing when we require it, or if we obtain financing on terms which are not favorable to us, or if we expend capital on products or technologies that are unsuccessful, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, or we may be required to delay the development, commercialization and marketing of our products.
Net cash used in operating activities was $515 for the nine months ended September 30, 2024, compared to net cash used in operating activities of $1,890 for the nine months ended September 30, 2023. The decrease in cash used in operating activities is primarily the result of a decrease in the net loss, offset by a decrease in non-cash expenses, including a decrease in (i) loss on debt extinguishment as the extinguishment of the Senior Term Facility occurred in 2023, (ii) stock-based compensation expense as a result of fewer grants of awards and more forfeitures in 2024, and (iii) amortization expense related to the write-down of the technology intangible asset for the TheraClear devices in the fourth quarter of 2023 in connection with the revaluation of the contingent consideration related to the TheraClear asset acquisition.
Net cash used in investing activities was $1,132 for the nine months ended September 30, 2024, compared to net cash used in investing activities of $3,301 for the nine months ended September 30, 2023. The decrease is primarily the result of a greater emphasis on refurbishing units that have been recalled from underperforming accounts as part of our stated plan to realign devices, which has a lower cost than building new units.
Net cash provided by financing activities was $1,925 for the nine months ended September 30, 2024, compared to net cash provided by financing activities of $6,861 for the nine months ended September 30, 2023. The financing activity for the nine months ended September 30, 2024 consisted of $1,943 in net proceeds from the issuance of common stock, partially offset by an $18 payment of contingent consideration to Theravant, whereas the cash provided by financing activities in 2023 was primarily due to the refinancing of the Senior Term Facility, pursuant to which we borrowed an additional $6,903, net of financing costs.
Commitments and Contingencies
There were no items that significantly impacted our commitments and contingencies as discussed in the notes to our financial statements included in the 2023 10-K.
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 1, Basis of presentation to the Notes to unaudited condensed consolidated financial statements.
Off-Balance Sheet Arrangements
The Company did not have any off-balance sheet arrangements as of September 30, 2024.
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, 2024. Based on that evaluation, management has concluded that, as of such date, our disclosure controls and procedures were effective.
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.
PART II - Other Information
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.
In the ordinary course of business, we are, from time to time, subject to audits performed by state taxing authorities. These actions and proceedings are generally based on the position that the arrangements entered into by us are subject to sales and use tax rather than exempt from tax under applicable law. The states of New York and California have assessed us an aggregate of $5.2 million including penalties and interest. The audits cover the period from March 2014 through November 2022. We received notification that an administrative state judge in New York issued an opinion finding in favor of us that the sale of XTRAC treatment codes was not taxable as sales tax with respect to that state’s first assessment. This ruling covers $1.8 million of the total $5.2 million of assessments. The relevant taxing authority filed an appeal of the administrative law judge’s finding and, following the submission of legal briefs by both sides and oral argument held in January 2022, on May 6, 2022, we received a written decision from the State of New York Appeals Tribunal (“Tribunal”) overturning the favorable sales tax determination of the administrative law judge. We appealed the Tribunal’s decision to the New York State Appellate Division (“Appellate Division”), and posted the required appellate bond in the form of cash collateral. Oral argument was held by the Appellate Division on January 18, 2024.
On March 8, 2024, we received a decision from the Appellate Division ruling against us in the matter of our sales tax appeal, affirming the Tribunal's ruling that our sale of XTRAC treatment codes is subject to sales tax. The Appellate Division concluded that, through the usage arrangements, our customers had possession of the laser devices and had a license and ability to use the laser devices. The Appellate Division also agreed with the Tribunal that the primary function analysis was not applicable in this matter. On April 11, 2024, we filed a motion for leave to appeal the Appellate Division’s decision to the New York State Court of Appeals (“Court of Appeals”). On October 22, 2024, in an unsigned one-line decision, the Court of Appeals denied our motion to appeal the Appellate Division ruling. Therefore, the adverse decision stands and New York will execute on the appellate bond we posted for $1.3 million. As of September 30, 2024, we have accrued $1.8 million including penalties and interest as a result of the Appellate Division ruling. We are in the administrative process of appeal with respect to the remaining $1.3 million of assessments in the State of New York. We believe that the Appellate Division ruling provides an avenue for challenging the pending audit periods and subsequent periods, provided we can show that the value of the equipment provided to customers is incidental to the overall value of the non-taxable services that are provided.
The State of California has made aggregate assessments of $2.1 million including penalties and interest. The audits cover the period from June 2018 through June 2022. We are in the administrative process of appeal in this jurisdiction as well.
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.
A description of the risks associated with our business, financial conditions and results of operations is set forth in Item 1A of our 2023 10-K for the fiscal year ended December 31, 2023 and filed with the SEC on March 28, 2024.
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.
During the quarter ended September 30, 2024, none of our directors or officers (as defined in Section 16 of the Securities Exchange Act of 1934, as amended) adopted or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement” (each as defined in Item 408(a) and (c) of Regulation S-K).
| Rule 13a-14(a) Certificate of Chief Executive Officer and Acting Chief Financial Officer |
| Certification of Chief Executive Officer and Acting Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* The certifications attached as Exhibit 32.1 accompany this Quarterly Report on Form 10-Q pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | STRATA SKIN SCIENCES, INC. |
| | | |
Date | November 13, 2024 | By: | /s/ Dolev Rafaeli |
| | | Name:
| Dolev Rafaeli |
| | | Title:
| President & Chief Executive Officer (Principal Executive Officer and Acting Chief Financial Officer) |