STRATA Skin Sciences
Annual Report 2017

Plain-text annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-K(Mark One)[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2017OR[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from ______________ to _____________Commission file number: 0-11635STRATA SKIN SCIENCES, INC.(Exact name of registrant as specified in its charter) Delaware(State or other jurisdictionof incorporation or organization) 13-3986004(I.R.S. EmployerIdentification No.) 100 Lakeside Drive, Suite 100, Horsham, Pennsylvania 19044(Address of principal executive offices, including zip code)(215) 619-3200(Issuer's telephone number, including area code)Securities registered under Section 12(b) of the Exchange Act: Title of Each ClassName of Each Exchange on Which Registered Common Stock, par value $0.001 per shareNasdaq Capital Market Securities registered under Section 12(g) of the Exchange Act:None(Title of Class)Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.Yes [ ] No [X]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 1934during 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 filingrequirements for the past 90 days.Yes [X] No [__]Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required tobe submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required tosubmit and post such files).Yes [X] No [__]Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the bestof registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form10-K.Yes [X] No [__]Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [__]Accelerated filer [ ] Non-accelerated filer [__]Smaller reporting company [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes [ ] No [X]The number of shares outstanding of our common stock as of June 30, 2017, was 2,477,743 shares. The aggregate market value of the common stock held bynon-affiliates (2,171,133 shares), based on the closing market price ($2.43) of the common stock as of June 30, 2017 was $5,275,853.As of March 22, 2018, the number of shares outstanding of our common stock was 4,379,425. The closing market price of our common stock as of March 22,2018 was $1.28.Documents Incorporated by Reference None Table of Contents PagePart I Item 1. Business 1Item 1A. Risk Factors 10Item 1B. Unresolved Staff Comments 25Item 2. Properties 26Item 3. Legal Proceedings 26Item 4 Mine Safety Disclosures 26Part II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 26Item 6. Selected Financial Data 27Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 27Item 7A. Quantitative and Qualitative Disclosures About Market Risk 38Item 8. Financial Statements and Supplementary Data 38Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 38Item 9A. Controls and Procedures 38Item 9B. Other Information 39Part III Item 10. Directors, Executive Officers and Corporate Governance 39Item 11. Executive Compensation 45Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 49Item 13. Certain Relationships and Related Transactions and Director Independence 51Item 14. Principal Accounting Fees and Services 52Part IV Item 15. Exhibits, Financial Statement Schedules 53 Signatures 59iCAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTSCertain statements in this Annual Report on Form 10-K, or this Report, are "forward-looking statements." These forward-looking statementsinclude, but are not limited to, statements about the plans, objectives, expectations and intentions of STRATA Skin Sciences, Inc., a Delaware corporation,(referred to in this Report as "we," "us," "our", "registrant" or "the Company") and other statements contained in this Report that are not historical facts.Forward-looking statements in this Report or hereafter included in other publicly available documents filed with the Securities and ExchangeCommission, or the Commission, reports to our stockholders and other publicly available statements issued or released by us involve known and unknownrisks, uncertainties and other factors which could cause our actual results, performance (financial or operating) or achievements to differ from the futureresults, performance (financial or operating) or achievements expressed or implied by such forward-looking statements. Such future results are based uponmanagement's best estimates based upon current conditions and the most recent results of operations. When used in this Report, the words "will, ""expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and similar expressions are generally intended to identify forward-lookingstatements, because these forward-looking statements involve risks and uncertainties. There are important factors that could cause actual results to differmaterially from those expressed or implied by these forward-looking statements, including our plans, objectives, expectations and intentions and otherfactors discussed under "Risk Factors." We undertake no obligation to update such forward-looking statements. These forward-looking statementsinclude, but are not limited to, statements about:•forecasts of future business performance, consumer trends and macro-economic conditions;•descriptions of market and/or competitive conditions;•descriptions of plans or objectives of management for future operations, products or services;•our estimates regarding the sufficiency of our cash resources, expenses, capital requirements and needs for additional financing and our ability toobtain additional financing;•our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;•our ability to obtain and maintain regulatory approvals of our products;•anticipated results of existing or future litigation; and•descriptions or assumptions underlying or related to any of the above items. In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained in this Reportmight not occur. Investors are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Report. Weare not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of newinformation, future events or otherwise. All subsequent forward-looking statements attributable to us or to any person acting on its behalf are expresslyqualified in their entirety by the cautionary statements contained or referred to in this section.PART IItem 1. BusinessOur CompanyOverviewWe are a medical technology company focused on the therapeutic and aesthetic dermatology market. STRATA sales include the following products:XTRAC® laser and VTRAC® excimer lamp systems utilized in the treatment of psoriasis, vitiligo and various other skin conditions; theSTRATAPEN® MicroSystems, a micropigmentation device; and Nordlys, a multi-technology aesthetic laser device for treating vascular and pigmentedlesions. - 1 -In June 2015 we completed the acquisition, the "Acquisition", of the XTRAC® Excimer Laser and the VTRAC® excimer lamp businesses fromPhotoMedex, Inc. The purchase price was $42.5 million plus the assumption of certain business-related liabilities. Prior to the Acquisition the Company'sonly product was the MelaFind® system, or MelaFind, a device for aiding dermatologists in the evaluation of clinically atypical pigmented skin lesions. TheMelaFind® system was to be used when the dermatologist chose to obtain additional information before making a final decision to biopsy in order to rule outmelanoma. MelaFind did not achieve a significant enough level of acceptance by dermatologists to justify the continued investment of our scarce resources.In March 2017, we sent a notice to the 90 owners of MelaFind devices in the United States informing them that, effective September 30, 2017, we no longerhad the resources to continue to support the device and that our inventory of spare parts was being offered for sale to them on a first-come, first-served basis.We have since discontinued all research and development; sales and support activity related to MelaFind. We continue to maintain the patent portfolio forthe related intellectual property, as we believe these assets may have value to a potential developer of similar technology.XTRAC® Systems and VTRAC SystemsThe XTRAC excimer laser technology emits highly concentrated UV light to treat dermatological skin disorders. It received U.S. Food and DrugAdministration ("FDA") clearance in 2000 and has since become a widely recognized treatment for psoriasis, vitiligo and other skin diseases. Psoriasis andvitiligo alone, affect up to 10.5 million people in the U.S. and 190 million people worldwide. VTRAC is a UV light lamp system that works in much the sameway as the XTRAC. It received FDA clearance in August 2005 and CE mark approval in January 2006 and has been marketed exclusively in internationalmarkets.Present in natural sunlight, ultraviolet B ("UVB") is an accepted psoriasis treatment that penetrates the skin to slow the growth of damaged skin cellsthereby placing the disease into remission for a period of time. Studies have shown that the remission time can last 3 to 6 months or longer. In our XTRACsystem, our targeted therapy approach delivers optimum amounts of UVB light directly to skin lesions, sparing healthy tissue. Many peer reviewed studieshave proven that the XTRAC can clear psoriasis faster and produce longer remissions than other UVB modalities, resulting in fewer treatments to produce thedesired result.We market two XTRAC excimer models: the XTRAC Velocity is our most advanced technology which allows clinicians to treat greater surface areas ofpsoriatic disease in a shorter period of time than other technologies. The XTRAC Ultra Plus is also a highly effective model marketed primarily in certaininternational markets. Both the Velocity and the Ultra plus are capable of treating mild, moderate and severe psoriasis, vitiligo, atopic dermatitis andleukoderma.The XTRAC is marketed in the U.S. mainly under a recurring revenue model in which we place the system in the physician's office for no upfrontcharge and generate our revenue on a per-use basis. We estimate that there are roughly 1,000 XTRAC lasers in use in the U.S., of which 753 systems were, asof December 31, 2017, included in the recurring revenue model. The target U.S. audience for XTRAC lasers comprises approximately 3,500 dermatologistswho perform disease management. In markets outside the U.S., the XTRAC laser is marketed primarily as a capital sale through a master internationaldistributor to distributors in twenty-five countries. The VTRAC is marketed exclusively in international markets through the same master internationaldistributor.Studies have concluded that XTRAC treatment leads to significant improvement in psoriasis area and severity scores in as few as 6 to 10 treatments.Treatment protocols recommend that patients receive two treatments per week with a minimum of 48 hours between treatments. Our data shows that XTRAChas an 89% efficacy rate and produces only minimal side effects. In support of its clinical effect, the XTRAC Excimer Lasers have been cited in over 45clinical studies and research programs, with findings published in peer-reviewed medical journals around the world. The products have also been endorsed bythe National Psoriasis Foundation, and their use for psoriasis is covered by nearly all major insurance companies, including Medicare.XTRAC is a reimbursable procedure for psoriasis under three Current Procedural Terminology ("CPT") codes. There are three applicable CPT codesthat differ based on area of treatment only. Insurance Reimbursement to physicians varies based upon insurance company and geography. The national CPTcode reimbursement established by the Center for Medicaid Services (CMS), which forms the basis for most insurance companies' - 2 -reimbursement levels, ranges for the three codes between $150 per treatment to $240 per treatment. (See "Third Party Reimbursement".)Psoriasis Treatment OptionsThere are essentially three main types of psoriasis treatments, as listed below. Topical therapies:These can include corticosteroids, vitamin D3 derivatives, coal tar, anthralin and retinoids, among others, that are sold as acream, gel, liquid, spray, or ointment. The efficacy of topical agents varies from person to person, although these products arecommonly associated with a loss of potency over time as people develop resistance. Phototherapy:This is the area in which we operate. Our XTRAC Excimer Systems are FDA-cleared, reimbursed by insurance, and exhibitnone of the significant side-effects associated with some alternative therapies. Systemic medications:There are a number of prescription medications available for psoriasis, which are given either by mouth or as an injection.The popularity and use of these medications is growing significantly, notwithstanding their potentially severe side-effects. The XTRAC Excimer Lasers are particularly significant and beneficial for moderate and severe psoriasis patients who prefer a noninvasive treatmentapproach without the side effects of invasive, systemic agents, or to patients who have developed a resistance to topical agents. In many cases, patientstreated with topical or systemic therapies are also candidates for phototherapy.Using the XTRAC Excimer Lasers to Treat Vitiligo and Other Skin DiseasesUV light therapy is considered to be an effective and safe treatment for many skin disorders beyond psoriasis. To this effect, the XTRAC technology isFDA cleared for the treatment of not only psoriasis but also vitiligo (a skin pigment deficiency), atopic dermatitis (eczema) and leukoderma, which is alocalized loss of skin pigmentation that occurs after an inflammatory skin condition, such as a burn, intralesional steroid injection, or post dermabrasion.XTRAC technology for vitiligo patients typically requires more therapy sessions than for psoriasis, but is dependent on the severity of the disease. Inthe treatment of vitiligo, the XTRAC functions to reactivate the skin's melanocytes (the cells that produce melanin), which causes pigment to return. To date,there is not sufficient data to confirm how long patients can expect their vitiligo to be in remission after XTRAC therapy. Based on anecdotal reports, webelieve that re-pigmentation may last for several years.Historically, vitiligo treatments had been considered cosmetic procedures by insurance companies, and as such were not reimbursed. However, over thepast several years, there has been a significant increase in insurance coverage for these procedures, and we estimate that currently approximately 50% ofinsurers consider XTRAC treatments to be medically necessary for the treatment of vitiligo and therefore provide coverage.We believe that several factors have limited the growth of the use of XTRAC treatments from those who suffer from psoriasis and vitiligo. Specifically,we believe that awareness of the positive effects of XTRAC treatments has not been high enough among both sufferers and providers; and that the treatmentregimen requiring sometimes up to 12 or more treatments has limited XTRAC use to certain patient populations. Therefore, to address the lack of knowledgeissue, we have a direct to patient advertising campaign aimed at motivating psoriasis and vitiligo patients to seek out XTRAC treatments from our physiciancustomers. Specific advertisements encourage prospective patients to contact our patient advocacy center through telephone or web site whereby we provideinformation on the treatment and insurance coverage, and we ultimately schedule an appointment for the prospective patient to be evaluated by a physicianwithin our customer network, convenient to their location, to determine if they would benefit from XTRAC treatments. We are in the process of a research anddevelopment effort to develop products to assist in the reduction of the number of treatments in the XTRAC treatment protocol to make XTRAC treatmentsgain a wider appeal for those patients who cannot fit the current treatment regimen into their schedules. - 3 -The MelaFind SystemIn November 2011, we received a Pre-Market Approval, or PMA, from the FDA for MelaFind, a non-invasive, point-of-care (i.e. in the doctor's office)instrument to aid in the detection of melanoma, having already received in September 2011 Conformité Européenne ("CE") Mark approval. On March 7,2012, we installed the first commercial MelaFind System. We designed MelaFind to aid in the evaluation of clinically atypical pigmented skin lesions, whena dermatologist chooses to obtain additional information before making a final decision to biopsy in order to rule out melanoma. MelaFind acquires anddisplays multi-spectral (from blue to near infrared) and dermoscopic Red Green Blue ("RGB") digital data from pigmented skin lesions. The MelaFind Systemhas not gained sufficient acceptance by dermatologists to justify continued investment.In March 2017, we sent a notice to the 90 owners of MelaFind devices in the United States informing them that effective September 30, 2017, we nolonger had the resources to continue to support the device and that our inventory of spare parts was being offered for sale to them on a first-come, first-servedbasis. We have since discontinued all research and development; sales and support activity related to MelaFind. We continue to maintain the patent portfoliofor the related intellectual property, as we believe these assets may have value to a potential developer of similar technology.The Nordlys SystemIn March 2017, the Company announced that it had become the US distributor for the Nordlys laser, a device representing the latest technology innon-ablative fractionated laser technology in the medical aesthetic field. This uniquely designed class of laser with patented Dual Mode Filtration ismanufactured in Denmark by Ellipse Global A/S under the brand name Nordlys. Nordlys utilizes the latest advancements in cosmetic and medicaltechnology and offers a superior patient, provider and practice experience. There is no requirement for medications or needles, and little to no downtime.The Nordlys systems have 24 indications cleared to date by the FDA and have the ability to use a multitude of light based technologies all in onecompact platform –SWT (Selective Waveband Technology: the latest evolution and advancements of Intense Pulsed Light), Nd:YAG and the FRAX 1550non-ablative fractionated technology. Nordlys users include leading dermatologists, plastic surgeons and cosmetic physicians with over 6,000 placementsworldwide.The distribution agreement requires certain minimum purchase commitments, which the parties have been negotiating but have not finalized.STRATAPENIn January 2017 the Company entered into an OEM agreement with Esthetic Advisors, LLC to private label the STRATAPEN device.STRATAPEN® MicroSystems is a micropigmentation device that provides advanced technology offering exceptional results. STRATAPEN offers thefollowing differentiating technology and features: •Patent-pending Biolock™ Cartridge •Gamma ray treated and sealed in individual packages •Incorporates seven-step safety system to prevent fluids from entering the motor •Multiple nose cones to facilitate more efficient patient flow •Ability to be reprocessed in autoclave after use •Adjustable speed and depth during the course of treatment •Corded and cordless power options. CompetitionOur XTRAC product line competes with pharmaceutical compounds and methodologies used to treat an array of skin conditions. Such alternativetreatments may be in the form of topical products, systemic medications, and phototherapies from both large pharmaceutical and smaller devices companies.Currently, our XTRAC system is - 4 -believed to be a competitive therapy to alternative treatments on the basis of its recognized clinical effect, minimal side effect profile, cost-effectiveness andreimbursement.The dermatologic laser field is highly competitive. The Nordlys device competes against lasers manufactured by some of the world's leading aestheticlaser manufacturers such as Cutera, Cynosure, Candela, and Syneron-Candela.STRATAPEN competes against a number of micro-needling devices, including those sold under the names DermaPen and Dr. Pen.ManufacturingWe manufacture our XTRAC products at our 28,000 sq. ft. facility in Carlsbad, California. Our California facility is ISO 13485 certified. ISO 13485 isan International standardization written by the International Organization for Standardization, which publishes requirements for a comprehensive qualitymanagement system for the design and manufacture of medical devices. Certification to the standard is awarded by accredited third parties. We believe thatour present manufacturing capacity at these facilities is sufficient to meet foreseeable demand for our products.Research and Development EffortsOur research and development team, including engineers, consists of approximately seven employees. We conduct research and development activitiesat our facility located in Carlsbad, California. Currently, our research and development efforts are focused on the application of our XTRAC system to thetreatment of inflammatory skin disorders.Intellectual PropertyOur policy is to protect our intellectual property by obtaining U.S. and foreign patents to protect technology, inventions and improvements importantto the development of our business. As of December 31, 2017, 28 issued U.S. patents are in force, and many of these patents have foreign counterparts issuedand pending. Of those issued, 10 U.S. patents and one German patent relate to the XTRAC and VTRAC product lines and eighteen U.S. patents, and severalforeign patents related to various aspects of MelaFind technology. Because we have discontinued our sales efforts for MelaFind, as these MelaFind relatedpatents come up for the payment of periodic maintenance fees, we will assess the need to continue to maintain their existence. We have not granted anysignificant licenses with respect to our intellectual property.We also rely on trade secrets and technical know-how in the manufacture and marketing of our products. We require our employees, consultants andcontractors to execute confidentiality agreements with respect to our proprietary information.We believe that our patented methods and apparatus, together with proprietary trade-secret technology and registered trademarks, give us a competitiveadvantage; however, whether a patent is infringed or is valid, or whether or not a patent application should be granted, are all complex matters of science andlaw, and therefore, we cannot be certain that, if challenged, our patented methods and apparatus and/or trade-secret technology would be upheld. If one ormore of our patented methods, patented apparatus or trade-secret technology rights, or our trademark rights, are invalidated, rejected or found unenforceable,that could reduce or eliminate any competitive advantage we might otherwise have had.GovernmentRegulationRegulations Relating to Products and ManufacturingOur products and research and development activities are regulated by numerous governmental authorities, principally the FDA and correspondingstate and foreign regulatory agencies. Any medical device or cosmetic we manufacture and/or distribute will be subject to pervasive and continuingregulation by the FDA. The U.S. Food, Drug and Cosmetics Act, or FD&C Act, and other federal and state laws and regulations govern the pre-clinical andclinical testing, design, manufacture, use, labeling and promotion of medical devices, including our XTRAC, VTRAC Nordlys, and STRATAPEN devices.Product development and approval for medical devices within this regulatory framework takes a number of years and involves the expenditure of substantialresources. - 5 -In the U.S., medical devices are classified into three different classes, Class I, II and III, on the basis of controls deemed necessary to provide areasonable assurance of the safety and effectiveness of the device. Class I devices are subject to general controls, such as facility registration, medical devicelisting, labeling requirements, premarket notification (unless the medical device has been specifically exempted from this requirement), adherence to theFDA's Quality System Regulation, and requirements concerning the submission of device-related adverse event reports to the FDA. Class II devices aresubject to general and special controls, such as performance standards, pre-market notification (510(k) clearance), post-market surveillance, and FDA QualitySystem Regulations. Generally, Class III devices are those that must receive premarket approval by the FDA to provide a reasonable assurance of their safetyand effectiveness, such as life-sustaining, life-supporting and implantable devices, or new devices that have been found not to be substantially equivalent toexisting legally marketed devices.With limited exceptions, before a new medical device can be distributed in the U.S., marketing authorization typically must be obtained from the FDAthrough a premarket notification under Section 510(k) of the FDA Act, or through a premarket approval application under Section 515 of the FDA Act. TheFDA will typically grant a 510(k) clearance if it can be established that the device is substantially equivalent to a predicate device that is a legally marketedClass I or II device (or to pre-amendments Class III devices for which the FDA has yet to call for premarket approvals). We have received FDA 510(k)clearance to market our XTRAC and VTRAC systems for the treatment of psoriasis, vitiligo, atopic dermatitis and leukoderma. The FDA granted theseclearances under Section 510(k) on the basis of substantial equivalence to other technologies that had received prior clearances.For any devices that are cleared through the 510(k) process, modifications or enhancements that could significantly affect the safety or effectiveness ofthe device, or that constitute a major change in the intended use of the device, will require a new 510(k) submission. In August 2003, the FDA granted 510(k)clearance for a significantly modified version of our XTRAC laser, which we have marketed as the XTRAC XL Plus Excimer Laser System. In October 2004,the FDA granted clearance for the XTRAC Ultra (AL 8000) Excimer Laser System and, in March 2008, we received 510(k) clearance for the XTRAC Velocity(AL 10000) Excimer Laser System. These approvals were originally granted to PhotoMedex, Inc. and acquired by us in the June 2015 asset acquisitiontransaction described above.We were required to secure premarket approval for the MelaFind system. A premarket approval application may be required for a Class II device if it isnot substantially equivalent to an existing legally marketed Class I or II device (or a pre-amendments Class III device for which the FDA has yet to call forpremarket approval) or if the device is a Class III premarket approval device by regulation. A premarket approval application must be supported by validscientific evidence to demonstrate a reasonable assurance of safety and effectiveness of the device, typically including the results of clinical trials, benchtests and possibly animal studies. In addition, the submission must include, among other things, the proposed labeling. The premarket approval process canbe expensive, uncertain and lengthy and a number of devices for which FDA approval has been sought by other companies have never been approved formarketing.We are subject to routine inspection by the FDA and, as noted above, must comply with a number of regulatory requirements applicable to firms thatmanufacture medical devices and other FDA-regulated products for distribution within the U.S., including requirements related to device labeling (includingprohibitions against promoting products for unapproved or off-label uses), facility registration, medical device listing, labeling requirements, adherence tothe FDA's Quality System Regulation, good manufacturing processes and requirements for the submission of reports regarding certain device-related adverseevents to the FDA.We are also subject to the radiological health provisions of the FDA Act and the general and laser-specific radiation safety regulations administered bythe Center for Devices and Radiological Health, or CDRH, of the FDA. These regulations require laser manufacturers to file initial, new product, supplementaland annual reports, to maintain quality control, product testing and sales records, to incorporate certain design and operating features (depending on the classof product) in lasers sold to end users pursuant to a performance standard and to certify and appropriately label each laser sold as belonging to one of fourclasses, based on the level of radiation from the laser that is accessible to users. Moreover, we are obligated to repair, replace, or refund the cost of certainelectronic products that are found to fail to comply with applicable federal standards or otherwise are found to be defective. The CDRH is empowered to seekfines and other remedies for violations of the regulatory requirements. To date, we have filed the documentation with the CDRH for our laser productsrequiring such filing and have not experienced any difficulties or incurred significant costs in complying with such regulations. - 6 -We are approved by the European Union to affix the CE Mark to our XTRAC laser and VTRAC lamp systems. This certification is a mandatoryconformity mark for products placed on the market in the European Economic Area, which is evidence that they meet all European Community, or EC,quality assurance standards and compliance with applicable European medical device directives for the production of medical devices. This will enable us tomarket our approved products in all of the member countries that accept the CE Mark. We also will be required to comply with additional individual nationalrequirements that are in addition to those required by these nations. Our products have also met the requirements for marketing in various other countries.Failure to comply with applicable regulatory requirements can result in fines, injunctions, civil penalties, recalls or seizures of products, total or partialsuspensions of production, refusals by the U.S and foreign governments to permit product sales and criminal prosecution.We are or may become subject to various other federal, state, local and foreign laws, regulations and policies relating to, among other things, safeworking conditions, good laboratory practices and the use and disposal of hazardous or potentially hazardous substances used in connection with researchand development.Fraud and Abuse LawsBecause of the significant federal funding involved in Medicare and Medicaid, Congress and the states have enacted, and actively enforce, a number oflaws whose purpose is to eliminate fraud and abuse in federal health care programs. Our business is subject to compliance with these laws.Anti-Kickback LawsIn the U.S., there are federal and state anti-kickback laws that generally prohibit the payment or receipt of kickbacks, bribes or other remuneration inexchange for the referral of patients or other health-related business. The U.S. federal healthcare programs' Anti-Kickback Statute makes it unlawful forindividuals or entities knowingly and willfully to solicit, offer, receive or pay any kickback, bribe or other remuneration, directly or indirectly, in exchangefor or to induce the purchase, lease or order, or arranging for or recommending purchasing, leasing, or ordering, any good, facility, service, or item for whichpayment may be made in whole or in part under a federal healthcare program such as Medicare or Medicaid. The Anti-Kickback Statute covers "anyremuneration," which has been broadly interpreted to include anything of value, including for example gifts, certain discounts, the furnishing of freesupplies, equipment or services, credit arrangements, payments of cash and waivers of payments. Several courts have interpreted the statute's intentrequirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, thearrangement can be found to violate the statute. Penalties for violations include criminal penalties and civil sanctions such as fines, imprisonment andpossible exclusion from Medicare, Medicaid and other federal healthcare programs. In addition, several courts have permitted kickback cases brought underthe Federal False Claims Act to proceed, as discussed in more detail below.The reach of the Anti-Kickback Statute was broadened by the Patient Protection and Affordable Care Act of 2010 (the "ACA"), which, among otherthings, amends the intent requirement of the federal Anti-Kickback Statute. Pursuant to the statutory amendment, a person or entity no longer needs to haveactual knowledge of this statute or specific intent to violate it in order to have committed a violation. In addition, the ACA provides that the government mayassert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim forpurposes of the civil False Claims Act (discussed below) or the civil monetary penalties statute, which imposes penalties against any person who isdetermined to have presented or caused to be presented a claim to a federal health program that the person knows or should know is for an item or service thatwas not provided as claimed or is false or fraudulent.Because the Anti-Kickback Statute is broadly written and encompasses many harmless or efficient arrangements, Congress authorized the Office ofInspector General of the U.S. Department of Health and Human Services, or OIG, to issue a series of regulations, known as "safe harbors." For example, thereare regulatory safe harbors for payments to bona fide employees, properly reported discounts and rebates, and for certain investment interests. Although anarrangement that fits into one or more of these exceptions or safe harbors is immune from prosecution, arrangements that do not fit squarely within anexception or safe harbor do not necessarily violate the statute. The failure of a transaction or arrangement to fit precisely within one or more of the exceptionsor safe - 7 -harbors does not necessarily mean that it is illegal or that prosecution will be pursued. However, conduct and business arrangements that arguably implicatethe Anti-Kickback Statute but do not fully satisfy all the elements of an exception or safe harbor may be subject to increased scrutiny by governmentenforcement authorities such as the OIG.Many states have laws that implicate anti-kickback restrictions similar to the Anti-Kickback Statute. Some of these state prohibitions apply, regardlessof whether federal health care program business is involved, to arrangements such as for self-pay or private-pay patients.Government officials have focused their enforcement efforts on marketing of healthcare services and products, among other activities, and recentlyhave brought cases against companies, and certain sales, marketing and executive personnel, for allegedly offering unlawful inducements to potential orexisting customers in an attempt to procure their business.Federal Civil False Claims Act and State False Claims LawsThe federal civil False Claims Act imposes liability on any person or entity who, among other things, knowingly and willfully presents, or causes to bepresented, a false or fraudulent claim for payment by a federal healthcare program, including Medicare and Medicaid. The "qui tam," or "whistleblower"provisions of the False Claims Act allow a private individual to bring actions on behalf of the federal government alleging that the defendant has submitted afalse claim to the federal government, and to share in any monetary recovery. In recent years, the number of suits brought against healthcare providers byprivate individuals has increased dramatically. Medical device companies, like us, can be held liable under false claims laws, even if they do not submitclaims to the government, when they are deemed to have caused submission of false claims by, among other things, providing incorrect coding or billingadvice about their products to customers that file claims, or by engaging in kickback arrangements with customers that file claims.The False Claims Act also has been used to assert liability on the basis of misrepresentations with respect to the services rendered and in connectionwith alleged off-label promotion of products. Our future activities relating to the manner in which we sell our products and document our prices, such as thereporting of discount and rebate information and other information affecting federal, state and third-party reimbursement of our products, and the sale andmarketing of our products, may be subject to scrutiny under these laws.When an entity is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by thegovernment, plus civil penalties of $5,500 to $11,000 for each separate false claim. There are many potential bases for liability under the False Claims Act. Anumber of states have enacted false claim laws analogous to the federal civil False Claims Act and many of these state laws apply where a claim is submittedto any state or private third-party payor. In this environment, our engagement of physician consultants in product development and product training andeducation could subject us to similar scrutiny. We are unable to predict whether we would be subject to actions under the False Claims Act or a similar statelaw, or the impact of such actions. However, the costs of defending such claims, as well as any sanctions imposed, could significantly affect our financialperformance.HIPAA Fraud and Other RegulationsThe Health Insurance Portability and Accountability Act of 1996, or HIPAA, created a class of federal crimes known as the "federal health careoffenses," including healthcare fraud and false statements relating to healthcare matters. The HIPAA health care fraud statute prohibits, among other things,knowingly and willfully executing, or attempting to execute, a scheme or artifice to defraud any healthcare benefit program, or to obtain by means of false offraudulent pretenses, any money under the control of any health care benefit program, including private payors. A violation of this statute is a felony and mayresult in fines, imprisonment and/or exclusion from government-sponsored programs. The HIPAA false statements statute prohibits, among other things,knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement orrepresentation in connection with the delivery of or payment for healthcare benefits, items or services. A violation of this statute is a felony and may result infines and/or imprisonment. Entities that are found to have aided or abetted in a violation of the HIPAA federal health care offenses are deemed by statute tohave committed the offense and are punishable as a principal. - 8 -We are also subject to the U.S. Foreign Corrupt Practices Act and similar anti-bribery laws applicable in non-U.S. jurisdictions that generally prohibitcompanies and their intermediaries from making improper payments to non-U.S. government officials for the purpose of obtaining or retaining business.Because of the predominance of government-sponsored healthcare systems around the world, most of our customer relationships outside of the U.S. will bewith governmental entities and therefore subject to such anti-bribery laws.HIPAA and Other Privacy RegulationsThe regulations that implement HIPAA also establish uniform standards governing the conduct of certain electronic healthcare transactions andprotecting the security and privacy of individually identifiable health information maintained or transmitted by healthcare providers, health plans andhealthcare clearinghouses, which are referred to as "covered entities." Several regulations have been promulgated under HIPAA's regulations including: theStandards for Privacy of Individually Identifiable Health Information, or the Privacy Rule, which restricts the use and disclosure of certain individuallyidentifiable health information; the Standards for Electronic Transactions, or the Transactions Rule, which establishes standards for common healthcaretransactions, such as claims information, plan eligibility, payment information and the use of electronic signatures; and the Security Standards for theProtection of Electronic Protected Health Information, or the Security Rule, which requires covered entities to implement and maintain certain securitymeasures to safeguard certain electronic health information. Although we do not believe we are a covered entity and therefore are not currently directlysubject to these standards, we expect that our customers generally will be covered entities and may ask us to contractually comply with certain aspects ofthese standards by entering into requisite business associate agreements. While the government intended this legislation to reduce administrative expensesand burdens for the healthcare industry, our compliance with certain provisions of these standards entails significant costs for us.The Health Information Technology for Economic and Clinical Health Act, or the HITECH Act, which was enacted in February 2009, strengthens andexpands the HIPAA Privacy and Security Rules and the restrictions on use and disclosure of patient identifiable health information. HITECH alsofundamentally changed a business associate's obligations by imposing a number of Privacy Rule requirements and a majority of Security Rule provisionsdirectly on business associates that were previously only directly applicable to covered entities. HITECH includes, but is not limited to, prohibitions onexchanging patient identifiable health information for remuneration, restrictions on marketing to individuals, and obligations to agree to provide individualsan accounting of virtually all disclosures of their health information. Moreover, HITECH requires covered entities to report any unauthorized use ordisclosure of patient identifiable health information, known as a breach, to the affected individuals, the United States Department of Health and HumanServices, or HHS, and, depending on the size of any such breach, the media for the affected market. Business associates are similarly required to notifycovered entities of a breach. Most of the HITECH provisions became effective in February 2010. HHS has already issued regulations governing breachnotification which were effective in September 2009.HITECH has increased civil penalty amounts for violations of HIPAA by either covered entities or business associates up to an annual maximum of$1.5 million for uncorrected violations based on willful neglect. Imposition of these penalties is more likely now because HITECH significantly strengthensenforcement. It requires HHS to conduct periodic audits to confirm compliance and to investigate any violation that involves willful neglect which carriesmandatory penalties. Additionally, state attorneys general are authorized to bring civil actions seeking either injunctions or damages in response toviolations of HIPAA Privacy and Security Rules that threaten the privacy of state residents.In addition to federal regulations issued under HIPAA, some states have enacted privacy and security statutes or regulations that, in some cases, aremore stringent than those issued under HIPAA. In those cases, it may be necessary to modify our planned operations and procedures to comply with the morestringent state laws. If we fail to comply with applicable state laws and regulations, we could be subject to additional sanctions.Federal and state consumer protection laws are being applied increasingly by the United States Federal Trade Commission, or FTC, and state attorneysgeneral to regulate the collection, use, storage and disclosure of personal or patient information, through websites or otherwise, and to regulate thepresentation of web site content. Courts may also adopt the standards for fair information practices promulgated by the FTC, which concern consumer notice,choice, security and access. Numerous other countries have or are developing laws governing the collection, use, disclosure and transmission of personal orpatient information. - 9 -HIPAA as well as other federal and state laws apply to our receipt of patient identifiable health information in connection with research and clinicaltrials. We collaborate with other individuals and entities in conducting research and all involved parties must comply with applicable laws. Therefore, thecompliance of the physicians, hospitals or other providers or entities with whom we collaborate also impacts our business.Third-Party ReimbursementOur ability to market our phototherapy products successfully depends in large part on the extent to which various third parties are willing to reimbursepatients or providers for the cost of medical procedures utilizing our treatment products. These third parties include government authorities, private healthinsurers and other organizations, such as health maintenance organizations. Third-party payors are systematically challenging the prices charged for medicalproducts and services. They may deny reimbursement if they determine that a prescribed device is not used in accordance with cost-effective treatmentmethods as determined by the payor, or is experimental, unnecessary or inappropriate. Accordingly, if less costly drugs or other treatments are available,third-party payors may not authorize, or may limit, reimbursement for the use of our products, even if our products are safer or more effective than thealternatives. Additionally, they may require changes to our pricing structure and revenue model before authorizing reimbursement.Reimbursement systems in international markets vary significantly by country and by region within some countries, and reimbursement approvals mustbe obtained on a country-by-country basis. Many international markets have government-managed healthcare systems that control reimbursement for newdevices and procedures. In most markets, there are private insurance systems, as well as government-managed systems. Our XTRAC products remainsubstantially without approval for reimbursement in many international markets under either government or private reimbursement systems.Many private plans key their reimbursement rates to rates set by the Centers for Medicare and Medicaid Services (CMS) under three distinct CurrentProcedural Terminology (CPT) codes based on the total skin surface area being treated.As of March 22, 2018 the national rates were as follows: •96920 - designated for: the total area less than 250 square centimeters. CMS assigned a 2016 national payment of approximately $158.27 pertreatment; •96921 - designated for: the total area 250 to 500 square centimeters. CMS assigned a 2016 national payment of approximately $174.42 pertreatment; and •96922 - designated for: the total area over 500 square centimeters. CMS assigned a 2016 national payment of approximately $240.81 pertreatment.The national rates are adjusted by overhead factors applicable to each state.EmployeesAs of December 31, 2017, we had 98 full-time employees, which consisted of one executive officer, 4 senior managers, 47 sales and marketing staff, 12people engaged in manufacturing of lasers, 17 customer-field service personnel, 6 engaged in research and development and 11 finance and administrationstaff.Financial Information about Geographic AreasSee Note 15 to the consolidated financial statements included elsewhere in this filing.Item 1A. Risk FactorsIn addition to the other information contained in this Annual Report and the exhibits hereto, the following risk factors should be considered carefully inevaluating our business. Our business, financial condition, cash flows or results of operations could be materially adversely affected by any of these risks.Additional risks not presently known to us or that we currently deem immaterial may also adversely affect our business, financial condition, cash flows orresults of operations. The following discussion of risk factors contains forward-looking statements - 10 -as discussed on page 1. Our business routinely encounters and addresses risks, some of which may cause our future results to be different – sometimesmaterially different – than we presently anticipate.We have incurred losses for a number of years, and anticipate that we will incur continued losses for the foreseeable future.Since 1999, we have primarily financed our operations through the sale of our equity securities and have devoted substantially all of our resources toresearch, development and commercialization of MelaFind. Our net loss for the year ended December 31, 2017 was approximately $18.8 million, and as ofDecember 31, 2017, we had an accumulated deficit of approximately $229.4 million. Our profitability has been negatively impacted by interest expenserelated to the June 2015 financing as well as the $11.8 million loss on the extinguishment of debentures in 2017. Our losses, among other things, have hadand will continue to have an adverse effect on our stockholders' equity. Since the closing of our acquisition of the XTRAC and VTRAC products in June2015 we began to recognize revenues of those products, which we expect will provide sufficient cash flow to fund our current operations for the foreseeablefuture.We may acquire other assets or businesses, or form collaborations or make investments in other companies or technologies that could harm our operatingresults, dilute our stockholders' ownership, increase our debt or cause us to incur significant expense.As part of our business strategy, we may pursue acquisitions of assets, including preclinical, clinical or commercial stage products or productcandidates, or businesses, or strategic alliances and collaborations, to expand our existing technologies and operations. We may not identify or completethese transactions in a timely manner, on a cost-effective basis, or at all, and we may not realize the anticipated benefits of any such transaction, any of whichcould have a detrimental effect on our financial condition, results of operations and cash flows. We have limited experience with acquiring other companies,products or product candidates, and limited experience with forming strategic alliances and collaborations. We may not be able to find suitable acquisitioncandidates, and if we make any acquisitions, we may not be able to integrate these acquisitions successfully into our existing business and we may incuradditional debt or assume unknown or contingent liabilities in connection therewith. Integration of an acquired company or assets may also disrupt ongoingoperations, require the hiring of additional personnel and the implementation of additional internal systems and infrastructure, especially the acquisition ofcommercial assets, and require management resources that would otherwise focus on developing our existing business. We may not be able to find suitablestrategic alliances or collaboration partners or identify other investment opportunities, and we may experience losses related to any such investments.To finance any acquisitions or collaborations, we may choose to issue debt or equity securities as consideration. Any such issuance of shares woulddilute the ownership of our stockholders. If the price of our common stock is low or volatile, we may not be able to acquire other assets or companies or funda transaction using our stock as consideration. Alternatively, it may be necessary for us to raise additional funds for acquisitions through public or privatefinancings. Additional funds may not be available on terms that are favorable to us, or at all.We may not be able to successfully integrate newly acquired businesses, joint ventures and other partnerships into our operations or achieve expectedprofitability from our acquisitions.If we cannot successfully integrate acquisitions, joint ventures and other partnerships on a timely basis, we may be unable to generate sufficientrevenue to offset acquisition costs, we may incur costs in excess of what we anticipate, and our expectations of future results of operations, including certaincost savings and synergies, may not be achieved. Acquisitions involve substantial risks, including: •unforeseen difficulties in integrating operations, technologies, services, accounting and personnel; •diversion of financial and management resources from existing operations; •unforeseen difficulties related to entering geographic regions where we do not have prior experience; •risks relating to obtaining sufficient equity or debt financing; •potential loss of customers. - 11 -In addition, if we finance acquisitions by issuing equity securities or securities convertible into equity securities, our existing stockholders' interestswould be diluted, which, in turn, could adversely impact the market price of our stock. Moreover, we could finance an acquisition with debt, resulting inhigher leverage and interest costs.Our laser treatments of psoriasis, vitiligo, atopic dermatitis and leukoderma and any of our future products or services may fail to gain market acceptance,which could adversely affect our competitive position.We have generated limited worldwide commercial distribution for our products. In the United States, our XTRAC systems are installed at physicianoffices at no upfront charge to the physician and we are paid on a per-usage method where we retain ownership of the system. We cannot assure you that ourproducts and services will find sufficient acceptance in the marketplace under our sales strategies.We also face a risk that other companies in the market for dermatological products and services may be able to provide dermatologists a higher overallreturn on investment and therefore compromise our ability to increase our base of users and ensure they engage in optimal usage of our products. If, forexample, such other companies have products (such as Botox or topical creams for disease management) that require less time commitment from thedermatologist and yield an attractive return on a dermatologist's time and investment, we may find that our efforts to increase our base of users are hindered.CPT codes for all procedures are subject to continued reevaluation. Should CMS reduce reimbursement for the CPT codes for XTRAC treatment wemay see a decline in our recurring revenue business as well as a decline in new XTRAC installations.Whether a treatment may be delegated and, if so, to whom and to what extent, are matters that may vary state by state, as these matters are within theprovince of the state medical boards. In states that may be more restrictive in such delegation, a physician may decline to adopt the XTRAC system into hisor her practice, deeming it to be fraught with too many constraints and finding other outlets for the physician's time and staff time to be more remunerative.There can be no assurance that we will be successful in persuading such medical boards that a liberal standard for delegation is appropriate for the XTRACsystem, based on its design for ease and safety of use. If we are not successful, we may find that even if a geographic region has wide insurancereimbursement, the region's physicians may decline to adopt the XTRAC system into their practices.We therefore cannot assure you that the marketplace will be receptive to our excimer laser technology over competing products, services and therapiesor that a cure will not be found for the underlying diseases we are focused on treating. Failure of our products to achieve market acceptance could have amaterial adverse effect on our business, financial condition and results of operations.The success of our products depends on third-party reimbursement of patients' costs, which could result in potentially reduced prices or reduced demandand adversely affect our revenues and business operations.Our ability to market our products successfully, especially XTRAC treatments, depends in large part on the extent to which various third parties arewilling to reimburse patients or providers for the costs of medical procedures utilizing such products. These third parties include government authorities,private health insurers and other organizations, such as health maintenance organizations, whose patterns of reimbursement may change as a result of newstandards for reimbursement determined by these third parties or because of the programs and policies enacted under the ACA. For the most part, aestheticand cosmetic treatments for many of the approved usages of Nordlys and Stratapen are not covered by insurance and patients pay out of pocket for thesetreatments.Third-party payors are systematically challenging the prices charged for medical products and services. They may deny reimbursement if theydetermine that a prescribed device is not used in accordance with cost-effective treatment methods as determined by the payor, or is experimental,unnecessary or inappropriate. Further, although third parties may approve reimbursement, such approvals may be under terms and conditions that discourageuse of the XTRAC system. Accordingly, if less costly drugs or other treatments are available, third-party payors may not authorize or may limitreimbursement for the use of our products, even if our products are safer or more effective than the alternatives. - 12 -In addition, medical insurance policies and treatment coverage have been and may be affected by the parameters of the ACA or successor policiesenacted by the new administration. While the ACA's stated purpose is to expand access to coverage, it also mandates certain requirements regarding the typesand limitations of insurance coverage. There can be no guarantee that the changes in coverage under the ACA will not affect the type and level ofreimbursement for our products.Although we have received reimbursement approvals from a majority of private healthcare plans for the XTRAC system, we cannot give assurance thatthese private plans will continue to adopt or maintain favorable reimbursement policies or accept the XTRAC system in its clinical role as a second-linetherapy in the treatment of psoriasis. Additionally, third-party payors may require further clinical studies or changes to our pricing structure and revenuemodel before authorizing or continuing reimbursement.As of March 22, 2018, we estimate, based on published coverage policies and on payment practices of private and Medicare insurance plans, that morethan 90% of the insured population in the U.S. is covered by insurance coverage or payment policies that reimburse physicians for using the XTRAC systemfor treatment of psoriasis. We can give no assurance that health insurers will not adversely modify their reimbursement policies for the use of the XTRACsystem in the future.Any failure in our customer education efforts could significantly reduce product marketing.It is important to the success of our marketing efforts to educate physicians and technicians how to properly use our products. We rely on physicians tospend their time and money to participate in our pre-installation educational sessions. Moreover, if physicians and technicians use our products improperly,they may have unsatisfactory patient outcomes or, in the case of the XTRAC system, cause patient injury, which may give rise to negative publicity orlawsuits against us, any of which could have a material adverse effect on our reputation, revenues and profitability.If revenue from a significant customer declines, we may have difficulty replacing the lost revenue, which would negatively affect our results andoperations.In our international business, we depend for a material portion of our sales in the international arena on several key sub-distributors, and especially onThe Lotus Global Group, Inc., doing business as GlobalMed Technologies Co., or GlobalMed, which is our master distributor over the XTRAC and VTRACproducts. If we lose GlobalMed or one of these sub-distributors, our sales of phototherapy products are likely to suffer in the short term, which could have anegative effect on our revenues and profitability.If we fail to manage our sales and marketing force or to market and distribute our products effectively, we may experience diminished revenues andprofits.There are significant risks involved in building and managing our sales and marketing force and marketing our products, including our ability: •to hire, as needed, a sufficient number of qualified sales and marketing personnel with the aptitude, skills and understanding to market ourproducts; •to adequately train our sales and marketing force in the use and benefits of all our products and services, thereby making them more effectivepromoters; •to manage our sales and marketing force and our ancillary channels (e.g., telesales) such that variable and semi-fixed expenses grow at a lesserrate than our revenues; and •to set the prices and other terms and conditions for treatments using the XTRAC system in a complex legal environment so that they will beaccepted as attractive skin health and appropriate alternatives to conventional modalities and treatments.To increase acceptance and utilization of our products, we may have to expand our sales and marketing programs in the U.S. While we may be able todraw on currently available personnel within our organization to meet this need, we also expect that we will have to increase the number of representativesdevoted to the sales and marketing programs and to broaden, through such representatives, the talents we have at our disposal. In some cases, we may lookoutside our organization for assistance in marketing our products. - 13 -We are not the manufacturer of some of our products and sell those products through contractual agreements.Our STRATAPEN and Nordlys line of products are purchased by us and resold to end users under a license agreement (STRATAPEN) or a distributionagreement (Nordlys). In order to retain those lines, we need to achieve certain minimum sales. We cannot assure you that we will continue to achieve a levelof sales required to maintain the rights to sell those products.We are reliant on a limited number of suppliers for production of our products.Production of our products requires specific component parts obtained from our suppliers. While we believe that we could find alternate suppliers, inthe event that our current suppliers fail to meet our needs, a change in suppliers or any significant delay in our ability to have access to such resources couldhave a material adverse effect on our delivery schedules, business, operating results and financial condition. Moreover, in the event we can no longer utilizethis supplier or acquire this resource and must identify a new supplier or substitute a different resource, such change may trigger an obligation for us tocomply with additional FDA regulatory requirements including, but not limited to, pre-marketing authorization and Quality System Requirements ("QSR").Our failure to respond to rapid changes in technology and our applications in the medical devices industry or the development of a cure for skin conditionstreated by our products could make our treatment system obsolete.The medical device industry is subject to rapid and substantial technological development and product innovations. To be successful, we must respondto new developments in technology, new applications of existing technology and new treatment methods. Our financial condition and operating resultscould be adversely affected if we fail to be responsive on a timely and effective basis to competitors' new devices, applications, treatments or price strategies.For example, the development of a cure for psoriasis, vitiligo, atopic dermatitis or leukoderma would eliminate the need for our XTRAC system for thesediseases and would require us to focus on other uses of our technology, which could have a material adverse effect on our business and prospects.As we develop new products or improve our existing products, we may accelerate the economic obsolescence of the existing, unimproved products andtheir components. The obsolete products and related components may have little to no resale value, leading to an increase in the reserves we have against ourinventory. Likewise, there is a risk that the new products or improved existing products may not achieve market acceptance and therefore may also lead to anincrease in the reserves against our inventory.On March 13, 2017 we notified the FDA that, as of September 30, 2017, we will no longer service the MelaFind device. As the device is subject to bothFDA requirements and requirements of certain foreign countries in which the device is still in use, we cannot assure you that a government agency may notmake a demand that we either continue to provide support or recall devices still in use and thereby increase our costs and expenses.Our customers, or physicians and technicians, as the case may be, may misuse certain of our products, and product liability lawsuits and other damagesimposed on us may exceed our insurance coverage, or we may be subject to claims that are not covered by insurance.We may be subject to product liability claims from time to time. Our products are highly complex and some are used to treat delicate skin conditions onand near a patient's face. In addition, the clinical testing, manufacturing, marketing and use of certain of our products and procedures may also expose us toproduct liability, FDA regulatory and/or legal actions, or other claims. If a physician elects to apply an off-label use and the use leads to injury, we may beinvolved in costly litigation. In addition, the fact that we train technicians whom we do not supervise in the use of our XTRAC system during patienttreatment may expose us to third-party claims if those doing the training are accused of providing inadequate training. We presently maintain liabilityinsurance with coverage limits of at least $5,000,000 per occurrence and overall aggregate, which we believe is an adequate level of product liabilityinsurance, but product liability insurance is expensive and we might not be able to obtain product liability insurance in the future on acceptable terms or insufficient amounts to protect us, if at all. A successful claim brought against us in excess of our insurance coverage could have a material adverse effect onour business, results of operations and financial condition. In addition, continuing insurance coverage may also not be available at an acceptable cost, if atall. Therefore, we may not be able to obtain insurance coverage that will be adequate to satisfy a liability that may arise. Regardless of merit or eventualoutcome, product liability claims may result in decreased demand for a product, injury to its reputation, withdrawal of clinical trial volunteers and loss ofrevenues. As a result, regardless - 14 -of whether we are insured, a product liability claim or product recall may result in losses that could result in the FDA taking legal or regulatory enforcementaction against us and or our products including recall, and could have a material adverse effect upon our business, financial condition and results ofoperations.We must comply with complex statutes prohibiting fraud and abuse, and both we and physicians utilizing our products could be subject to significantpenalties for noncompliance.There are extensive federal and state laws and regulations prohibiting fraud and abuse in the healthcare industry that can result in significant criminaland civil penalties. These federal laws include: •the anti-kickback statute which prohibits certain business practices and relationships, including the payment or receipt of remuneration for thereferral of patients whose care will be paid by Medicare or other federal healthcare programs, as modified by the ACA; •the physician self-referral prohibition, commonly referred to as the Stark Law; •the anti-inducement law, which prohibits providers from offering anything to a Medicare or Medicaid beneficiary to induce that beneficiary touse items or services covered by either program; the Civil False Claims Act, which prohibits any person from knowingly presenting or causingto be presented false or fraudulent claims for payment by the federal government, including the Medicare and Medicaid programs and; •the Civil Monetary Penalties Law, which authorizes HHS to impose civil penalties administratively for fraudulent or abusive acts. Sanctions forviolating these federal laws include criminal and civil penalties that range from punitive sanctions, damage assessments, monetary penalties,imprisonment, denial of Medicare and Medicaid payments, or exclusion from the Medicare and Medicaid programs, or both.As federal and state budget pressures continue, federal and state administrative agencies may also continue to escalate investigation and enforcement effortsto root out waste and to control fraud and abuse in governmental healthcare programs. Private enforcement of healthcare fraud has also increased, due in largepart to amendments to the Civil False Claims Act in 1986 that were designed to encourage private persons to sue on behalf of the government. A violation ofany of these federal and state fraud and abuse laws and regulations could have a material adverse effect on our liquidity and financial condition. Aninvestigation into the use of our products by physicians may dissuade physicians from either purchasing or using our products and could have a materialadverse effect on our revenues.If the effectiveness and safety of our devices are not supported by long-term data, and the level of acceptance of our products by dermatologists does notincrease or is not maintained, our revenues could decline.Our products may not be accepted in the market if we do not produce clinical data supported by the independent efforts of clinicians. We receivedclearance from the FDA for the use of the XTRAC system to treat psoriasis based upon our study of a limited number of patients. Safety and efficacy datapresented to the FDA for the XTRAC system was based on studies on these patients. For the treatment of vitiligo, atopic dermatitis and leukoderma, we havereceived clearance from the FDA for the use of the XTRAC system based primarily on a showing of substantial equivalence to other previously clearedpredicate devices. However, we may discover that physicians will expect clinical data on such treatments with the XTRAC system. We also may find that datafrom longer-term psoriasis patient follow-up studies may be inconsistent with those indicated by our relatively short-term data. If longer-term patient studiesor clinical experience indicate that treatment with the XTRAC system does not provide patients with sustained benefits or that treatment with our product isless effective or less safe than our current data suggests, our revenues could decline. In addition, the FDA could then bring legal or regulatory enforcementactions against us and/or our products including, but not limited to, recalls or requirements for pre-market 510(k) authorizations. We can give no assurancethat our data will be substantiated in studies involving more patients. In such a case, we may never achieve significant revenues or profitability.Our failure to obtain or maintain necessary FDA clearances or approvals, or equivalents thereof in the U.S. and relevant foreign markets, could hurt ourability to distribute and market our products.In both our U.S. and foreign markets, we are affected by extensive laws, governmental regulations, - 15 -administrative determinations, court decisions and similar constraints. Such laws, regulations and other constraints may exist at the federal, state or locallevels in the U.S. and at analogous levels of government in foreign jurisdictions. In addition, the formulation, manufacturing, packaging, labeling,distribution, importation, sale and storage of our products are subject to extensive regulation by various federal agencies, including, but not limited to, theFDA and the FTC, State Attorneys General in the U.S., as well as by various other federal, state, local and international regulatory authorities in the countriesin which its products are manufactured, distributed or sold. If we or our manufacturers fail to comply with those regulations, we could become subject tosignificant penalties or claims, which could harm our results of operations or our ability to conduct our business. In addition, the adoption of new regulationsor changes in the interpretations of existing regulations may result in significant compliance costs or discontinuation of product sales and may impair themarketing of our products, resulting in significant loss of net sales. Our failure to comply with federal or state regulations, or with regulations in foreignmarkets that cover our product claims and advertising, including direct claims and advertising by us, may result in enforcement actions and imposition ofpenalties or otherwise harm the distribution and sale of its products. Further, our businesses are subject to laws governing our accounting, tax and import andexport activities. Failure to comply with these requirements could result in legal and/or financial consequences that might adversely affect our sales andprofitability. Each medical device that we wish to market in the U.S. must first receive either 510(k) clearance or PMA from the FDA unless an exemptionapplies. Either process can be lengthy and expensive. The FDA's 510(k) clearance process may take from three to twelve months, or longer, and may or maynot require human clinical data. The PMA process is much more costly and lengthy. It may take from eleven months to three years, or even longer, and willlikely require significant supporting human clinical data. Delays in obtaining regulatory clearance or approval could adversely affect our revenues andprofitability. Although we have obtained a PMA for the MelaFind system to aid in the diagnosis of melanoma and 510(k) clearances for our XTRAC systemfor use in treating psoriasis, vitiligo, atopic dermatitis and leukoderma, these approvals and clearances may be subject to revocation if post-marketing datademonstrates safety issues or lack of effectiveness. Similar clearance processes may apply in foreign countries. Further, more stringent regulatoryrequirements or safety and quality standards may be issued in the future with an adverse effect on our business. We have ceased manufacturing and marketingMelaFind but must still maintain records for FDA and foreign regulatory purposes.If required, clinical trials necessary to support a 510(k) notice or PMA application will be expensive and will require the enrollment of large numbers ofpatients, and suitable patients may be difficult to identify and recruit. Delays or failures in our clinical trials will prevent us from commercializing anymodified or new products and will adversely affect our business, operating results and prospects.Initiating and completing clinical trials necessary to support a 510(k) notice or a PMA application will be time-consuming and expensive and theoutcome uncertain. Moreover, the results of early clinical trials are not necessarily predictive of future results, and any product we advance into clinical trialsmay not have favorable results in early or later clinical trials.Conducting successful clinical studies will require the enrollment of large numbers of patients, and suitable patients may be difficult to identify andrecruit. Patient enrollment in clinical trials and completion of patient participation and follow-up depend on many factors, including the size of the patientpopulation, the nature of the trial protocol, the attractiveness of, or the discomforts and risks associated with, the treatments received by patients enrolled assubjects, the availability of appropriate clinical trial investigators, support staff, and proximity of patients to clinical sites and ability to comply with theeligibility and exclusion criteria for participation in the clinical trial and patient compliance. For example, patients may be discouraged from enrolling in ourclinical trials if the trial protocol requires them to undergo extensive post-treatment procedures or follow-up to assess the safety and effectiveness of ourproducts or if they determine that the treatments received under the trial protocols are not attractive or involve unacceptable risks or discomforts. Patientsmay also not participate in our clinical trials if they choose to participate in contemporaneous clinical trials of competitive products. In addition, patientsparticipating in clinical trials may die before completion of the trial or suffer adverse medical events unrelated to investigational products.Development of sufficient and appropriate clinical protocols to demonstrate safety and efficacy may be required and we may not adequately develop suchprotocols to support clearance and approval. Further, the FDA may require us to submit data on a greater number of patients than we originally anticipatedand/or for a longer follow-up period or change the data collection requirements or data analysis for any clinical trials. Delays in patient enrollment or failureof patients to continue to participate in a clinical trial may cause an increase in costs and delays in the approval and attempted commercialization of ourproducts or result in the failure of the clinical trial. The FDA may not consider - 16 -our data adequate to demonstrate safety and efficacy. Such increased costs and delays or failures could adversely affect our business, operating results andprospects.Our medical device operations are subject to pervasive and continuing FDA regulatory requirements.Medical devices regulated by the FDA are subject to "general controls" which include: registration with the FDA; listing commercially distributedproducts with the FDA; complying with good manufacturing practices under the quality system regulations; filing reports with the FDA and keeping recordsrelative to certain types of adverse events associated with devices under the medical device reporting regulation; assuring that device labeling complies withdevice labeling requirements; reporting certain device field removals and corrections to the FDA; and obtaining premarket notification 510(k) clearance fordevices prior to marketing. Some devices known as "510(k)-exempt" can be marketed without prior marketing clearance or approval from the FDA. Inaddition to the "general controls," some Class II medical devices are also subject to "special controls," including adherence to a particular guidance documentand compliance with the performance standard. Instead of obtaining 510(k) clearance, some Class III devices are subject to PMA. In general, obtaining PMAto achieve marketing authorization from the FDA is a more onerous process than seeking 510(k) clearance.Many medical devices, such as medical lasers, are also regulated by the FDA as "electronic products." In general, manufacturers and marketers of"electronic products" are subject to certain FDA regulatory requirements intended to ensure the radiological safety of the products. These requirementsinclude, but are not limited to, filing certain reports with the FDA about the products and defects/safety issues related to the products as well as complyingwith radiological performance standards.The medical device industry is now experiencing greater scrutiny and regulation by federal, state and foreign governmental authorities. Companies inour industry are subject to more frequent and more intensive reviews and investigations, often involving the marketing, business practices, and productquality management including standards for device recalls and product labeling. Such reviews and investigations may result in civil and criminalproceedings; the imposition of substantial fines and penalties; the receipt of Warning Letters, untitled letters, demands for recalls or the seizure of ourproducts; the requirement to enter into corporate integrity agreements, stipulated judgments or other administrative remedies, and result in our incurringsubstantial unanticipated costs and the diversion of key personnel and management's attention from their regular duties, any of which may have an adverseeffect on our financial condition, results of operations and liquidity, and may result in greater and continuing governmental scrutiny of our business in thefuture.We must also have the appropriate FDA clearances and/or approvals from other governmental entities in order to lawfully market devices and or/drugs.The FDA, federal, state or foreign governments and agencies may disagree that we have such clearance and/or approvals for all of our products and may takeaction to prevent the marketing and sale of such devices until such disagreements have been resolved.Additionally, federal, state and foreign governments and entities have enacted laws and issued regulations and other standards requiring increasedvisibility and transparency of our interactions with healthcare providers. For example, the U.S. Physician Payment Sunshine Act requires us to disclosepayments and other transfers of value to all U.S. physicians and U.S. teaching hospitals at the U.S. federal level made. Failure to comply with these legal andregulatory requirements could impact our business, and we have had and will continue to spend substantial time and financial resources to develop andimplement enhanced structures, policies, systems and processes to comply with these legal and regulatory requirements, which may also impact our business.Healthcare policy changes may have a material adverse effect on us.Healthcare costs have risen significantly over the past decade. As a result, there have been and continue to be proposals by federal, state and foreigngovernments and regulators as well as third-party insurance providers to limit the growth of these costs. Among these proposals are regulations that couldimpose limitations on the prices we will be able to charge for our products, the amounts of reimbursement available for our products from governmentalagencies or third-party payors, requirements regarding the usage of comparative studies, technology assessments and healthcare delivery structure reforms todetermine the effectiveness and select the products and therapies used for treatment of patients. While we believe our products provide favorable clinicaloutcomes, value and cost efficiency, the resources necessary to demonstrate this value to our customers, patients, payors, and regulators is significant andmay require longer periods of time and effort in which to obtain acceptance of our products. There is no assurance - 17 -that our efforts will be successful, and these limitations could have a material adverse effect on our financial position and results of operations.These changes and additional proposed changes in the future could adversely affect the demand for our products as well as the way in which weconduct our business. For example, the ACA was enacted into law in the U.S. in March 2010. The law imposed on medical device manufacturers a 2.3 percentexcise tax on U.S. sales of Class I, II and III medical devices, which includes certain products marketed and sold by us, as well as requiring research into theeffectiveness of treatment modalities and instituting changes to the reimbursement and payment systems for patient treatments. In addition, governments andregulatory agencies continue to study and propose changes to the laws governing the clearance or approval, manufacture and marketing of medical devices,which could adversely affect our business and results of operations.FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. TheFDA is currently exploring ways to modify its 510(k) clearance process. In addition, due to changes at the FDA in general, it has become increasingly moredifficult to obtain 510(k) clearance as data requirements have increased. It is impossible to predict whether legislative changes will be enacted or FDAregulations, guidance or interpretations changed, and what the impact of such changes, if any, may be. However, any changes could make it more difficult forus to maintain or attain clearance or approval to develop and commercialize our products and technologies.Various healthcare reform proposals have also emerged at the state level. We cannot predict what healthcare initiatives, if any, will be implemented atthe federal or state level, or the effect any future legislation or regulation will have on us. However, an expansion in government's role in the U.S. healthcareindustry may lower reimbursements for our products, reduce medical procedure volumes and adversely affect our business, possibly materially. In addition, ifthe excise taxes contained in the House or Senate health reform bills are enacted into law, our operating expenses resulting from such an excise tax andresults of operations would be materially and adversely affected.Our market acceptance in international markets requires regulatory approvals from foreign governments and may depend on third party reimbursement ofparticipants' cost.We have introduced our XTRAC and VTRAC products into markets in more than 30 countries in Europe, the Middle East, Asia, Australia, South Africaand parts of Central and South America through distributors. We cannot be certain that our salesforce and distributor network will be successful in marketingour products in these or other countries or that our distributors will purchase XTRAC or VTRAC systems beyond their current contractual obligations or inaccordance with our expectations.Even if we obtain and maintain the necessary foreign regulatory registrations or approvals, market acceptance of our products in international marketsmay be dependent, in part, upon the availability of reimbursement within applicable healthcare payment systems. Reimbursement and healthcare paymentsystems in international markets vary significantly by country, and include both government-sponsored healthcare and private insurance. We may seekinternational reimbursement approvals for our products, but we cannot assure you that any such approvals will be obtained in a timely manner, if at all.Failure to receive international reimbursement approvals in any given market could have a material adverse effect on the acceptance or growth of ourproducts in that market or others.We may become subject to claims of infringement or misappropriation of the intellectual property rights of others, which could prohibit us from shippingaffected products, require us to obtain licenses from third parties or to develop non-infringing alternatives, and subject us to substantial monetarydamages and injunctive relief. Our patents may also be subject to challenge on validity grounds, and our patent applications may be rejected.Third parties could, in the future, assert infringement or misappropriation claims against us with respect to our current or future products. Whether aproduct infringes a patent involves complex legal and factual issues, the determination of which is often uncertain. Therefore, we cannot be certain that wehave not infringed the intellectual property rights of such third parties. Our potential competitors may assert that some aspect of our products infringes theirpatents. There also may be existing patents of which we are unaware that one or more components of our products may inadvertently infringe. - 18 -Any infringement or misappropriation claim could cause us to incur significant costs, could place significant strain on our financial resources, divertmanagement's attention from our business and harm our reputation. If the relevant patents were upheld as valid and enforceable and we were found toinfringe, we could be prohibited from selling our product unless we could obtain licenses to use the technology covered by the patent or are able to designaround the patent. We may be unable to obtain a license on terms acceptable to us, if at all, and we may not be able to redesign the affected product to avoidinfringement.A court could order us to pay compensatory damages for such infringement, plus prejudgment interest and could, in addition, treble the compensatorydamages and award attorney fees. These damages could be substantial and could harm our reputation, business, financial condition and operating results. Acourt also could enter orders that temporarily, preliminarily or permanently enjoin us and our customers from making, using, selling, offering to sell orimporting MelaFind, and/or could enter an order mandating that we undertake certain remedial activities. Depending on the nature of the relief ordered bythe court, we could become liable for additional damages to third parties.We rely on our patents, patent applications and other intellectual property rights to give us a competitive advantage. Whether a patent is valid, orwhether a patent application should be granted, is a complex matter of science and law. Therefore we cannot be certain that, if challenged, our patents, patentapplications and/or other intellectual property rights would be upheld. If one or more of those patents, patent applications and other intellectual propertyrights are invalidated, rejected or found unenforceable, those outcomes could reduce or eliminate any competitive advantage we might otherwise have had.We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws and regulations and could face substantial penalties if weare unable to fully comply with such laws.While we do not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors, many healthcare laws andregulations apply to our business. For example, we could be subject to healthcare fraud and abuse and patient privacy regulation and enforcement by boththe federal government and the states in which we conduct our business. The healthcare laws and regulations that may affect our ability to operate include: •the federal healthcare programs' Anti-Kickback Law, as modified by the ACA, which prohibits, among other things, persons or entities fromsoliciting, receiving, offering or providing remuneration, directly or indirectly, in return for or to induce either the referral of an individual for,or the purchase order or recommendation of, any item or service for which payment may be made under a federal healthcare program such as theMedicare and Medicaid programs; •federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented,claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent, or are for items or services not provided asclaimed and which may apply to entities like us to the extent that our interactions with customers may affect their billing or coding practices; •the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which established new federal crimes for knowingly andwillfully executing a scheme to defraud any healthcare benefit program or making false statements in connection with the delivery of orpayment for healthcare benefits, items or services, as well as leading to regulations imposing certain requirements relating to the privacy,security and transmission of individually identifiable health information; and •state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or servicesreimbursed by any third-party payor, including commercial insurers, and state laws governing the privacy of health information in certaincircumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating complianceefforts.The medical device industry has been under heightened scrutiny as the subject of government investigations and regulatory or legal enforcementactions involving manufacturers who allegedly offered unlawful inducements to potential or existing customers in an attempt to procure their business,including arrangements with physician consultants. If our operations or arrangements are found to be in violation of any of the laws described above or any - 19 -other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from theMedicare and Medicaid programs and the curtailment or restructuring of its operations. Any penalties, damages, fines, exclusions, curtailment or restructuringof our operations could adversely affect our ability to operate our business and our financial results. The risk of us being found in violation of these laws isincreased by the fact that many of these laws are broad and their provisions are open to a variety of interpretations. Any action against us for violation ofthese laws, even if we successfully defend against that action and the underlying alleged violations, could cause us to incur significant legal expenses anddivert our management's attention from the operation of our business. If the physicians or other providers or entities with whom we do business are found tobe non-compliant with applicable laws, they may be subject to sanctions, which could also have a negative impact on our business.If we or our third-party manufacturers or suppliers fail to comply with the FDA's Quality System Regulation or any applicable state equivalent, ourmanufacturing operations could be interrupted and our potential product sales and operating results could suffer.We and some of our third-party manufacturers and suppliers are required to comply with some or all of the FDA's drug Good Manufacturing Practices orits QSR, which delineates the design controls, document controls, purchasing controls, identification and traceability, production and process controls,acceptance activities, nonconforming product requirements, corrective and preventive action requirements, labeling and packaging controls, handling,storage, distribution and installation requirements, records requirements, servicing requirements, and statistical techniques potentially applicable to theproduction of our medical devices. We and our manufacturers and suppliers are also subject to the regulations of foreign jurisdictions regarding themanufacturing process if we market its products overseas. The FDA enforces the QSR through periodic and announced or unannounced inspections ofmanufacturing facilities. Our facilities have been inspected by the FDA and other regulatory authorities, and we anticipate that we and certain of our third-party manufacturers and suppliers will be subject to additional future inspections. If our facilities or those of our manufacturers or suppliers are found to be innon-compliance or fail to take satisfactory corrective action in response to adverse QSR inspectional findings, FDA could take legal or regulatoryenforcement actions against us and/or our products, including but not limited to the cessation of sales or the recall of distributed products, which couldimpair our ability to produce our products in a cost-effective and timely manner in order to meet our customers' demands. We may also be required to bearother costs or take other actions that may have a negative impact on our future sales and our ability to generate profits.Current regulations depend heavily on administrative interpretation. If the FDA does not believe that we are in substantial compliance with applicableFDA regulations, the agency could take legal or regulatory enforcement actions against us and/or our products. We are also subject to periodic inspections bythe FDA, other governmental regulatory agencies, as well as certain third-party regulatory groups. Future interpretations made by the FDA or other regulatorybodies made during the course of these inspections may vary from current interpretations and may adversely affect our business and prospects. The FDA's andforeign regulatory agencies' statutes, regulations, or policies may change, and additional government regulation or statutes may be enacted, which couldincrease post-approval regulatory requirements, or delay, suspend, prevent marketing of any cleared / approved products or necessitate the recall ofdistributed products. We cannot predict the likelihood, nature or extent of adverse governmental regulation that might arise from future legislative oradministrative action, either in the U.S. or abroad.The medical device industry has been under heightened FDA scrutiny as the subject of government investigations and enforcement actions. If ouroperations and activities are found to be in violation of any FDA laws or any other governmental regulations that apply to us, we may be subject to penalties,including civil and criminal penalties, damages, fines and other legal and/or agency enforcement actions. Any penalties, damages, fines, or curtailment orrestructuring of our operations or activities could adversely affect our ability to operate our business and our financial results. The risk of us being found inviolation of FDA laws is increased by the fact that many of these laws are broad and their provisions are open to a variety of interpretations. Any actionagainst us for violation of these laws, even if we successfully defend ourselves against that action and its underlying allegations, could cause us to incursignificant legal expenses and divert management's attention from the operation of our business. Where there is a dispute with a federal or state governmentalagency that cannot be resolved to the mutual satisfaction of all relevant parties, we may determine that the costs, both real and contingent, are not justified bythe commercial returns to us from maintaining the dispute or the product. - 20 -Various claims, design features or performance characteristics of our medical devices, that we regarded as permitted by the FDA without marketingclearance or approval, may be challenged by the FDA or state regulators. The FDA or state regulatory authorities may find that certain claims, design featuresor performance characteristics, in order to be made or included in the products, may have to be supported by further studies and marketing clearances orapprovals, which could be lengthy, costly and possibly unobtainable.If we fail to comply with ongoing regulatory requirements, or if we experience unanticipated problems with products, these products could be subject torestrictions or withdrawal from the market.We are also subject to similar state requirements and licenses. Failure by us to comply with statutes and regulations administered by the FDA and otherregulatory bodies, discovery of previously unknown problems with our products (including unanticipated adverse events or adverse events of unanticipatedseverity or frequency), manufacturing problems, or failure to comply with regulatory requirements, or failure to adequately respond to any FDA observationsconcerning these issues, could result in, among other things, any of the following actions: •warning letters or untitled letters issued by the FDA; •fines, civil penalties, injunctions and criminal prosecution; •unanticipated expenditures to address or defend such actions; •delays in clearing or approving, or refusal to clear or approve, our products; •withdrawal or suspension of clearance or approval of our products by the FDA or other regulatory bodies; •product recall or seizure; •orders for physician or customer notification or device repair, replacement or refund; •interruption of production; and •operating restrictions.If any of these actions were to occur, it would harm our reputation and adversely affect our business, financial condition and results of operations.Our medical products may in the future be subject to product recalls that could harm our reputation, business and financial results.The FDA has the authority to require the recall of commercialized medical device products in the event of material deficiencies or defects in design ormanufacture. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the devicewould cause serious injury or death. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. Agovernment-mandated or voluntary recall by us or one of our distributors could occur as a result of component failures, manufacturing errors, design orlabeling defects or other deficiencies and issues. Recalls of any of our products would divert managerial and financial resources and have an adverse effect onour financial condition and results of operations. The FDA requires that certain classifications of recalls be reported to the FDA within ten working days afterthe recall is initiated. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA. We may initiate voluntaryrecalls involving our products in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, they couldrequire us to report those actions as recalls. A future recall announcement could harm our reputation with customers and negatively affect its sales. Inaddition, the FDA could take enforcement action for failing to report the recalls when they were conducted.If any of our medical products cause or contribute to a death or a serious injury, or malfunction in certain ways, we will be subject to medical devicereporting regulations, which can result in voluntary corrective actions or agency enforcement actions.Under the FDA medical device reporting regulations, medical device manufacturers are required to report to the FDA information that a device has ormay have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or contribute to death or serious injury ifthe malfunction of the device or one of our similar devices were to recur. If we fail to report these events to the FDA within the required - 21 -timeframes, or at all, the FDA could take enforcement action against us. Any such adverse event involving our products also could result in future voluntarycorrective actions, such as recalls or customer notifications, or agency action, such as inspection or enforcement action. Any corrective action, whethervoluntary or involuntary, as well as defending ourselves in a lawsuit, will require our time and capital, distract management from operating our business, andmay harm our reputation and financial results.We have a need for operating funds and there is no guarantee that we will be able to generate those funds from our business.Our capital and future revenue may not be sufficient to support the expenses of our operations in the near term, although based upon our currentbudgeting and projected cash flow models, we believe that we will be able to support our operations for at least the next twelve months following the filingof this Form 10-K. We plan to fund operations by the recurring revenue generated by the use of the XTRAC lasers in the U.S. plus domestic and internationalsales of our products. If revenues from the sale and use of our existing products are inadequate to fund our operations, we may need to raise additionalfinancing. We cannot assure you that we will be able to raise additional capital or secure alternate financing to fund operations, if necessary, or that we willbe able to raise additional capital under terms that are favorable to us. Further, we cannot assure that the Acquisition will in any way negate or mitigate ourneed for future capital. Any additional financing may dilute the ownership interest of our existing stockholders and could adversely affect the market price ofour common stock.If we do not have enough capital to fund operations, then we will have to cut costs or raise funds.If we are unable to raise additional funds, if necessary, under terms acceptable to us and in the interests of our stockholders, then we will have to takemeasures to cut operating costs or obtain funds using alternative methods, such as: •Sell or license some of our technologies that we would not otherwise sell or license if we were in a stronger financial position; •Sell or license some of our technologies under terms that are less favorable than they otherwise might have been if we were in a strongerfinancial position; and •Consider further business combination transactions with other companies or positioning ourselves to be acquired by another company.If it became necessary to take one or more of the above-listed actions, then our perceived valuation may be lower, which could impact the market priceof our stock. Further, the effects on our operations, financial performance and stock price may be significant if we do not or cannot take one or more of theabove-listed actions in a timely manner and when needed, and our ability to do so may be limited significantly due to the instability of the global financialmarkets and the resulting limitations on available financing to us and to potential licensees, buyers and investors. Additionally these options may not beavailable to us as all of our assets have been pledged as security for the various financings.If our actual liability for sales and use taxes is different from our accrued liability, it could have a material impact on our financial condition.Included in accrued sales taxes and regulatory fees are certain estimated sales and use taxes and related penalties and interest to taxing authorities. Weuse estimates when accruing our sales and use tax liability, including interest and penalties. All of our tax positions are subject to audit. While we believe allof our estimates and assumptions are reasonable and will be sustained upon audit, actual liabilities and credits may differ significantly. If so, it may materiallyimpact our financial condition, negatively if we underestimated our liability or positively if we overestimated our liability.We may be subject to disruptions or failures in our information technology systems and network infrastructures, including through cyber-attacks or otherthird party breaches that could have a material adverse effect on our business.We rely on the efficient and uninterrupted operation of complex information technology systems and network infrastructures to operate our business.We also hold data in various data center facilities upon which our business - 22 -depends. A disruption, infiltration or failure of our information technology systems or any of our data centers as a result of software or hardware malfunctions,system implementations or upgrades, computer viruses, third-party security breaches, employee error, theft or misuse, malfeasance, power disruptions, naturaldisasters or accidents could cause breaches of data security, loss of intellectual property and critical data and the release and misappropriation of sensitivecompetitive information. Further, data maintained in digital form is subject to risk of cyber-attacks, which are increasing in frequency and sophistication. Cyber-attacks couldinclude the deployment of harmful malware and other means to affect service reliability and threaten data confidentiality, integrity and availability. Despiteour efforts to monitor and safeguard our systems to prevent data compromise, the possibility of a future data compromise cannot be eliminated entirely, andrisks associated with intrusion, tampering, and theft remain. In addition, we do not have insurance coverage with respect to system failures or cyber-attacks.While we have implemented a number of protective measures, including firewalls, antivirus, patches, data encryption, log monitors, routine back-upswith offsite retention of storage media, system audits, data partitioning, routine password modifications and disaster recovery procedures, such measures maynot be adequate or implemented properly to prevent or fully address the adverse effect of such events. If our systems were to fail or we are unable tosuccessfully expand the capacity of these systems, or we are unable to integrate new technologies into our existing systems, our operations and financialresults could suffer.We have also outsourced significant elements of our information technology infrastructure and as a result we depend on third parties who areresponsible for maintaining significant elements of our information technology systems and infrastructure and who may or could have access to ourconfidential information. The size and complexity of our information technology systems, and those of our third party vendors, make such systemspotentially vulnerable to service interruptions and security breaches from inadvertent or intentional actions by its employees, partners or vendors. Thesesystems are also vulnerable to attacks by malicious third parties, and may be susceptible to intentional or accidental physical damage to the infrastructuremaintained by us or by third parties. A breach of our security measures or the accidental loss, inadvertent disclosure, unapproved dissemination,misappropriation or misuse of trade secrets, proprietary information, or other confidential information, whether as a result of theft, hacking, fraud, trickery orother forms of deception, or for any other cause, could enable others to produce competing products, use our proprietary technology or information, and/oradversely affect our business. Further, any such interruption, security breach, loss or disclosure of confidential information could result in financial, legal,business, and reputational harm to us and could have a material adverse effect on our business, results of operations and financial condition.Risks Relating to the December 30, 2015 Financing (the "Refinancing")If we fail to abide by the terms and conditions of the Refinancing, the secured lenders have the right to proceed against our intellectual property andother assets pursuant to their first priority security interest.On December 30, 2015, we entered into a $12.0 million credit facility pursuant to a Credit and Security Agreement (the "Agreement") and relatedfinancing documents with MidCap Financial Trust ("MidCap") and the lenders listed in the loan documents. We have drawn down the full $12.0 millionavailable to us. Our obligations under the credit facility are secured by a first priority lien on all of our assets. Our commitments under the Agreement requirethat we maintain our listing on a nationally recognized stock exchange and that we meet certain rolling 12-month revenue milestones. We have amended theAgreement twice to lower the revenue milestones. Our failure to abide by our on-going obligations under the loan documents could result in the lenderseizing our assets.Risks Relating to Our Common StockAs a result of a financing in June 2015 we incurred significant debt in the form of convertible preferred stock. In order to repay the underlying debt andhelp make our stock more liquid, we entered into an exchange agreement with holders of the debt and issued them a new class of preferred shares. Thesepreferred shares present significant dilution risk for our shareholders.On September 20, 2017, we announced the closing of an exchange transaction pursuant to the Securities Exchange Agreement (the "ExchangeAgreement") dated as of June 7, 2017 between us and holders of our 2.25% Senior Series A Secured Convertible Debentures due June 30, 2021 and 4% SeniorSecured Convertible Debentures due July 30, 2021 (collectively, the "Debentures"). In closing the exchange transaction under the Exchange Agreement, theholders of the Debentures exchanged the Debentures, having an aggregate principal amount of - 23 -approximately $40.5 million, into 40,482 shares (the "Preferred Shares") of our newly created Series C Convertible Preferred Stock. The Preferred Shares areconvertible into a total of approximately 15,049,000 shares of our common stock. Each Preferred Share has a stated value of $1,000 and is convertible intoshares of common stock at a conversion price equal to $2.69. We included the Exchange Agreement as an exhibit to its Form 8-K current report, which wasfiled with the Securities and Exchange Commission (the "SEC") on June 7, 2017. We relied upon the exemption from registration under the Securities Act of1933 (the "1933 Act") afforded by Section 3(a)(9) of the 1933 Act, i.e., the exchange of the Debentures for the Preferred Shares in which no commission orother remuneration was paid or given directly or indirectly for soliciting such exchange. In connection with the closing under the Exchange Agreement, onSeptember 20, 2017, we filed a Certificate of Designations with the Delaware Secretary of State setting forth the rights, preferences and privileges of theCompany's Series C Convertible Preferred Stock.If we fail to maintain the adequacy of our internal controls, our ability to provide accurate financial statements could be impaired and any failure tomaintain our internal controls could have an adverse effect on our stock price.The Sarbanes-Oxley Act of 2002 ("SOX"), as well as rules implemented by the SEC, the Public Company Accounting Oversight Board and the NasdaqStock Market, have required changes in the corporate governance practices of public companies. Monitoring compliance with the existing rules andimplementing changes required by these rules is expensive and may increase our legal and financial compliance costs, divert management attention fromoperations and strategic opportunities, and make legal, accounting and administrative activities more time-consuming. Since 2008, we have retained aconsultant experienced in SOX that assists us in the process of instituting changes to our internal procedures to satisfy the requirements of SOX. We haveevaluated our internal control systems in order to allow us to report on our internal controls, as required by Section 404 of the SOX. See Item 9A includedherein. As a small company with limited capital and human resources, we may need to divert management's time and attention away from our business inorder to ensure continued compliance with these regulatory requirements. We may require new information technologies systems, the auditing of our internalcontrols, and compliance training for our directors, officers and personnel. Such efforts may entail a significant expense. If we fail to maintain the adequacy ofour internal controls as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on anongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of SOX. Any failure to maintain the adequacyof our internal controls could have an adverse effect on timely and accurate financial reporting and the trading price of our common stock.Our stock price may be volatile, meaning purchasers of our common stock could incur substantial losses.Our stock price has been and is likely to continue to be volatile. The stock market in general and the market for medical technology companies inparticular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. The following factors, inaddition to other risk factors described in this section and general market and economic conditions, may have a significant impact on the market price of ourcommon stock: •failure of any of our products to achieve or continue to have commercial success; •the timing of regulatory approval for our future products; •adverse regulatory determinations with respect to our existing products; •results of our research and development efforts and our clinical trials; •the announcement of new products or product enhancements by us or our competitors; •regulatory developments in the U.S. and foreign countries; •our ability to manufacture our products to commercial standards; •developments concerning our clinical collaborators, suppliers or marketing partners; - 24 - •changes in financial estimates or recommendations by securities analysts; •public concern over our products; •developments or disputes concerning patents or other intellectual property rights; •product liability claims and litigation against us or our competitors; •the departure of key personnel; •the strength of our balance sheet; •variations in our financial results or those of companies that are perceived to be similar to us; •changes in the structure of third-party reimbursement in the U.S. and other countries; •changes in accounting principles or practices; •general economic, industry and market conditions; and •future sales of our common stock.A decline in the market price of our common stock could cause you to lose some or all of your investment, limit your ability to sell your shares of stockand may adversely impact our ability to attract and retain employees and raise capital. In addition, stockholders have, and may in the future, initiatesecurities class action lawsuits if the market price of our stock drops significantly. Whether or not meritorious, litigation brought against us could result insubstantial costs and could divert the time and attention of our management. Our insurance to cover claims of this sort may not be adequate.Our charter documents and Delaware law may inhibit a takeover that stockholders consider favorable and could also limit the market price of our stock.Provisions of our restated certificate of incorporation and bylaws and applicable provisions of Delaware law may make it more difficult for or prevent athird party from acquiring control of us without the approval of our board of directors. These provisions: •limit who may call a special meeting of stockholders; •establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon atstockholder meetings; •do not permit cumulative voting in the election of our directors, which would otherwise permit less than a majority of stockholders to electdirectors; •prohibit stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders; and •provide our board of directors the ability to designate the terms of and issue a new series of preferred stock without stockholder approval.In addition, Section 203 of the Delaware General Corporation Law generally limits our ability to engage in any business combination with certainpersons who own 15% or more of our outstanding voting stock or any of our associates or affiliates who at any time in the past three years have owned 15%or more of our outstanding voting stock.These provisions may have the effect of entrenching our management team and may deprive you of the opportunity to sell your shares to potentialacquirers at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price of our common stock.Item 1B. Unresolved Staff CommentsThere are no unresolved comments from the staff of the Securities and Exchange Commission. - 25 -Item 2.PropertiesWe lease a 10,672 sq. ft. facility in Horsham, Pennsylvania that houses our executive offices and marketing. The term of the lease runs throughNovember 30, 2018.We lease 28,000 sq. ft. facility consisting of office, manufacturing and warehousing space in Carlsbad, California. The lease expires on September 30,2019. Our Carlsbad facility houses the manufacturing and development operations for our excimer laser business, as well as the patient call center andreimbursement center.Item 3.Legal ProceedingsFrom 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 ourbusiness. 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 4.Mine Safety DisclosuresNot applicable.PART II Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesAs of March 22, 2018, we had 4,379,425 shares of common stock issued and outstanding. This did not include (i) options to purchase 865,722 shares ofcommon stock, of which 542,905 were vested as of March 22, 2018, (ii) warrants to purchase up to 2,406,625 shares of common stock, all of which warrantswere vested or (iii) 35,980 shares of Preferred C stock convertible into 13,375,636 shares of common stock.Our common stock is listed on the Nasdaq Global Select Market ("Nasdaq") under the symbol "SSKN." The following table sets forth, for the periodsindicated, the high and low closing sale prices per share of our common stock: High Low Year Ended December 31, 2017: Fourth Quarter $1.84 $1.14 Third Quarter 2.38 1.53 Second Quarter 3.97 2.33 First Quarter 3.15 2.25 Year Ended December 31, 2016: Fourth Quarter $3.05 $2.20 Third Quarter 3.70 2.50 Second Quarter 4.80 3.05 First Quarter 5.75 4.65 On March 22, 2018, the last reported sale price for our common stock on Nasdaq was $1.28 per share. As of March 22, 2018, we had approximately 25stockholders of record, without giving effect to determining the number of stockholders who held shares in "street name" or other nominee accounts.Dividend PolicyWe have not declared or paid any dividend on our common stock, since our inception. We do not anticipate that any dividends on our common stockwill be declared or paid in the future. - 26 -Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on then existingconditions, including our earnings, financial condition, results of operations, level of indebtedness, contractual restrictions, capital requirements, businessprospects and other factors our board of directors may deem relevant. Our board of directors' ability to declare a dividend is also subject to limits imposed byDelaware law.Securities Authorized for Issuance Under Equity Compensation PlansThe following is a summary of all of our equity compensation plans, including plans that were assumed through acquisitions and individualarrangements that provide for the issuance of equity securities as compensation, as of December 31, 2017. See Notes 1 and 13 to the consolidated financialstatements for additional discussion. Number ofSecurities tobeIssued UponExercise ofOutstandingOptions Weighted-AverageExercisePrice ofOutstandingOptions Number ofSecuritiesRemainingAvailableUnder EquityCompensationPlans(excludingsecuritiesreflected incolumn (A)) (A) (B) (C) Equity compensation plans approved by security holders 865,722 $4.74 1,624,795 Equity compensation plans not approved by security holders - - - Total 865,722 $4.74 1,624,795 Recent Issuances of Unregistered SecuritiesNone.Purchases of Equity SecuritiesNone.Item 6.Selected Financial DataNot applicable.Item 7.Management's Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and related notes includedelsewhere in this Report. Dollar amounts are reported in thousands, except per share and per treatment data.Introduction, Outlook and Overview of Business OperationsWe are a medical technology company focused on the therapeutic and aesthetic dermatology market. STRATA sales include the followingproducts: XTRAC ® laser and VTRAC ® excimer lamp systems utilized in the treatment of psoriasis, vitiligo and various other skin conditions; theSTRATAPEN® MicroSystems, a micropigmentation device; and Nordlys, a multi-technology aesthetic laser device for treating vascular and pigmentedlesions.The XTRAC device is utilized to treat psoriasis, vitiligo and other skin diseases. The XTRAC device received FDA clearance in 2000 and has sincebecome a widely recognized treatment among dermatologists. The - 27 -system delivers targeted 308um ultraviolet light to affected areas of skin, leading to psoriasis clearing and vitiligo repigmentation, following a series oftreatments. As of December 31, 2017, there were 753 XTRAC systems placed in dermatologists' offices in the United States under our recurring revenuemodel, down from 775 at the end of December 31, 2016. Under the recurring revenue model, the XTRAC system is placed in a physician's office and fees arecharged 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 forpsoriasis is covered by nearly all major insurance companies, including Medicare. The VTRAC Excimer Lamp system, offered internationally in addition tothe XTRAC, provides targeted therapeutic efficacy demonstrated by excimer technology with the simplicity of design and reliability of a lamp system. Thereare approximately 7.5 million people in the United States and up to 125 million people worldwide suffering from psoriasis, and 1% to 2% of the world'spopulation suffers from vitiligo. In 2017, over 335,000 XTRAC laser treatments were performed on approximately 21,000 patients in the United States.In March 2017 we informed all of the users of the MelaFind System that all service efforts for the device would end on September 30, 2017, we havenow fully discontinued our efforts to develop and commercialize MelaFind. This activity is included in the Dermatology Imaging segment. MelaFind is anon-invasive, point-of-care (i.e., in the doctor's office) instrument designed to aid in the dermatologists' decision to biopsy pigmented skin lesions,particularly melanoma. We have been unsuccessful in commercializing the MelaFind product in a way that would bring financial benefit to our shareholders.In March 2017, we sent a notice to the 90 owners of MelaFind devices informing them that, effective September 30, 2017, we no longer had the resources tocontinue to support the device and that our inventory of spare parts was being offered for sale to them on a first-come, first-served basis.Effective March 1, 2017, we entered into an agreement to license the exclusive US distribution rights for the Ellipse family of products, Nordlys,from Ellipse USA ("Ellipse") through December 31, 2019. The agreement was to be renewed if certain minimum purchase requirements were achieved and anapproximate $33 monthly license fee was paid, for a contractual total license fee of $1.1 million over the Initial Term. On October 26, 2017, by mutualagreement of the three parties involved in the transaction, the Company, Ellipse USA and the manufacturer Ellipse A/S, cancelled the agreement with EllipseUSA retroactively effective to August 9, 2017, and we entered into two new agreements. Under the new agreements we will have the exclusive USdistribution rights for the Ellipse family of products, Nordlys, from Ellipse A/S, the Danish manufacturer, through August 9, 2020. If certain sales targets aremet, the new agreement will automatically be extended for two additional years. Under the terms of the new agreements, we will be the exclusive distributorof Ellipse lasers and will pay to Ellipse USA a monthly license fee of $10 through August 9, 2020, in addition to commissions for each system sold. Thelicense fee amounts to approximately $355 over the Initial Term with a present value as of the effective date of the agreement of $286. As a result of thetermination of the old agreement and the signing of the new agreements we reversed the intangible asset and corresponding liability recorded on March 1,2017 (which resulted in a $40 gain) and recorded the distribution rights at the present value of the payments under the new agreements.Effective February 1, 2017, we entered into an exclusive OEM distribution agreement with Esthetic Education, LLC to be the exclusive marketerand seller of private label versions of the SkinStylus MicroSystem and associated parts under the name of STRATAPen. This three-year agreement allows fortwo one year extensions.Key Technology •XTRAC® Excimer Laser. XTRAC received FDA clearance in 2000 and has since become a widely recognized treatment amongdermatologists for psoriasis and other skin diseases. The XTRAC System delivers ultra-narrowband ultraviolet B light to affected areas ofskin. Following a series of treatments typically performed twice weekly, psoriasis remission can be achieved and vitiligo patches can bere-pigmented. XTRAC is endorsed by the National Psoriasis Foundation, and its use for psoriasis is covered by nearly all major insurancecompanies, including Medicare. We estimate that more than half of all major insurance companies now offer reimbursement for vitiligo aswell, a figure that is increasing. •VTRAC® Lamp. VTRAC received FDA clearance in 2005 and provides targeted therapeutic efficacy demonstrated by excimer technologywith the simplicity of design and reliability of a lamp system. - 28 - •Nordlys System. Nordlys has 16 indications cleared by FDA and has the ability to use a multitude of light based technologies all in onecompact platform–SWT (Selective Waveband Technology: the latest evolution and advancement of Intense Pulsed Light), Nd:YAG andthe FRAX 1550 non-ablative fractionated technology. •STRATAPEN®. STRATAPEN uses the patent-pending Biolock cartridge. The Biolock needle depth can be adjusted during the course ofthe procedure to accommodate different treatment areas, and can easily maneuver around facial contours and delicate features, such as theeyes, nose and mouth.Sales and MarketingAs of December 31, 2017, our sales and marketing personnel consisted of 47 full-time employees, inclusive of a direct sales organization as well as anin-house call center staffed with patient advocates and a reimbursement group that provides necessary insurance information to our physician partners andtheir patients.Reverse Stock SplitOn April 6, 2017, we completed the reverse split of our common stock in the ratio of 1-for-5. Our common stock began trading at the market opening onApril 7, 2017 on a split-adjusted basis. The reverse split is intended to enable us to increase our marketability to institutional investors and to maintain ourlisting on the Nasdaq Global Market, among other benefits. All data on common stock and equivalents was retroactively adjusted to be shown herein asreflective of this reverse stock split.Critical Accounting Policies and EstimatesThe discussion and analysis of our financial condition and results of operations in this Report are based upon our Consolidated Financial Statements,which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements requiresmanagement to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and disclosures at the date ofthe financial statements. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to revenue recognition, accountsreceivable, inventories, impairment of property and equipment and of intangibles and goodwill, and accruals for warranty claims. We use authoritativepronouncements, historical experience and other assumptions as the basis for making estimates. Actual results could differ from those estimates.Management believes that the following critical accounting policies affect our more significant judgments and estimates in the preparation of ourConsolidated Financial Statements.Revenue Recognition. In the Dermatology Recurring Procedures Segment the Company has two types of arrangements for its phototherapy treatmentequipment as follows: (i) the Company places its lasers in a physician's office at no charge to the physician, and generally charges the physician a fee for anagreed upon number of treatments; or (ii) the Company places its lasers in a physician's office and charges the physician a fixed fee for a specified period oftime not to exceed an agreed upon number of treatments; if number is exceeded additional fees will have to be paid.For the purposes of U.S. GAAP only, these two types of arrangements are treated as short term operating leases. While these are not contractuallyoperating leases these are viewed as operating leases for accounting purposes since in these arrangements the Company provides the customers the rights touse the treatment equipment and the customers control physical access to the treatment equipment while controlling the utility and output of such equipmentduring the term of the arrangement. For the first type of arrangement, fees are recognized as revenue over the contract term, which equates to the usage periodof the agreed upon number of treatments, as the treatments are being used. For the second type of arrangement fees are recognized ratably as revenue on astraight line basis over the term period specified in the agreement. Contingent amounts that will be paid only if customer exceeds the agreed upon number oftreatments are recognized only when such treatments are being exceeded and used. Pre-paid amounts are recorded in deferred revenue and recognized asrevenue over the lease term in the patterns described above. - 29 -The fee charged is inclusive of the use of the system and the services provided by the Company to the customer which include system maintenance andother services. The Company considers the other service and support elements in the contract to be perfunctory and inconsequential.In the Dermatology Procedures Equipment segment the Company sells its products internationally through a distributor, and domestically directly to aphysician. For the product sales, the Company recognizes revenues when the following four criteria have been met: (i) the product has been delivered and theCompany has no significant remaining obligations; (ii) persuasive evidence of an arrangement exists; (iii) the price to the buyer is fixed or determinable; and(iv) collection is reasonably assured. Revenues from product sales are recorded net of provisions for expected returns and cash discounts.The Company ships most of its products FOB shipping point, although from time to time certain customers, for example governmental customers, will begranted FOB destination terms. Among the factors the Company takes into account when determining the proper time at which to recognize revenue are (i)when title to the goods transfers and (ii) when the risk of loss transfers. Shipments to distributors or physicians that do not fully satisfy the collection criteriaare recognized when invoiced amounts are fully paid or fully assured and included in deferred revenues until that time.Inventory. We account for inventory at the lower of cost or net realizable value. Cost is determined to be purchased cost for raw materials and theproduction cost (materials, labor and indirect manufacturing cost) for work-in-process and finished goods. The cost is determined on the first-in, first-outmethod. Throughout the laser manufacturing process, the related production costs are recorded within inventory. Work-in-process is immaterial, given thetypically short manufacturing cycle, and therefore is disclosed in conjunction with raw materials. We perform full physical inventory counts for XTRAC andcycle counts on the other inventory to maintain controls and obtain accurate data.Our XTRAC laser is either (i) sold to distributors or physicians directly or (ii) placed in a physician's office and remains our property. The cost to build alaser, whether for sale or for placement, is accumulated in inventory. When a laser is placed in a physician's office, the cost is transferred from inventory to"lasers in service" within property and equipment. At times, units are shipped to distributors, but revenue is not recognized until all of the revenuerecognition criteria have been met, and until that time, the unit is carried on our books as inventory.Reserves for slow-moving, excess and obsolete inventories, reduce the historical carrying value of our inventories, and are provided based on historicalexperience and product demand. Management evaluates the adequacy of these reserves periodically based on forecasted sales and market trends.Allowance for Doubtful Accounts. Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. Fromtime to time, our customers dispute the amounts due to us, and, in other cases, our customers experience financial difficulties and cannot pay on a timelybasis. In certain instances, these factors ultimately result in uncollectible accounts. The determination of the appropriate reserve needed for uncollectibleaccounts involves significant judgment. Such factors include changes in the financial condition of our customers as a result of industry, economic orcustomer-specific factors. A change in the factors used to evaluate collectability could result in a significant change in the allowance needed. As of December31, 2017 and 2016, allowance for doubtful accounts was $172 and $135, respectively.Property and Equipment. As of December 31, 2017 and 2016, we had net property and equipment of $7,703 and $10,180, respectively. The mostsignificant component relates to the XTRAC lasers placed by us in physicians' offices. We own the equipment and charge the physician on a per-treatmentbasis for use of the equipment. The recoverability of the net carrying value of the lasers is predicated on continuing revenues from the physicians' use of thelasers. If the physician does not generate sufficient treatments, then we may remove the laser from the physician's office and redeploy it elsewhere. XTRAClasers placed in service are depreciated on a straight-line basis over the estimated useful life of five-years. For other property and equipment depreciation iscalculated on a straight-line basis over the estimated useful lives of the assets, primarily three to seven years for computer hardware and software, furnitureand fixtures, automobiles and machinery and equipment. Leasehold improvements are amortized over the lesser of the useful lives or lease terms. Useful livesare determined based upon an estimate of either physical or economic obsolescence, or both. - 30 -Goodwill. Our balance sheet includes goodwill which is subject to an annual assessment for impairment under FASB ASC Topic 350, "Goodwill andOther Intangibles" and is not amortizable. Management's judgments regarding the existence of impairment indicators, on an interim or annual basis, are basedon various factors, including market conditions and operational performance of our business. As of December 31, 2017 and 2016, we had $8,803 of goodwillaccounting for 22.8% and 20.4% of our total assets, respectively. The acquisition of the XTRAC and VTRAC businesses that gave rise to the recordedgoodwill closed on June 22, 2015. The determination of the fair value of the reporting units to which the goodwill relates requires management to makeestimates and assumptions. We test our goodwill for impairment at least annually. This test is conducted in December of each year in connection with theannual budgeting and forecast process. Also, on a quarterly basis, we evaluate whether events or changes in circumstances have occurred that wouldnegatively impact the realizable value of our intangibles or goodwill.We organized our business into three operating segments, which also serve as our goodwill reporting units and are defined as Dermatology RecurringProcedures, Dermatology Procedures Equipment and Dermatology Imaging. The balance of our goodwill for each of our segments as of December 31, 2017 isas follows: Dermatology Recurring Procedures $7,958, Dermatology Procedures Equipment $845 and Dermatology Imaging $0. We completed our annualgoodwill impairment analysis as of December 31, 2017 for our reporting units. Our assessment concluded that there was no impairment of goodwill. Ouranalysis employed the use of both a market and income approach, with each method given equal weighting. Significant assumptions used in the incomeapproach include growth and discount rates, profit margins and our weighted average cost of capital. We used historical performance and managementestimates of future performance to determine profit margins and growth rates. Discount rates selected for each reporting unit varied. Our weighted averagecost of capital included a review and assessment of market and capital structure assumptions. Of the two reporting units with goodwill, DermatologyRecurring Procedures has a fair value that is in excess of its carrying value by approximately 10.95%, while Dermatology Procedures Equipment has a fairvalue that is approximately 178.9% in excess of its carrying value. Considerable management judgment is necessary to evaluate the impact of operatingchanges and to estimate future cash flows. Changes in our actual results and/or estimates or any of our other assumptions used in our analysis could result in adifferent conclusion.Intangibles. All of our intangibles are definite lived assets, with amortization recorded over the estimated useful life on a straight-line basis. As ofDecember 31, 2017 and 2016, we had $11,325 and $13,412 of intangible assets accounting for 29.3% and 31.1% of our total assets, respectively. Thedefinite lived assets are tested for impairment when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.Our intangible assets are grouped into five categories: core technology, product technology, customer relationships, tradenames and distribution rights.Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the undiscounted cash flows attributable to theasset. If the carrying amount of an asset exceeds its undiscounted cash flows, an impairment charge is recognized in the amount by which the carryingamount of the asset exceeds its fair value of the asset. Our assessment concluded that the product technology intangible asset carrying value exceeded therecoverable amount of the intangible, thus an impairment loss was recognized for the difference between the carrying value and the fair value of the asset of$500 for the period ended December 31, 2017.Considerable management judgment is necessary to assess recoverable amounts of intangible assets and measure fair value of the intangible assets thatwere impaired as such measurements involve estimation of future revenues, royalty rates, profit margins and other cash flows. Changes in our actual resultsand/or estimates or any of our other assumptions used in our analysis could result in a different conclusion.Income taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of thejurisdictions in which we operate. This process requires us to estimate our actual current tax exposure and make an assessment of temporary differencesresulting from differing treatment of items, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are includedwithin our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, tothe extent we believe that recovery is not more likely than not, we establish a valuation allowance. To the extent we establish a valuation allowance orincrease this allowance in a period, we must include an expense within the tax provision in the consolidated statement of operations. Significant managementjudgment is required in determining our deferred tax assets and liabilities and any valuation allowance - 31 -recorded against our net deferred tax assets. In the event that we generate taxable income in the jurisdictions in which we operate and in which we have netoperating loss carry-forwards, we may be required to adjust our valuation allowance. As of December 31, 2017 and 2016 we have a full valuation allowanceon our net deferred tax assets.ASC Topic 740-10 requires that we recognize in our financial statements the impact of a tax position, if that position will more likely than not besustained upon examination, based on the technical merits of the position, without regard to the likelihood that the tax position may be challenged. If anuncertain tax position meets the "more-likely-than-not" threshold, the largest amount of tax benefit that is greater than 50% likely to be recognized uponultimate settlement with the taxing authority is recorded. We do not have any uncertain tax positions or accrued penalties and interest. If such matters were toarise, we would recognize interest and penalties related to income tax matters in income tax expense.Stock-based compensation. We account for stock based compensation to employees in accordance with the "Share-Based Payment" accountingstandard. The standard requires estimating the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of theaward is recognized as an expense over the requisite service periods in our consolidated statement of operations. For performance-based awards, we recognizethe expense only if we deem it probable that the vesting condition will occur.The fair value of employee stock options is estimated using a Black-Scholes valuation model. Compensation costs are recognized over the requisiteservice period. Total stock-based compensation expense was $186 and $113 for the years ended December 31, 2017 and 2016, respectively.Fair Value Measurements. We measure fair value in accordance with Financial Accounting Standards Board Accounting Standards Codification820, Fair Value Measurements and Disclosures ("ASC Topic 820"). ASC Topic 820 defines fair value, establishes a framework and gives guidance regardingthe methods used for measuring fair value, and expands disclosures about fair value measurements. Fair value is an exit price, representing the amount thatwould be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-basedmeasurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for consideringsuch assumptions there exists a three-tier fair-value hierarchy, which prioritizes the inputs used in measuring fair value. Our derivative financial instrumentswere measured using significant unobservable inputs (level 3).Results of Operations (The following financial data, in this narrative, are expressed in thousands, except for the earnings per share.)RevenuesThe following table presents revenues from our three segments for the periods indicated below: For the YearEndedDecember 31, 2017 2016 Dermatology Recurring Procedures $22,640 $23,508 Dermatology Procedures Equipment 8,792 7,065 Dermatology Imaging 17 134 Total Revenues $31,449 $30,707 Dermatology Recurring ProceduresRevenues from Dermatology Recurring Procedures for the year ended December 31, 2017 was $22,640 which approximates 335,000 treatments, withprices from $65 to $95 per treatment. Revenues from Dermatology Recurring Procedures for the year ended December 31, 2016 was $23,508 whichapproximates 351,000 treatments, with prices from $65 to $95 per treatment. Increases in procedures are dependent upon building market acceptance - 32 -through marketing programs with our physician partners and their patients to show that the XTRAC procedures will be of clinical benefit and will begenerally reimbursed by insurers. We believe that several factors have limited the growth of the use of XTRAC treatments from those who suffer frompsoriasis and vitiligo. Specifically, we believe that awareness of the positive effects of XTRAC treatments has not been understood well enough among bothsufferers and providers; and the treatment regimen requiring sometimes up to 12 or more treatments has limited XTRAC use to certain patient populations.Therefore, we have a direct to patient program for XTRAC advertising in the United States targeted at psoriasis and vitiligo patients through a variety ofmedia including television and radio; and through our use of social media such as Facebook and Twitter. We continue to increase our advertisingexpenditures in this area to reach the more than 10 million patients in the United States afflicted with these diseases. Our revenues in 2017 were adverselyeffected by our attempts to reorient our direct to patient advertising programs from our traditional TV and radio markets into social media and the internet.Revenues from Dermatology Recurring Procedures are recognized over the contract term, which equates to the usage period of the agreed upon numberof treatments, as the treatments are being used. As of December 31, 2017 and 2016, we deferred net revenues of $151 and $91, respectively which will berecognized as revenue over the remaining contract term.Dermatology Procedures EquipmentFor the year ended December 31, 2017 dermatology equipment revenues were $8,792. Internationally, we sold 63 systems for the year ended December31, 2017, 24 of which were VTRAC systems. Domestically, we sold 29 systems for the year ended December 31, 2017. For the year ended December 31, 2016dermatology equipment revenues were $7,065. Internationally, we sold 88 systems for the year ended December 31, 2016, 27 of which were VTRAC systems.Domestically, we sold 3 systems for the year ended December 31, 2016.Additionally, included in the year ended December 31, 2017 was $1,207 in revenues for 9 Nordlys units (and accessories). There were no such revenuesfor the year ended December 31, 2016.Dermatology ImagingFor the year ended December 31, 2017 and 2016, imaging revenues were $17 and $134, respectively. We have discontinued our efforts to develop theMelaFind System and have discontinued our efforts to develop and commercialize it. We no longer have the resources to continue to support the device. Inannouncing our discontinuation of support for the device we offered MelaFind users the opportunity to purchase our inventory of spare parts. Imagingrevenues for the current period include those sales.Cost of RevenuesThe following table illustrates cost of revenues from our three business segments for the periods listed below: For the YearEndedDecember 31, 2017 2016 Dermatology Recurring Procedures $8,744 $8,763 Dermatology Procedures Equipment 4,529 3,506 Dermatology Imaging 225 367 Total Cost of Revenues $13,498 $12,636 Gross Profit AnalysisGross profit decreased to $17,951 for the year ended December 31, 2017 from $18,071 during the same period in 2016. As a percentage of revenues, thegross margin was 57.1% for the year ended December 31, 2017 versus 58.8% during the same period in 2016. - 33 -The following tables analyze changes in our gross margin, by segment, for the periods presented below:Company Profit Analysis For the Year EndedDecember 31, 2017 2016 Revenues $31,449 $30,707 Percent increase 2.4% Cost of revenues 13,498 12,636 Percent increase 6.8% Gross profit $17,951 $18,071 Gross margin percentage 57.1% 58.8%Dermatology Recurring Procedures For the Year EndedDecember 31, 2017 2016 Revenues $22,640 $23,508 Percent decrease (3.7%) Cost of revenues 8,744 8,763 Percent decrease (0.2%) Gross profit $13,896 $14,745 Gross margin percentage 61.4% 62.7%The primary reason for the change in gross profit for the year ended December 31, 2017, compared to the same period in 2016, was due to animpairment charge of $500 recorded during the year ended December 31, 2017 (of which $406 was allocated to this segment), and a decline in mediapresence which resulted in a decline in treatments, partially offset by technical improvements in the product which reduced gas consumption and servicerepairs for the year ended 2017. Incremental treatments delivered on existing equipment incur negligible incremental costs, so increases and/or decreases inthose treatments have an impact on gross margin.Dermatology Procedures Equipment For the Year EndedDecember 31, 2017 2016 Revenues $8,792 $7,065 Percent increase 24.4% Cost of revenues 4,529 3,506 Percent increase 29.2% Gross profit $4,263 $3,559 Gross margin percentage 48.5% 50.4%The primary reason for the change in gross profit for the year ended December 31, 2017, compared to the same period in 2016, was product mix. Thegross margin change is affected by the mix of products sold as XTRAC systems have a lower gross margin than parts. Additionally, domestic XTRAC systemsales and Nordlys system sales have a greater gross margin than international sales.Dermatology ImagingThe primary reason for the change in gross profit for the year ended December 31, 2017, compared to the same period in 2016, was the fact that wehave discontinued our efforts to develop and commercialize the MelaFind System. We no longer have the resources to continue to support the device and ourinventory of spare parts is being offered for sale to customers on a first-come, first-served basis. - 34 -Engineering and Product DevelopmentEngineering and product development expenses for the year ended December 31, 2017 decreased to $1,711 from $1,929 for the year ended December31, 2016. The decrease was due to having ended the ongoing research and development efforts for the MelaFind technology on product enhancements.Selling and Marketing ExpensesFor the year ended December 31, 2017, selling and marketing expenses decreased to $11,249 from $12,102 for the year ended December 31, 2016. Thedecrease was related to the planned reduction of expense in TV and radio media as we transition over to more of an internet and social media campaign.General and Administrative ExpensesFor the year ended December 31, 2017, general and administrative expenses decreased to $7,401 from $7,637 for the year ended December 31, 2016.The decrease was primarily due to the closing of the Irvington, NY facility in May 2016, partially offset by an increase in sales and use tax expense.Interest Expense, NetInterest expense for the year ended December 31, 2017 was $4,612 compared to $4,900 in the year ended December 31, 2016. Interest expense for theconvertible debentures (see Note 8), which included amortization of the related debt discount and deferred financing fees, was for just less than nine monthsfor 2017 due to their exchange for convertible Preferred C stock on September 20, 2017, whereas there was a full year of such interest expense in 2016,causing a net decrease of $409 year over year. Partially offsetting this decrease was the addition of $75 of interest expense related to the Ellipse licenseagreement that was new in 2017.Change in Fair Value of Warrant LiabilityIn accordance with FASB ASC 470, "Debt – Debt with Conversion and Other Options" ("ASC Topic 470") and FASB ASC 820, Fair ValueMeasurements and Disclosures ("ASC Topic 820"), we measured the fair value of our warrants that were recorded at their fair value and recognized asliabilities as of December 31, 2017, and recorded $102 in other income for the year ended December 31, 2017. We measured the fair value of these warrants asof December 31, 2016, and recorded $5,396 in other income for the year ended December 31, 2016.Loss on Extinguishment of DebenturesLoss on extinguishment of debentures of $11,799 for the year ended December 31, 2017, represents the loss recognized as a result of the exchange ofthe 2.25% Senior Series A Secured Convertible Debentures due June 30, 2021 and the 4% Senior Secured Convertible Debentures due July 30, 2021 for40,482 shares of Series C Convertible Preferred Stock. For more information, see Note 8 to the accompanying consolidated financial statements.Income TaxesIncome tax expense for the year ended December 31, 2017 was $129 compared to $255 for the year ended December 31, 2016. The expense iscomprised primarily of the change in deferred tax liability related to goodwill. Goodwill is an amortizing asset according to tax regulations. This generates adeferred tax liability that is not used to offset deferred tax assets for valuation allowance considerations. On December 22, 2017, the U.S. government enactedcomprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). With regards to the Tax Act impact on the tax provision asit relates to the Company for year ended December 31, 2017, we have recognized the provisional impact of tax reform related to the revaluation of deferredtax assets and liabilities from 35% to 21% in the amount of $23.8 million tax expense, which is almost entirely offset by a reduction in the valuationallowance.Net LossThe factors described above resulted in net loss of $18,831 during the year ended December 31, 2017, as compared to a net loss of $3,335 during theyear ended December 31, 2016. - 35 -Non-GAAP adjusted EBITDAWe have determined to supplement our consolidated financial statements, prepared in accordance with GAAP, presented elsewhere within this report,with certain non-GAAP measures of financial performance. These non-GAAP measures include non-GAAP adjusted EBITDA.We consider these non-GAAP measures in addition to our results prepared under current accounting standards, but they are not a substitute for, norsuperior to, GAAP measures. These non-GAAP measures are provided to enhance readers' overall understanding of our current financial performance and toprovide further information for comparative purposes.Specifically, we believe the non-GAAP measures provide useful information to management and investors by isolating certain expenses, gains andlosses that may not be indicative of our core operating results and business outlook. In addition, we believe non-GAAP measures enhance the comparabilityof results against prior periods. Reconciliation to the most directly comparable GAAP measure of all non-GAAP measures included in this report is as follows: For the Year Ended December 31, 2017 2016 Change Net loss $ (18,831) $ (3,335) $ (15,496) Adjustments: Income taxes 129 255 (126)Depreciation and amortization * 6,336 6,366 (30)Interest expense, net 2,056 2,226 (170)Non-cash interest expense 2,556 2,674 (118) EBITDA (7,754) 8,186 (15,940) Stock-based compensation expense 186 113 73 Impairment of lasers placed-in-service 196 - 196 Impairment of intangible assets 523 - 523 Change in fair value of warrants (102) (5,396) 5,294 Loss on extinguishment of debentures 11,799 - 11,799 Non-GAAP adjusted EBITDA $4,848 $2,903 $1,945 * Includes depreciation on lasers placed-in-service of $4,247 and $4,410 for the year ended December 31, 2017 and 2016, respectively.Liquidity and Capital ResourcesAs of December 31, 2017, we had $3,080 of working capital compared to $4,619 as of December 31, 2016. Cash and cash equivalents were $4,069 as ofDecember 31, 2017, as compared to $3,928, as of December 31, 2016.In June 2015, we raised additional gross proceeds of approximately $42,500 through the issuance of $32,500 of 2.25% senior secured convertibledebentures due June 2020, $10,000 of Senior secured notes and warrants to purchase common stock. The debentures were convertible at any time into anaggregate of approximately 8.7 million shares of our common stock at a price of $3.75 per share. Our obligations under the debentures were secured by asubordinated first priority lien on all of our assets.On December 30, 2015, we entered into a $12,000 credit facility pursuant to a Credit and Security Agreement (the "Agreement") and related financingdocuments with MidCap Financial Trust ("MidCap") and the lenders listed therein. Our obligations under the credit facility are secured by a first priority lienon all of our assets.On June 6, 2017, the Company entered into a Securities Exchange Agreement (the "Agreement") with the holders of its 2.25% Senior Series A SecuredConvertible Debentures due June 30, 2021 and 4% Senior Secured Convertible Debentures due July 30, 2021, pursuant to which the holders have agreed toexchange all of such outstanding debentures into shares of newly created Series C Convertible Preferred Stock. The stockholders - 36 -approved the exchange at the stockholders' meeting held on September 14, 2017. The closing of the exchange was effective on September 20, 2017 and$40,465 of principal was exchanged for 40,482 shares of Series C Preferred Stock.Other than the limitations on conversions to keep each such holders beneficial ownership below 9.99%, the terms of the Series C Convertible PreferredStock generally bestow the same rights to each holder as such holder would receive if they are common stock shareholder and are not redeemable by theholders, except that the Series C Convertible Preferred Stock shares have no voting rights. Each share of Series C Convertible Preferred Stock has a statedvalue of $1,000 and is convertible into shares of common stock at a conversion price equal to $2.69 for a total of approximately 15,049,000 shares ofcommon stock.On March 30, 2018 we entered into a Stock Purchase Agreement (the "Accelmed SPA") with Accelmed Growth Partners ("Accelmed") investing $13million into the Company in exchange for 12,307,037 shares of our common stock. In connection with the proposed Accelmed investment, we entered intotwo separate stock purchase agreements on March 30, 2018 for approximately $1 million with our current shareholders, Broadfin Capital ("Broadfin") andSabby Management ("Sabby"). Upon closing of these transactions, each of Sabby and Broadfin will receive 925,926 shares of our common stock. Twoseparate subscription agreements were also executed on March 30, 2018 for $1 million each to purchase 925,926 shares of our common stock. See Note 18 –Subsequent Events for additional detail.In connection with the Accelmed investment, we entered into a non-binding letter of intent dated March 30, 2018 with Midcap to terminate the existingMidcap loan agreement and replace it with a new agreement reflecting a $3 million repayment of the current facility and the base amount of the loan to be$7.6 million.Since inception we have experienced recurring losses and, until 2016, negative cash flow from operations. Historically, we have been dependent onraising capital from the sale of securities in order to continue to operate and to meet our obligations in the ordinary course of business. The equity financingsdescribed above are subject to shareholder approval. Therefore, there is uncertainty whether the Company will close on the equity purchase and subscriptionagreements as well as the MidCap non-binding letter of intent. We believe that our cash as of December 31, 2017, combined with the anticipated revenuesfrom the sale of our products and the proposed investment discussed above, will be sufficient to satisfy our working capital needs, capital asset purchases,outstanding commitments and other liquidity requirements associated with our existing operations through the next 12 months following the filing of thisForm 10-K. However, if we fail to meet the monthly revenue covenants per the MidCap loan agreement, we may be declared in breach of the credit facilityagreement and Midcap will have the option to call the loan balance. Without the investment described above, we would not have sufficient cash to pay theoutstanding loan balance in full in the next 12 months following the filing of this form 10-K. See Note 2 for further discussion of liquidity and goingconcern. Net cash and cash equivalents provided by operating activities was $4,140 for the year ended December 31, 2017 compared to cash provided byoperating activities of $322 for the year ended December 31, 2016. The primary reasons for the change were overall reduction of operating expenses of$1,456, as well as the favorable increase from changes in operating assets and liabilities of $1,944.Net cash and cash equivalents used in investing activities was $2,194 for the year ended December 31, 2017 compared to cash used in investingactivities of $868 for the year ended December 31, 2016. The primary reason for the change was the increased investment in lasers placed in service duringthe year ended December 31, 2017.Net cash and cash equivalents used in financing activities was $1,803 for the year ended December 31, 2017 compared to cash provided by financingactivities of $1,167 for the year ended December 31, 2016. In the year ended December 31, 2017, we had repayments on the term debt of $1,429. In the yearended December 31, 2016, we drew down $1,500 on a long-term debt facility.Off-Balance Sheet ArrangementsAt December 31, 2017, we had no off-balance sheet arrangements.Impact of InflationWe have not operated in a highly inflationary period, and we do not believe that inflation has had a material effect on our revenues or expenses. - 37 - Item 7A. Quantitative and Qualitative Disclosure about Market RiskOur exposure to market risk is confined to our cash and cash equivalents. We invest in high-quality financial instruments, primarily money marketfunds, with the average effective duration of the portfolio within one year which we believe are subject to limited credit risk. We currently do not hedgeinterest rate exposure. Due to the short-term nature of our investments, we do not believe that we have any material exposure to interest rate risk arising fromour investments. We are exposed to credit risks in the event of default by the financial institutions or issuers of investments in excess of FDIC insured limits.We perform periodic evaluations of the relative credit standing of these financial institutions and limit the amount of credit exposure with any institution.Item 8. Financial Statements and Supplementary DataThe financial statements required by this Item 8 are included in this Report and begin on page F-1.Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A. Controls and ProceduresEvaluation of Disclosure Controls and ProceduresOur management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design andoperation 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 December 31, 2017. Based on that evaluation, management has concluded that, as of such date, our disclosure controls andprocedures were effective at the reasonable assurance level described below.We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in reports that we file orsubmit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that suchinformation is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, toallow timely decisions regarding required disclosure.In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter howwell conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met.Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefitrelationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certainassumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potentialfuture conditions.Management's Report on Internal Control over Financial ReportingOur Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act. Our management conducted an assessment of the effectiveness of our internal control over financial reporting based onthe framework established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO). Based on this assessment, our management has determined that our internal control over financial reporting was effective as ofDecember 31, 2017.Because of the inherent limitations in a cost-effective control system, no evaluation of internal control over financial reporting can provide absoluteassurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company have beendetected. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation andpresentation. Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detectall errors and all fraud. - 38 - The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance thatany design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to futureperiods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance withpolicies or procedures.Changes in Internal Control over Financial ReportingThere has been no change in our internal control over financial reporting in our most recent fiscal quarter that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.Item 9B. Other InformationNone. PART III Item 10. Directors, Executive Officers and Corporate GovernanceOur directors currently have terms which will end at our next annual meeting of the stockholders or until their successors are elected and qualify,subject to their prior death, resignation or removal. Officers serve at the discretion of the Board of Directors. There are no family relationships among any ofour directors and executive officers. Members of our Board of Directors are encouraged to attend meetings of the Board of Directors and the Annual Meetingof Stockholders. The Board of Directors held 15 meetings.The following sets forth certain biographical information concerning our current directors and our executive officers as of March 22, 2018. Name Position AgeLuAnn Via Chairperson of the Board 64Francis J. McCaney President, Chief Executive Officer and Director 63James L. Coyne Director 60Samuel E. Navarro Director 62David K. Stone Director 61Kathryn Swintek Director 65Jeffrey F. O'Donnell, Sr. Director 58LuAnn Via has served as a member of our Board of Directors since April 2012 and became Chairperson on December 18, 2017. From November 2012through January 2017, Ms. Via was President and CEO of Christopher & Banks Corporation, a specialty retailer of women's clothes; a company operatingmore than 500 retail stores. Prior to this, Ms. Via served as the President and Chief Executive Officer of Payless ShoeSource, a unit of Collective Brands, Inc.,from July 2008 to October 2012 when the company was acquired and taken private. Before joining Payless ShoeSource, from January 2006 Ms. Via served asgroup divisional President of Lane Bryant and Cacique store chains and as President of Catherines stores, both divisions of Charming Shoppes, Inc. Prior tothis, and for more than 20 years, Ms. Via held several leadership positions with a number of top retailers. Ms. Via is a member of Women Corporate Directorsand The Committee of 200, a business women's leadership group. We believe Ms. Via's qualifications to serve on our Board of Directors and as Chairpersoninclude her experience in retail sales and manufacturing and her extensive experience as a CEO and senior executive of several publicly-listed companies.Francis J. McCaney became our President and Chief Executive Officer on October 31, 2016. Mr. McCaney was most recently the chief executiveofficer of Corpak MedSystems, a private equity-backed medical device company in the field of enteral feeding. Corpak was sold to Halyard Health (HYH:NYSE) for $174 million in May 2016. Prior to Corpak, he was the founder and CEO of Nitric BioTherapeutics, a venture backed-medical technologycompany from 2006 until 2012. Prior to Nitric Bio, he was a senior executive at Viasys Healthcare, Inc. (VAS: NYSE), a medical technology companyfocusing on respiratory, neurology, medical disposable and orthopedic - 39 - products and had a lead role in spinning Viasys out of Thermo Electron Corporation (TMO: NYSE). While at Viasys, Mr. McCaney had severalresponsibilities including strategy, business development and investor relations. He currently serves as a director of Diasome Pharmaceuticals, a privately-held company. We believe Mr. McCaney's qualifications to serve on our Board of Directors include his extensive executive experience in the healthcareindustry, including medical device companies.James L. Coyne joined as a member of the Board of Directors in March 2017. Mr. Coyne has been the Chief Executive Officer of Modevity, LLC sincehelping to found the company in April 2004. Modevity is the developer of the ARALOC Secure Content Distribution Platform, a software system for sharingproprietary and / or confidential content files over the internet. ARALOC permits approved users to share documents, forms, videos, and to collaboratesecurely from any mobile or desktop device. Concurrently with his activities at Modevity, beginning in February 2017, Mr. Coyne also serves as the ChiefOperating Officer of CanSurround a start-up Health Tech enterprise focusing on providing psychosocial support to Cancer survivors, their caregivers, andsupporters to build resilience and improve treatment adherence. For ten years from 1993-2003 Mr. Coyne was the Co-Founder and CEO at CB Technologies acompany that offered software solutions to the pharmaceutical industry to improve clinical trials. Since March 2005, Mr. Coyne has served as a boardmember and ex-chairman of Chester County Futures, a non-profit organization providing academic support, mentoring, and scholarships to economicallydisadvantaged youth. Mr. Coyne earned his undergraduate degree at Penn State University and performed graduate study in MIS at Widener University. Webelieve Mr. Coyne's qualifications to serve on the Board of Directors include his extensive executive experience in the healthcare industry, includingmedical device companies.Samuel Navarro has served as a member of our Board of Directors since March 2014. Since October 2008, Mr. Navarro has been Managing Partner atGravitas Healthcare, LLC, which provides strategic advisory services to medical technology companies. From September 2005 to October 2008, Mr. Navarrowas Managing Director of Cowen & Co. in New York City and head of their Medical Technology Investment Banking initiatives, leading a team of seniorpeople, and was responsible for building the franchise across all product categories, including M&A/Advisory and financing services and products. From2001 to 2005, Mr. Navarro was at The Galleon Group running the Galleon Healthcare Fund as a Senior Portfolio Manager. He was responsible for all healthcare investments across all sectors, including pharmaceutical/biopharmaceutical industries, medical technology and hospital supplies, and all areas ofhealthcare services. From July 1998 to February 2001, Mr. Navarro was Global Head of Healthcare Investment Banking at ING Barings. Mr. Navarro has alsoserved or serves on the boards of Arstasis, Derma Sciences, MicroTherapeutics, Jomed, PhotoMedex and Pixelux Entertainment. Mr. Navarro received anMBA in Finance from The Wharton School at the University of Pennsylvania, a Master of Science in Engineering from Stanford University and a Bachelor ofScience in Engineering from The University of Texas at Austin. We believe Mr. Navarro's qualifications to serve on our Board of Directors include his wealthof knowledge and industry expertise in finance, investment banking, mergers and acquisitions, equity research and investment management experience in themedical device industry.David K. Stone has served as a member of our Board of Directors since December 2011 and served as Chairman of our Board of Directors from June2013 to November 2013. In 2006, Mr. Stone founded Liberty Tree Advisors, LLC, a life sciences investment banking and consulting firm where he served asa Managing Director until July 2017. Prior to this, from 2000 to 2006 Mr. Stone was a Managing Director and Partner at Flagship Ventures, a venture capitalfund focused in the life sciences industry. From 1989 to 1999, Mr. Stone led the biotechnology equity research team at Cowen & Company. Mr. Stone hasserved on the Board of Directors of PAKA Pulmonary Pharmaceuticals. He has also served on the Board of Directors of Seahorse Bioscience, where he wasChairman of the Audit Committee from 2001 to November 2015 when Seahorse Bioscience was acquired by Agilent. He served on the Board of Directors ofOscient Pharmaceuticals, where he served as Chairman from 2005 to 2009. In March 2017, Mr. Stone was sanctioned by FINRA, the Financial IndustryRegulatory Authority, for failure to supervise a broker in a private securities transaction. The sanction consists of a two-month suspension from associatingwith any FINRA member firm in a principal capacity and a minimal fine. We believe Mr. Stone's qualifications to serve on our Board of Directors include hisextensive experience as a biopharmaceutical industry research analyst and his venture capital work with numerous pharmaceutical and medical devicecompanies. - 40 - Kathryn Swintek has served as a member of our Board of Directors since April 2013. Since August 2010, Ms. Swintek has been a Managing Partner andmember of the Investment Committee of Golden Seeds Fund 2, and Managing Director of Golden Seeds LLC, an angel investment forum backing womenowned or managed early stage and growth companies. Prior to Golden Seeds, Ms. Swintek was a senior executive at BNP Paribas from November 1989 toApril 2008, where she most recently served as Managing Director and Global Co-Head of its London-based Financial Sponsors Coverage Group. From 1974to 1989, Ms. Swintek was a senior executive with Irving Trust Company (now known as BNY Mellon), where she was a Sr. Vice President and held positionsin risk management, and acquisition finance, and managed business relationships for the International Division in North Africa and the Near East, as well asin France, where she served as Representative while residing in Paris. Ms. Swintek is a former Chair of the Governing Board and the Executive Committee ofThe Committee of 200 ("C200"), a business women's leadership organization, which she joined in 2003. She serves on the Board of Directors of Turtle &Hughes, Inc., Open Road Integrated Media, Inc., Oculogica Inc. and American Bank of Investments. She is a member of C200, the Women's Forum of NewYork, and Women Business Leaders of the U.S. Health Care Industry Foundation. We believe that Ms. Swintek's qualifications to serve on our Board ofDirectors include her corporate leadership experience and her wide-ranging experience in international financial services.Jeffrey F. O'Donnell, Sr. was appointed to serve on our Board of Directors in January 2014 and appointed as Chairman of the Board of Directors inMarch 2014. Mr. O'Donnell resigned the chairmanship in December 2017, but has remained an active board member. Mr. O'Donnell is currently President andChief Executive Officer of Trice Medical, an emerging growth medical device company developing optical needles used by orthopedic surgeons to diagnosesoft tissue damage of joints. In 2008, Mr. O'Donnell started Embrella Cardiovascular, Inc., a medical device startup company. In July 2009, Mr. O'Donnell wasnamed President and Chief Executive Officer of the company, which was later sold to Edwards Lifesciences Corporation in March 2011. From 1999 through2009, Mr. O'Donnell served as President, Chief Executive Officer and a Director of PhotoMedex, Inc., a public medical device company listed on the NasdaqStock Market. From 1995 through 2000, Mr. O'Donnell was at Cardiovascular Dynamics, Inc., a company focused in interventional cardiology, where heserved in a number of senior executive positions, including President and Chief Operating Officer and Chairman and Chief Executive Officer. CardiovascularDynamics became Radiance Medical Systems, which was purchased by Endologix, Inc. in 2000. Mr. O'Donnell remained on the Board of Directors until2012. Currently, Mr. O'Donnell sits on the Board of Directors of BioSig Technologies. We believe Mr. O'Donnell's qualifications to serve on our Board ofDirectors include his extensive experience in the healthcare industry; his traditional corporate background with emerging growth company experience; andhis past experience as a president, chief executive officer or director of several other companies.With respect to the incumbent members of the Board of Directors, none of the members has, in the past 10 years, been subject to a federal or statejudicial or administrative order, judgment, decree or finding, not subsequently reversed, suspended or vacated, relating to any legal proceedings, whichinclude judicial or administrative proceedings resulting from involvement in mail or wire fraud or fraud in connection with any business entity or based onviolations of federal or state securities, commodities, banking, or insurance laws and regulations, or any settlement to such actions, and any disciplinarysanction or order imposed by a stock, commodities or derivatives exchange other self-regulatory organization.Board Leadership StructureOur Board of Directors administers its risk oversight function as a whole by making risk oversight a matter of collective consideration. Whilemanagement is responsible for identifying risks, our Board of Directors has charged the Audit Committee of the Board of Directors with evaluating financialand accounting risk, the Compensation Committee of the Board of Directors with evaluating risks associated with employees and compensation. Investor-related risks are usually addressed by the Board as a whole. - 41 - Compensation, Nominations and Corporate Governance and Audit CommitteesGeneral. Our Board of Directors maintains charters for select committees. In addition, our Board of Directors has adopted a written set of corporategovernance guidelines and a code of business conduct and ethics and a code of conduct for our chief executive and senior financial officers that generallyformalize practices that we already had in place. We have adopted a Code of Ethics on Interactions with Health Care Professionals, an Anti-Fraud Programand a policy for compliance with the Foreign Corrupt Practices Act. To view the charters of our Audit, Compensation and Nominations and CorporateGovernance Committees, Code of Ethics, corporate governance guidelines, codes of conduct and whistle blower policy, please visit our website atwww.strataskinsciences.com, under the Corporate Governance section of the Investor Relations page (this website address is not intended to function as ahyperlink and the information contained on our website is not intended to be a part of this Report). In compliance with Nasdaq rules, the majority of ourBoard of Directors is comprised of independent directors. The Board of Directors determined in 2017 that, except for Mr. McCaney, who is our ChiefExecutive Officer, as well as Mr. O'Donnell and Mr. Navarro, who received consulting fees, all other current members of the Board of Directors areindependent under the revised listing standards of NASDAQ.Compensation Committee. Our Compensation Committee discharges the Board of Directors' responsibilities relating to compensation of our ChiefExecutive Officer and other executive officers, produces an annual report on executive compensation for inclusion in our annual proxy statement and thisReport and provides general oversight of compensation structure. Other specific duties and responsibilities of the Compensation Committee include: • reviewing and approving objectives relevant to executive officer compensation; •evaluating performance and recommending to the Board of Directors the compensation, including any incentive compensation, of our ChiefExecutive Officer and other executive officers in accordance with such objectives; •reviewing employment agreements for executive officers; •recommending to the Board of Directors the compensation for our directors; •administering our equity compensation plans and other employee benefit plans; •evaluating human resources and compensation strategies, as needed; and •evaluating periodically the Compensation Committee charter.Our Board of Directors has adopted a written charter for the Compensation Committee. The Compensation Committee is currently composed of LuAnnVia, Kathryn Swintek, David K. Stone and James Coyne. Ms. Via served as the Chairperson of the Compensation Committee during 2017, with Ms. Swintektaking over as Chairperson in December 2017. Our Board of Directors determined that each member of the Compensation Committee as of December 31,2017 satisfies the independence requirements of Nasdaq. The Compensation Committee held four formal meetings during 2017.The Compensation Committee reviews executive compensation from time to time and reports to the Board of Directors, which makes all final decisionswith respect to executive compensation. The Compensation Committee adheres to several guidelines in carrying out its responsibilities, includingperformance by the employees, our performance, enhancement of stockholder value, growth of new businesses and new markets and competitive levels offixed and variable compensation. The report of the Compensation Committee for 2017 is presented below.Nominations and Corporate Governance Committee. Our Board of Directors has established a Nominations and Corporate Governance Committeefor the purpose of reviewing all Board of Director-recommended and stockholder-recommended nominees, determining each nominee's qualifications andmaking a recommendation to the full Board of Directors as to which persons should be our Board of Directors' nominees. Our Board of Directors has adopteda written charter for the Nominations and Corporate Governance Committee. The Nominations and Corporate Governance Committee is composed of Mrs.Via, Mrs. Swintek, Mr. Stone and Mr. Coyne. Mr. Stone serves as the Chairman of the Nominations and Corporate Governance Committee. The Nominationsand Corporate Governance Committee held four meetings during 2017. - 42 - The duties and responsibilities of the Nominations and Corporate Governance Committee include: •identifying and recommending to our Board of Directors individuals qualified to become members of our Board of Directors; •recommending to our Board of Directors the director nominees for the next annual meeting of stockholders; •recommending to our Board of Directors director committee assignments; •reviewing and evaluating succession planning for our Chief Executive Officer and other executive officers; •monitoring the independence of our directors; •developing and overseeing the corporate governance principles applicable to members of our Board of Directors, officers and employees; •reviewing and approving director compensation and administering the Non-Employee Director Plan; •monitoring the continuing education for our directors; and •evaluating annually the Nominations and Corporate Governance Committee charter. The Nominations and Corporate Governance Committee considers these requirements when recommending nominees to our Board of Directors. OurNominations and Corporate Governance Committee utilizes a variety of methods for identifying and evaluating nominees for our directors. Our Nominationsand Corporate Governance Committee will regularly assess the appropriate size of our Board of Directors and whether any vacancies on the Board ofDirectors are expected due to retirement or other circumstances. When considering potential director nominees, the Nominations and Corporate GovernanceCommittee also considers the candidate's character, judgment, diversity, age, skills, including financial literacy and experience in the context of the needs ofSTRATA Skin and of our existing directors. The Nominations and Corporate Governance Committee also seeks director nominees who are from diversebackgrounds and who possess a range of experiences as well as a reputation for integrity. The Nominations and Corporate Governance Committee considersall of these factors to ensure that our Board of Directors as a whole possesses a broad range of skills, knowledge and experience useful to the effectiveoversight and leadership of us.Audit Committee. Our Board of Directors has established an Audit Committee to assist it in fulfilling its responsibilities for general oversight of theintegrity of our consolidated financial statements, compliance with legal and regulatory requirements, the independent auditors' qualifications andindependence, the performance of our independent auditors and an internal audit function and risk assessment and risk management. The duties of our AuditCommittee include: •appointing, evaluating and determining the compensation of our independent auditors; •reviewing and approving the scope of the annual audit, the audit fee and the financial statements; •reviewing disclosure controls and procedures, internal control over financial reporting, any internal audit function and corporate policieswith respect to financial information; •reviewing other risks that may have a significant impact on our financial statements; •preparing the Audit Committee report for inclusion in the annual proxy statement; •establishing procedures for the receipt, retention and treatment of complaints regarding accounting and auditing matters; •approving all related party transactions, as defined by applicable Nasdaq Rules, to which we are a party; and •evaluating annually the Audit Committee charter. - 43 - The Audit Committee works closely with management as well as our independent auditors. The Audit Committee has the authority to obtain advice andassistance from, and receive appropriate funding from us for, outside legal, accounting or other advisors as the Audit Committee deems necessary to carry outits duties.Our Board of Directors has adopted a written charter for the Audit Committee that meets the applicable standards of the Commission and Nasdaq. Themembers of the Audit Committee are Kathryn Swintek, David K. Stone and LuAnn Via. Ms. Swintek serves as the Chairman of the Audit Committee. TheAudit Committee meets regularly and held four meetings during 2017.The Board of Directors determined in 2017 that each member of the Audit Committee satisfies the independence and other composition requirements ofthe Securities and Exchange Commission (the "Commission") and Nasdaq. Our Board has determined that each member of the Audit Committee qualifies asan "audit committee financial expert" under Item 407(d)(5) of Regulation S-K and has the requisite accounting or related financial expertise required byapplicable Nasdaq rules.Stockholder Communications with the Board of DirectorsOur Board of Directors has established a process for stockholders to communicate with the Board of Directors or with individual directors. Stockholderswho wish to communicate with our Board of Directors or with individual directors should direct written correspondence to Jay Sturm, Corporate Counsel atjsturm@strataskin.com or to the following address (our principal executive offices): Board of Directors, c/o Corporate Secretary, 100 Lakeside Drive, Suite100, Horsham, Pennsylvania 19044. Any such communication must contain: •a representation that the stockholder is a holder of record of our capital stock; •the name and address, as they appear on our books, of the stockholder sending such communication; and •the class and number of shares of our capital stock that are beneficially owned by such stockholder.Mr. Sturm, as the Corporate Secretary will forward such communications to our Board of Directors or the specified individual director to whom thecommunication is directed unless such communication is unduly hostile, threatening, illegal or similarly inappropriate, in which case the Corporate Secretaryhas the authority to discard the communication or to take appropriate legal action regarding such communication.REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS*The audit committee oversees the Company's financial reporting process on behalf of the Board of Directors. Management has the primaryresponsibility for the financial statements and the reporting process, including the systems of internal control over financial reporting and disclosure controlsand procedures. In fulfilling its oversight responsibilities, the audit committee reviewed the audited financial statements included in the Company's AnnualReport on Form 10-K for the year ended December 31, 2017 with management, including a discussion of the quality, not just the acceptability, of theaccounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the financial statements.The audit committee is responsible for reviewing, approving and managing the engagement of the Company's independent registered publicaccounting firm, including the scope, extent and procedures of the annual audit and compensation to be paid therefore, and all other matters the auditcommittee deems appropriate, including the Company's independent registered public accounting firm's accountability to the Board of Directors and theaudit committee. The audit committee reviewed with the Company's independent registered public accounting firm, which is responsible for expressing anopinion on the conformity of audited financial statements with generally accepted accounting principles, its judgment as to the quality, not just theacceptability, of the Company's accounting principles and such other matters as are required to be discussed with the audit committee by the Standards of thePublic Company Accounting Oversight Board ("PCAOB"), including PCAOB Auditing Standard No. 16, Communications With Audit Committees, the rulesof the Securities and Exchange Commission (SEC) and other applicable regulations, and discussed and reviewed the results of the Company's independentregistered public accounting firm's examination of the financial statements. In addition, the audit committee discussed with the - 44 - Company's independent registered public accounting firm the independent registered public accounting firm's independence from management and theCompany, including the matters in the written disclosures and the letter regarding its independence by Rule 3526 of the PCAOB regarding the independentregistered public accounting firm's communications with the audit committee concerning independence. The audit committee also considered whether theprovision of non-audit services was compatible with maintaining the independent registered public accounting firm's independence.The audit committee discussed with the Company's independent registered public accounting firm the overall scope and plans for its audits, andreceived from them written disclosures and letter regarding their independence. The audit committee meets with the Company's independent registeredpublic accounting firm, with and without management present, to discuss the results of its examinations, its evaluations of the Company's internal controlover financial reporting and the overall quality of the Company's financial reporting. The audit committee held four meetings during the fiscal year endedDecember 31, 2017.In reliance on the reviews and discussions referred to above, the audit committee recommended to the Board of Directors (and the Board of Directors hasapproved) that the audited financial statements be included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017 for filingwith the Commission. The audit committee has also retained EisnerAmper LLP as the Company's independent registered public accounting firm for the fiscalyear ending December 31, 2018.AUDIT COMMITTEE:Kathryn SwintekLuAnn ViaDavid K. StoneSection 16(a) Beneficial Ownership Reporting ComplianceSection 16(a) of the Exchange Act requires our directors and executive officers and beneficial holders of more than 10% of our common stock to filewith the Commission initial reports of ownership and reports of changes in ownership of our equity securities. As of March 22, 2018, we believe, based solelyon a review of the copies of such reports furnished to us and representations of these persons that all Section 16(a) filing requirements applicable to directorsand officers were timely met during the year ended December 31, 2017.Item 11. Executive CompensationSUMMARY COMPENSATION TABLEThe following table includes information for the years ended December 31, 2017 and 2016 concerning compensation for our Named Executive Officers.Name and Principal PositionYearSalary ($)Bonus ($) (3)StockAwards ($)(4)OptionAwards ($)(4))All OtherCompensation ($)(5)Total ($) Francis J. McCaney (1), Director, President andChief Executive Officer2017375,000---13,190388,190201656,700--150,2731,000207,973 Christina L. Allgeier (2), Chief Financial Officerand Treasurer2017220,000---13,610233,6102016200,00025,500-37,60013,500276,600 (1)Francis J. McCaney was hired as President and Chief Executive Officer on October 31, 2016. (2)Christina L. Allgeier resigned from the Company effective December 31, 2017. (3)Bonus in the foregoing table is the bonus earned in 2017 and 2016, even though such bonus may have been paid in a subsequent period. (4)The amounts shown for option awards, restricted stock awards and stock purchase rights relate to shares granted. These amounts are equal to theaggregate grant-date fair value with respect to the awards made in the respective year, computed in accordance with FASB ASC Topic 718, beforeamortization and without giving effect to estimated forfeitures. (5)"All Other Compensation" includes car allowance of $12,000 and 401(k) matching contributions of $1,190 for Mr. McCaney. For Ms. Allgeier itincludes car allowance of $12,000 and 401(k) matching contributions of $1,610. - 45 - Overview of Executive Employment Agreements and Payments upon Termination or Change of ControlEmployment Agreement with Francis J. McCaney. On October 31, 2016, we entered into an Employment Agreement (the "Agreement") with FrancisJ. McCaney, our President and Chief Executive Officer. Under the terms of the agreement, Mr. McCaney will receive a base salary of $375,000 and will beeligible to receive a bonus of up to 50% of his base salary per annum, starting for fiscal year 2017, based on achievement of specified milestones, asdetermined by our Board based upon annual budgets approved by our Board from time to time.In addition, Mr. McCaney was granted options to purchase up to 310,002 shares of our common stock, having a term of ten years, as follows: (i)108,501 shares vesting in three substantially equal installments on the first, second and third anniversaries of October 31, 2016; and (ii) up to 201,501 sharesvesting in three substantially equal annual installments upon a determination by our Board that we have achieved the following milestones for each of the2017, 2018 and 2019 fiscal years, respectively: (A) one-third if we achieve the revenue plan established by our Board for such year, (B) one-third if weachieve the EBITDA plan established by our Board for such year, and (C) one-third if we achieve the goals established by our Board for such year; providedthat any such stock option that has not vested with respect to any particular year due to the failure to satisfy a milestone condition for that year will terminateas of the end of that year and will no longer become exercisable. The milestones for the year ended December 31, 2017 were not achieved, resulting in theforfeiture of 67,167 options. If (i) we undergo a change of control before the stock option vests in full and (ii) Mr. McCaney is not offered post-change ofcontrol employment by us or any successor entity, or if offered such post-change of control employment and Mr. McCaney terminates his employment forgood reason (as those terms are defined in the employment agreement) within a period of 30 days after the date of the change of control, conditioned upon hisexecution of a release satisfactory to us, all such stock options that have not previously terminated shall accelerate and shall vest in full upon the effectivedate of the termination of Employee's employment.In the event of a change of control, as defined in the agreement, and (a) Mr. McCaney has not been offered post-change of control employment byus or any successor entity or (b) Mr. McCaney is offered such post-change of control employment, and he terminates his employment for good reason, asdefined in the agreement, within 30 days after the date of change of control, in addition to payment of his base salary and any cash bonus earned through thedate of termination, Mr. McCaney will be entitled to receive, conditioned upon his execution of a release satisfactory to us, severance in the amount of histhen current base salary for 18 months. In the event we terminate Mr. McCaney's employment other than for cause or upon a change of control or by reason ofhis death or disability or his voluntary decision to terminate, in addition to payment of his base salary and any cash bonus earned through the date oftermination, Mr. McCaney will be entitled to receive, conditioned upon his execution of a release satisfactory to us, severance in the amount of his thencurrent base salary for 12 months.Employment Agreement with Christina L. Allgeier. On November 11, 2015 we entered into an employment agreement with Christina L. Allgeier, ourChief Financial Officer. The agreement had a one-year initial term, subject to annual extensions thereafter. Under the terms of the agreement, Ms. Allgeierreceived a base salary of $200,000 and was eligible to receive a bonus of up to 30% of her base salary per annum, based on achievement of specifiedmilestones, as determined by the Board of Directors following approval of the annual budget, and other objectives to be determined. In the event Ms.Allgeier's employment is terminated, without cause or in conjunction with a change of control, she will be entitled to severance equal to 12 months of herbase salary. The agreement also contains a 12 month non-compete and non-solicitation period. Upon her resignation, Ms. Allgeier entered into a severanceagreement, under which she was paid $18,333. Simultaneously with executing the severance agreement, she entered into a three month consulting agreementwith the Company ending on March 31, 2018, for which she is to be paid $10,000 per month for a total of $30,000.Outstanding Equity Awards Value at Fiscal Year-End TableThe following table includes certain information with respect to the value of all unexercised options and unvested shares of restricted stock previouslyawarded to the executive officers named above at the fiscal year end, December 31, 2017. - 46 - OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE Option Awards Stock Awards NameNumber ofSecuritiesUnderlyingUnexercisedOptions (#)Exercisable(1)Number ofSecuritiesUnderlyingUnexercisedOptions (#)Unexercisable(1)EquityIncentive Plan Awards:Number ofSecuritiesUnderlyingUnexercisedUnearnedOptions (#)OptionExercisePrice ($)OptionExpirationDateNumber ofShares orUnits ofStock ThatHave NotVested (#)MarketValue ofShares orUnits ofStock ThatHave NotVested ($)EquityIncentivePlan Awards:Number ofUnearnedShares, Unitsor OtherRights ThatHave NotVested (#)Equity IncentivePlan Awards:Market orPayout Value ofUnearnedShares, Units orOther RightsThat Have NotVested ($) (1)Francis J.McCaney36,36772,134134,3342.7510/31/202600N/AN/A Christina L.Allgeier7,500003.753/31/201800N/AN/A(1)Options granted to Mr. McCaney were under the 2016 Omnibus Incentive Plan and options granted to Ms. Allgeier were under the 2013 EquityPlan. Director CompensationEach of our non-employee directors receives an annual fee of $35,000 for serving as a director, pro-rated to the date they join the Board of Directors,and an annual grant of stock options to purchase up to 15,000 shares of common stock, which grant is pro-rated to the first day of the quarter during whichthey join the Board of Directors. In addition, our Chairperson of the Board receives an annual fee of $85,000 and the chairperson of each of our auditcommittee, our compensation committee and our nominating and corporate governance committee receives an annual fee of $15,000, $10,000 and $10,000,respectively. Committee members who are not chairs of each of our audit committee, our compensation committee and our nominating and corporategovernance committee receive annual fees of $6,000, $5,000 and $5,000, respectively, with no payments being made on a meeting-attended basis. As ouremployee, Francis McCaney received no compensation for his services as a director. The table below sets forth our non-employee directors' compensation forthe year ended December 31, 2017.On November 4, 2015, we entered into consulting agreements with two of our directors, Jeffrey F. O'Donnell, Sr. and Samuel E. Navarro, the terms ofwhich are the same. Under the terms of their respective agreements, each director agrees to provide strategic support, advice and guidance to us and ourmanagement team in connection with the integration and operation of our expanded business, investor relations and internal and external businessdevelopment activities. The consultant will make himself available to our President and Chief Executive Officer and our management team on request atmutually convenient times and will report to our Board of Directors quarterly and otherwise when requested by the Board. The term of the agreement for Mr.Navarro and Mr. O'Donnell was extended through June 30 and December 31, 2017, respectively. The directors were each paid an up-front fee of $40,000 foradvice and services rendered prior to the date of the agreement, a retainer of $10,000 per month, commencing November 10, 2016 and continuing on thetenth day of each month through the expiration of the agreement, and reimbursement of pre-approved, out-of-pocket expenses. - 47 - DIRECTOR COMPENSATION TABLE Name Fees Earned ($) StockAwards($) (1) All OtherCompensation($) (2) Total ($) Jeffrey F. O'Donnell, Sr. 85,000 9,030 120,000 214,030 Samuel E. Navarro 35,000 9,030 60,000 104,030 Kathryn Swintek 60,000 9,030 0 69,030 David K. Stone 56,000 9,030 0 65,030 LuAnn Via 54,500 9,030 0 63,530 James L. Coyne (3) 30,000 22,688 0 52,688 R. Rox Anderson (4) 10,250 0 0 10,250(1)The amounts shown for stock awards are equal to the aggregate grant-date fair value with respect to the stock awards for financial statementpurposes.(2)Mr. O'Donnell Sr. and Mr. Navarro receive a monthly payment of $10,000 for their services under a consulting agreement with us. Mr. O'Donnell'sagreement terminated on December 31, 2017, and Mr. Navarro's agreement terminated on June 30, 2017.(3)Mr. Coyne joined the Board in March 2017.(4)Dr. Anderson resigned from the Board on May 10, 2017. Limitation on Directors' Liabilities; Indemnification of Officers and DirectorsOur Fifth Amended and Restated Certificate of Incorporation, as amended ("Certificate of Incorporation") and bylaws designate the relative duties andresponsibilities of our officers, establish procedures for actions by directors and stockholders and other items. Our Certificate of Incorporation and bylawsalso contain extensive indemnification provisions, which will permit us to indemnify our officers and directors to the maximum extent provided by Delawarelaw. Pursuant to our Certificate of Incorporation and under Delaware law, our directors are not liable to us or our stockholders for monetary damages forbreach of fiduciary duty, except for (i) any breach of the director's duty of loyalty; (ii) acts for omissions not in good faith or which involve intentionalmisconduct or a knowing violation of law; breach of duty with respect to dividends and other distributions; or (iv) any transaction from which the directorderived an improper personal benefit.Directors' and Officers' Liability InsuranceWe have obtained directors' and officers' liability insurance, which expires on November 16, 2018. We are required under our indemnificationagreements to maintain such insurance for us and members of our Board of Directors. - 48 - Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information set forth in Item 5 of this Annual Report under the heading "Securities Authorized for Issuance Under Equity Compensation Plans" ishereby incorporated by reference.The following table reflects, as of March 22, 2018, the beneficial common stock ownership of: (a) each of our directors, (b) each executive officer, (c)each person known by us to be a beneficial holder of five percent (5%) or more of our common stock, and (d) all of our executive officers and directors as agroup. Unless otherwise provided in the accompanying footnotes, the information used in the table below was obtained from the referenced beneficial owner.Name and Address Of Beneficial Owner (1) Number of SharesBeneficially Owned Percentage ofSharesBeneficially Owned (1)Francis J. McCaney (2) 40,367 *Jeffrey F. O'Donnell, Sr. (3) 145,856 3.22%Samuel E. Navarro (4) 145,276 3.21%David K. Stone (5) 47,007 1.06%Kathryn Swintek (6) 46,827 1.06%LuAnn Via (7) 46,566 1.05%James L. Coyne (8) 11,250 *All directors and officers as a group (seven persons) (9) 483,149 9.95% Broadfin Healthcare Master Fund, Ltd (10) 203,346 9.99%Sabby Healthcare Master Fund, Ltd (11) 225,103 9.99%Sabby Volatility Warrant Master Fund, Ltd (12) - 9.99%* Less than 1%.(1)Beneficial ownership is determined in accordance with the rules of the Commission. Shares of common stock subject to delivery, or subject tooptions or warrants currently exercisable or exercisable, within 60 days of March 22 2018, are deemed outstanding for computing the percentageownership of the stockholder holding the options or warrants, but are not deemed outstanding for computing the percentage ownership of any otherstockholder. Unless otherwise indicated in the footnotes to this table, we believe stockholders named in the table have sole voting and soleinvestment power with respect to the shares set forth opposite such stockholder's name. Unless otherwise indicated, the listed officers, directors andstockholders can be reached at our principal offices. Percentage of ownership is based on 4,379,425 shares of common stock outstanding as of March22, 2018.(2)Includes 4,000 shares of common stock and vested options to purchase 36,367 shares of common stock. Does not include options to purchase up to206,468 shares of common stock, which may vest more than 60 days after March 22, 2018.(3)Includes 271 shares of common stock and vested options to purchase 145,585 shares of common stock. Does not include unvested options topurchase up to 15,000 shares of common stock, which may vest more than 60 days after March 22, 2018. Mr. O'Donnell's address is 100 LakesideDrive, Suite 100, Horsham, PA 19044.(4)Includes vested options to purchase 145,276 shares of common stock. Does not include unvested options to purchase up to 15,000 shares ofcommon stock, which may vest more than 60 days after March 15, 2018. Mr. Navarro's address is 100 Lakeside Drive, Suite 100, Horsham, PA19044.(5)Includes 271 shares of common stock and vested options to purchase 46,736 shares of common stock. Does not include unvested options topurchase up to 15,000 shares of common stock, which may vest more than 60 days after March 22 2018. Mr. Stone's address is 100 Lakeside Drive,Suite 100, Horsham, PA 19044. - 49 - (6)Includes 671 shares of common stock and vested options to purchase 46,156 shares of common stock. Does not include unvested options topurchase up to 15,000 shares of common stock, which may vest more than 60 days after March 22, 2018. Ms. Swintek's address is 100 LakesideDrive, Suite 100, Horsham, PA 19044. (7)Includes 571 shares of common stock and vested options to purchase 45,995 shares of common stock. Does not include unvested options topurchase up to 15,000 shares of common stock, which may vest more than 60 days after March 22 2018. Ms. Via's address is 100 Lakeside Drive,Suite 100, Horsham, PA 19044.(8)Includes vested options to purchase 11,250 shares of common stock. Does not include unvested options to purchase up to 15,000 shares of commonstock, which may vest more than 60 days after March 22, 2018. Mr. Coyne's address is 100 Lakeside Drive, Suite 100, Horsham, PA 19044.(9)Includes 5,784 shares of common stock and vested options to purchase 477,365 shares of common stock. Does not include unvested options topurchase up to 296,468 shares of common stock, which may vest more than 60 days after March 22, 2018.(10)The business address of Broadfin Healthcare Master Fund, LTD ("Broadfin") is 20 Genesis Close Ansbacher House, Second Floor, P.O. Box 1344,Grand Cayman KY1-1108, Cayman Islands and the business address of each of Broadfin Capital, LLC and Kevin Kotler is 300 Park Avenue, 25thFloor, New York, New York 10022. Broadfin, Broadfin Capital, LLC and Kevin Kotler have shared voting and investment control of the securitiesheld by Broadfin. Broadfin holds the following securities: (i) 203,346 shares of common stock; (ii) warrants to purchase 640,057 shares of commonstock at $3.75 per share; (iii) 6,488,037 shares of common stock issuable upon conversion of 17,453 shares of Series C convertible preferred stock.The conversion of all preferred stock and the exercise of all warrants referenced in this footnote are subject to a 9.99% blocker. The foregoinginformation has been derived in part from a Schedule 13D filed by Broadfin Capital, LLC on March 15, 2016 and a Form 13F filed by BroadfinCapital LLC on February 13, 2018.(11)The business address of Sabby Healthcare Master Fund Ltd. ("Sabby HMF") is c/o Sabby Management LLC, 10 Mountainview Road, Suite 205,Upper Saddle River, NJ 07458. Sabby Management, LLC serves as the investment manager of Sabby HMF. Hal Mintz is the manager of SabbyManagement, LLC and has voting and investment control of the securities held by Sabby HMF. Each of Sabby Management, LLC and Hal Mintzdisclaims beneficial ownership over the securities beneficially owned by Sabby HMF except to the extent of their respective pecuniary interesttherein. Sabby HMF holds the following securities: (i) 225,103 shares of common stock; (ii) warrants to purchase969,308 shares of common stock at$3.75 per share; (iii) 4,971,067 shares of common stock issuable upon conversion of 13,372 shares of Series C convertible preferred stock. Theconversion of all preferred stock and the exercise of all warrants referenced in this footnote are subject to a 9.99% blocker. The foregoinginformation has been derived in part from a Schedule 13D filed by Sabby HMF on January 2, 2018. (12)The business address of Sabby Volatility Warrant Master Fund Ltd. ("Sabby VWMF") is c/o Sabby Management LLC, 10 Mountainview Road, Suite205, Upper Saddle River, NJ 07458. Sabby Management, LLC serves as the investment manager of Sabby VWMF. Hal Mintz is the manager ofSabby Management, LLC and has voting and investment control of the securities held by Sabby VWMF. Each of Sabby Management, LLC and HalMintz disclaims beneficial ownership over the securities beneficially owned by Sabby VWMF except to the extent of their respective pecuniaryinterest therein. Sabby VWMF holds the following securities: (i) -0- shares of common stock; (ii) warrants to purchase251,426 shares of commonstock at $3.75 per share; (iii) 1,861,948 shares of common stock issuable upon conversion of 5,009 shares of Series C convertible preferred stock.The conversion of all preferred stock and the exercise of all warrants referenced in this footnote are subject to a 9.99% blocker. The foregoinginformation has been derived in part from a Schedule 13D filed by Sabby VWMF on January 2, 2018. - 50 - Item 13. Certain Relationships and Related Transactions, Director IndependenceRelated Person TransactionsOn June 22, 2015, the Company entered into a securities purchase agreement with the Purchasers, including certain funds managed by SabbyManagement, LLC and Broadfin Capital LLC (existing Company shareholders), in connection with a private placement. The Purchasers were issued Warrantsto purchase an aggregate of 0.6 million shares of common stock, having an exercise price of $3.75 per share. We also issued $32.5 million aggregate principalamount of Debentures that, subject to certain ownership limitations and stockholder approval conditions, were convertible into 8,666,668 shares of commonstock at an initial conversion price of $3.75 per share. The Debentures were bearing interest at the rate of 2.25% per year, and, unless previously converted,were to mature on the five-year anniversary of the date of issuance. On September 30, 2015, the Company repriced outstanding Warrants held by certaininvestors to reduce the exercise price to $3.75 per share.In connection with this financing, we also granted to the Purchasers resale registration rights with respect to the shares of common stock underlying theDebentures and the Warrants pursuant to the terms of the Registration Rights Agreement. In addition to the registration rights, the Selling Stockholders areentitled to receive liquidated damages upon the occurrence of a number of events relating to filing, becoming effective and maintaining an effectiveregistration statement covering the shares underlying the Debentures and the Warrants. The liquidated damages will be payable upon the occurrence of eachof those events and each monthly anniversary thereof until cured. The amount of liquidated damages payable is equal to 2.0% of the aggregate purchaseprice paid by each Purchaser, provided, however, the maximum aggregate liquidated damages payable to a Purchaser shall be 12% of the aggregatesubscription amount paid by such Purchaser pursuant to the Purchase Agreement. The liquidated damages shall accrue interest at a rate of 12% per annum (orsuch lesser maximum amount that is permitted to be paid by applicable law), accruing on a daily basis for each event until such event is cured.The Registration Rights Agreement requires us to file one or more registration statements for all of the securities that may be issued upon conversion ofthe Debentures and exercise of the Warrants issued to the Purchasers. Pursuant to the applicable transaction documents, however, certain Purchasers may notexercise their conversion/exercise rights for that number of shares of common stock which, together with all other shares owned by that Purchaser and itsaffiliates would result in more than 9.99% of our issued and outstanding shares of common stock calculated on the basis of the then outstanding shares.On September 20, 2017, the Company announced the closing of an exchange transaction pursuant to the Securities Exchange Agreement (the"Exchange Agreement") dated as of June 7, 2017 between the Company and holders of its 2.25% Senior Series A Secured Convertible Debentures due June30, 2021 and 4% Senior Secured Convertible Debentures due July 30, 2021 (collectively, the "Debentures"). In closing the exchange transaction under theExchange Agreement, the holders of the Debentures exchanged the Debentures, having an aggregate principal amount of approximately $40.5 million, into40,482 shares (the "Preferred Shares") of the Company's newly created Series C Convertible Preferred Stock. The Preferred Shares are convertible into a totalof approximately 15,049,000 shares of the Company's common stock. Each Preferred Share has a stated value of $1,000 and is convertible into shares ofcommon stock at a conversion price equal to $2.69. The Company included the Exchange Agreement as an exhibit to its Form 8-K current report, which wasfiled with the Securities and Exchange Commission (the "SEC") on June 7, 2017. The Company relied upon the exemption from registration - 51 -under the Securities Act of 1933 (the "1933 Act") afforded by Section 3(a)(9) of the 1933 Act, i.e., the exchange of the Debentures for the Preferred Shares inwhich no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange. In connection with the closing under theExchange Agreement, on September 20, 2017, the Company filed a Certificate of Designations with the Delaware Secretary of State setting forth the rights,preferences and privileges of the Company's Series C Convertible Preferred Stock.During 2017, Modevity LLC ("Modevity"), the developer of the ARALOC Secure Content Distribution Platform, a software system for sharingproprietary and / or confidential content files over the internet and allowing its users to collaborate securely from any mobile or desktop device, has providedcertain consulting services to the Company advising on the development of our digital media and marketing initiatives, including providing assistance inour first limited test of targeted advertising using Facebook. Our Board member, James Coyne, has been the Chief Executive Officer of Modevity sincehelping to found the company in April 2004. To date, Modevity has provided this assistance without charge to the Company. Should the Company continueto utilize Modevity's services, we expect to be charged at market rates for such assistance. Independent of these services provided by Modevity, in November2017 the Company entered into an agreement with Olympic Media, a company founded by Ryan Coyne, the son of James Coyne, to create and execute afocused tactical plan to leverage new and existing digital assets across social and digital platforms to drive psoriasis and vitiligo sufferers to the Company'swebsite and call center for conversion to new patient appointments. The agreement with Olympic Media provides for no minimum payments or otherfinancial commitments and is terminable by either party without penalty on ten days written notice. James Coyne has no financial interest in Olympic Media.Director IndependenceAs required under the NASDAQ Stock Market LLC, or NASDAQ, listing standards, a majority of the members of a listed company's board of directorsmust qualify as "independent," as affirmatively determined by the board of directors. Our board of directors consults with internal counsel to ensure that theboard's determinations are consistent with relevant securities and other laws and regulations regarding the definition of "independent," including those setforth in pertinent NASDAQ listing standards, as in effect from time to time. Consistent with these considerations, after review of all relevant transactions orrelationships between each director, or any of his or her family members, and our company, our senior management and our independent registered publicaccounting firm, the board of directors has affirmatively determined that in 2017 that, except for Mr. McCaney, who is our Chief Executive Officer, as well asMr. O'Donnell and Mr. Navarro, who received consulting fees, all other current members of the Board of Directors are independent under the revised listingstandards of NASDAQ.Director Consulting AgreementsOn November 4, 2015, we entered into consulting agreements with two of our directors, Jeffrey F. O'Donnell, Sr. and Samuel E. Navarro, the terms ofwhich are the same. Under the terms of their respective agreements, each director agrees to provide strategic support, advice and guidance to us and ourmanagement team in connection with the integration and operation of our expanded business, investor relations and internal and external businessdevelopment activities. The consultant will make himself available to our President and Chief Executive Officer and our management team on request atmutually convenient times and will report to our Board of Directors quarterly and otherwise when requested by the Board. The initial term of the agreementwas from November 4, 2015 through June 30, 2016. The term of the agreement for Mr. Navarro and Mr. O'Donnell was extended through June 30, andDecember 31, 2017, respectively. The directors were each paid an up-front fee of $40,000 for advice and services rendered prior to the date of the agreement,a retainer of $10,000 per month, commencing November 10, 2015 and continuing on the tenth day of each month through the expiration of the agreement,and reimbursement of pre-approved, out-of-pocket expenses. Each of these consulting agreements has expired.Item 14. Principal Accounting Fees and ServicesWe engaged EisnerAmper LLP as our independent auditors for 2017 and 2016. - 52 -The following table shows the fees paid or accrued by us for the audit and other services provided by EisnerAmper for 2017 and 2016: 2017 2016 Audit Fees (1) $428,100 $370,500 Audit-Related Fees (2) 29,700 - Tax Fees (3) 58,000 56,500 All Other Fees (4) - - Total $515,800 $427,000 (1)Consists of fees billed for the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form10-Q and services that are normally provided by the auditors in connection with statutory and regulatory filings or engagements.(2)Consists of assurance and related services that are reasonably related to the performance of the audit and reviews of our financial statements andare not included in "audit fees" in this table.(3)Consists of all tax related services.(4)There were no other fees billed by EisnerAmper LLP for the years ended December 31, 2017 and 2016.Engagement of the Independent Auditor. The Audit Committee is responsible for approving every engagement of EisnerAmper LLP to perform audit ornon-audit services for us before EisnerAmper LLP is engaged to provide those services. Under applicable Commission rules, the Audit Committee is requiredto pre-approve the audit and non-audit services performed by the independent auditors in order to ensure that they do not impair the auditors' independence.The Commission's rules specify the types of non-audit services that an independent auditor may not provide to its audit client and establish the AuditCommittee's responsibility for administration of the engagement of the independent auditors.Consistent with the Commission's rules, the Audit Committee Charter requires that the Audit Committee review and pre-approve all audit services andpermitted non-audit services provided by the independent auditors to us or any of our subsidiaries. The Audit Committee may delegate pre-approvalauthority to a member of the Audit Committee and if it does, the decisions of that member must be presented to the full Audit Committee at its nextscheduled meeting.The Audit Committee's pre-approval policy provides as follows:· First, once a year when the base audit engagement is reviewed and approved, management will identify all other services (including fee ranges)for which management knows it will engage EisnerAmper LLP for the next 12 months. Those services typically include quarterly reviews, specified taxmatters, certifications to the lenders as required by financing documents, consultation on new accounting and disclosure standards and, in future years,reporting on management's internal controls assessment.· Second, if any new "unlisted" proposed engagement arises during the year, the engagement will require approval of the Audit Committee.All fees to our independent accounting firms were approved by the Audit Committee.Auditor Selection for Fiscal 2018. The Audit Committee has selected EisnerAmper LLP to serve as our independent auditors for the year endingDecember 31, 2018. The Committee's selection will be submitted to our stockholders for ratification at our 2018 Annual Meeting of Stockholders.PART IV Item 15. Exhibits and Financial Statement Schedules (a)(1)Financial Statements - 53 -Consolidated balance sheets of STRATA Skin Sciences, Inc. and subsidiary as of December 31, 2017 and 2016, and the relatedconsolidated statements of comprehensive loss, changes in equity and cash flows for each of the years in the two-year period ended December 31, 2017.(a)(2) Financial Statement SchedulesAll schedules have been omitted because they are not required, not applicable, or the information is otherwise set forth in the consolidatedfinancial statements or notes thereto.(a)(3) ExhibitsThe exhibits listed under subsections (b) of this Item 15 are hereby incorporated by reference.(b) Exhibits3.1 Fifth Amended and Restated Certificate of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 contained in ourRegistration Statement on Form S-3 (File No. 333-167113), as filed on May 26, 2010).3.2 Fourth Amended and Restated Bylaws of the Company, as amended (Incorporated by reference to Exhibit 3.2 contained in our Form8-K current report as filed on January 8, 2016).3.3 Certificate of Amendment to Fifth Amended and Restated Certificate of Incorporation of the Company (Incorporated by reference toExhibit 3.1 contained in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013 filed on August 7, 2013).3.4 Certificate of Amendment to Fifth Amended and Restated Certificate of Incorporation of the Company (Incorporated by reference toExhibit 3.1 contained in our Current Report on Form 8-K, filed on July 10, 2014).3.5 Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (Incorporated by reference toExhibit 3.1 contained in our Current Report on Form 8-K, filed on February 3, 2014).3.6 Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock (Incorporated by reference toExhibit 3.1 contained in our Current Report on Form 8-K, filed on July 23, 2014).3.7 Certificate of Amendment to Fifth Amended and Restated Certificate of Incorporation of the Company (Incorporated by reference toExhibit 3.1 contained in our Current Report on Form 8-K, as filed on September 30, 2015).3.8 Certificate of Amendment to Fifth Amended and Restated Certificate of Incorporation of the Company (Incorporated by reference toExhibit 3.1 contained in our Current Report on Form 8-K, as filed on January 8, 2016).4.1 Specimen Stock Certificate Incorporated by reference to our Registration Statement on Form S-1, as amended (File No. 333-125517),as filed on August 8, 2005).4.2 Warrant dated May 7, 2009 issued by Electro-Optical Sciences, Inc. to Kingsbridge Capital Limited (Incorporated by reference to ourCurrent Report on Form 8-K filed on May 8, 2009).4.3 Warrant Agreement, dated as of April 26, 2013, by and between MELA Sciences, Inc. and Hercules Technology Growth Capital, Inc.(Incorporated by reference to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013 filed on April 30,2013).4.4 Form of Series A Warrant (Incorporated by reference to our Current Report on Form 8-K filed on October 30, 2013).4.5 Form of Series B Prefunded Warrant (Incorporated by reference to our Current Report on Form 8-K filed on October 30, 2013).4.6 Form of Common Stock Purchase Warrant (Incorporated by reference to our Current Report on Form 8-K filed on February 3, 2014).4.7 Form of Series [A/B] Common Stock Purchase Warrant (Incorporated by reference to our Current Report on Form 8-K filed on July 23,2014).4.8 Form of 4% Senior Secured Convertible Debenture Due July 24, 2019 (Incorporated by reference to our Current Report on Form 8-Kfiled on July 23, 2014).4.9 Form of Common Stock Purchase Warrant (Incorporated by reference to Exhibit 4.1 contained in our Form 8-K current report, filed onJune 23, 2015). - 54 -4.10 Form of 9.0% Senior Secured Notes (Incorporated by reference to Exhibit 4.2 contained in our Form 8-K current report, filed on June23, 2015).4.11 Form of 2.25% Series A Senior Secured Convertible Debenture (Incorporated by reference to Exhibit 4.3 contained in our Form 10-Qquarterly report for the quarter ended June 30, 2015 filed on August 14, 2015).4.12 Form of 2.25% Series B Senior Unsecured Convertible Debenture (Incorporated by reference to Exhibit 4.4 contained in our Form 10-Q quarterly report for the quarter ended June 30, 2015 filed on August 14, 2015).4.13 Form of Warrant Amendment Agreement (Incorporated by reference to Exhibit 4.1 contained in our Current Report on Form 8-K, filedon January 22, 2016).4.14* Form of Incentive Stock Option Agreement. (Incorporated by reference to our Annual Report on Form 10-K for the year endedDecember 31, 2015 filed on March 15, 2016)4.15* Form of Nonqualified Stock Option Agreement. (Incorporated by reference to our Annual Report on Form 10-K for the year endedDecember 31, 2015 filed on March 15, 2016)10.1* Form of Indemnification Agreement for directors and executive officers. (Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2013 filed on March 17, 2014).10.2* 2005 Stock Incentive Plan (Incorporated by reference to our Registration Statement on Form S-1, as amended (File No. 333-125517),filed on August 8, 2005.10.3 Form of Securities Purchase Agreement dated as of June 22, 2015 by and among the company and the purchasers (Incorporated byreference to our Form 8-K current report, as filed on June 23, 2015).10.4 Registration Rights Agreement dated as of June 22, 2015 by and among the Company and the purchasers (Incorporated by referenceto our Form 8-K current report, as filed on June 23, 2015).10.5 Security Agreement dated as of June 22, 2015 by and among the Company and parties thereto (Incorporated by reference to our Form8-K current report, as filed on June 23, 2015).10.6 Licensing Agreement between the Registrant and KaVo Dental GmbH, dated as of December 5, 2006. (Incorporated by reference to ourCurrent Report on Form 8-K filed on December 11, 2006).10.7 Securities Purchase Agreement dated as of July 21, 2014 between MELA Sciences, Inc. and the purchasers identified on the signaturepages thereto (Incorporated by reference to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014filed on November 14, 2014).10.8 Registration Rights Agreement dated as of July 21, 2014 between MELA Sciences, Inc. and the purchasers identified on the signaturepages thereto (Incorporated by reference to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014filed on November 14, 2014).10.9 Security Agreement dated as of July 21, 2014 among MELA Sciences, Inc., all of the Subsidiaries of the Registrant and the holders ofthe Registrant's 4% Senior Secured Convertible Debentures (Incorporated by reference to our Quarterly Report on Form 10-Q for thequarterly period ended September 30, 2014 filed on November 14, 2014).10.10 Agreement of Lease, dated as of July 14, 2009, by and between Stanford Bridge LLC and Electro-Optical Sciences, Inc. (Incorporatedby reference to our Current Report on Form 8-K filed on July 14, 2009).10.11 Supply Agreement with Arrow Electronics, Inc., dated April 8, 2011 (Incorporated by reference to our Quarterly Report on Form 10-Qfor the quarterly period ended June 30, 2011 filed on August 5, 2011).10.12 Production Agreement, dated as of January 6, 2012, by and between MELA Sciences, Inc. and Askion GmbH (Incorporated byreference to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2012 filed on May 3, 2012).10.13 Service Agreement, dated March 21, 2012, by and between MELA Sciences, Inc. and QUINTILES Commercial Germany GmbH(Incorporated by reference to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2012 filed on May 3,2012).10.14 Asset Purchase Agreement dated as of June 22, 2015 by and among the Company and parties identified on the signature pages thereto.(Incorporated by reference to our Form 8-K current report, as filed on June 23, 2015.)10.15 Amended and Restated Security Agreement dated as of August 3, 2015 by and among the Company and the parties thereto. (Includedin Exhibit 10.8 filed incorporated by reference to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015,filed on August 14, 2015).10.16 MELA Sciences, Inc. Amended and Restated 2013 Stock Incentive Plan (Incorporated by reference to the Registrant's Proxy Statementon Schedule 14A filed on August 24, 2015). - 55 -10.17 Loan and Security Agreement, dated as of March 15, 2013, by and between MELA Sciences, Inc. and Hercules Technology GrowthCapital, Inc. (Incorporated by reference to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013 filed onApril 30, 2013).10.18 Amended and Restated Security Agreement dated as of August 3, 2015 by and among the Company and the parties thereto. (Includedin Exhibit 10.8 filed incorporated by reference to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015,filed on August 14, 2015.).10.19 Form of Securities Purchase Agreement, dated as of October 29, 2013, by and among MELA Sciences, Inc. and the purchasersidentified on the signature pages thereto (Incorporated by reference to our Current Report on Form 8-K filed on October 30, 2013).10.20 Omnibus Amendment to 2014 Transaction Documents dated as of August 3, 2015 by and among the Company and the purchasesidentified therein. (Incorporated by reference to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015, filedon August 14, 2015.).10.21 Form of Securities Purchase Agreement, dated as of January 31, 2014, by and among MELA Sciences, Inc. and the purchasersidentified on the signature pages thereto (Incorporated by reference to our Current Report on Form 8-K filed on February 3, 2014).10.22 Form of Registration Rights Agreement, dated as of February 5, 2014, by and among MELA Sciences, Inc. and the purchasersidentified on the signature pages thereto (Incorporated by reference to our Current Report on Form 8-K filed on February 3, 2014).10.23 Intentionally omitted.10.24 Warrant Amendment Agreement dated as of June 22, 2015 (effective September 30, 2015) by and among the Company and partiesidentified on the signature pages thereto (Incorporated by reference to Exhibit 10.5 contained in our Form 8-K current report filed onJune 23, 2015).10.25* Consulting Agreement, dated as of November 4, 2015 between the Company and Jeffrey F. O'Donnell, Sr. (Incorporated by referenceto our Form 10-Q quarterly report for the quarter ended September 30, 2015 filed on November 16, 2015).10.26* Consulting Agreement, dated as of November 4, 2015 between the Company and Samuel E. Navarro (Incorporated by reference to ourForm 10-Q quarterly report for the quarter ended September 30, 2015 filed on November 16, 2015).10.27* Transition Agreement and Release dated as of November 9, 2015 between the Company and Robert W. Cook (Incorporated byreference to our Form 10-Q quarterly report for the quarter ended September 30, 2015 filed on November 16, 2015).10.28* Employment Agreement dated as of November 9, 2015 between the Company and Christina L. Allgeier (Incorporated by reference toour Form 10-Q quarterly report for the quarter ended September 30, 2015 filed on November 16, 2015).10.29* Amended and Restated Employment Agreement, dated as of December 15, 2015 by and between the Company and Michael R. Stewart(Incorporated by reference to Exhibit 10.1 contained in our Current Report on Form 8-K, as filed on December 15, 2015).10.30* Restricted Stock Award Agreement, dated as of December 15, 2015 by and between the Company and Michael R. Stewart(Incorporated by reference to Exhibit 10.2 contained in our Current Report on Form 8-K, as filed on December 15, 2015).10.31 Credit and Security Agreement dated as of December 30, 2015 among MidCap, as administrative agent, the Lenders listed on theCredit Facility Schedule attached thereto and the Company. (Incorporated by reference to Exhibit 10.1 contained in our CurrentReport on Form 8-K, as filed on January 5, 2016).10.32 Warrant to purchase shares of the Company's common stock issued December 30, 2015 issued to MidCap. (Incorporated by referenceto Exhibit 10.2 contained in our Current Report on Form 8-K, as filed on January 5, 2016).10.33 Warrant to purchase shares of the Company's common stock issued December 30, 2015 to Lender under the Credit Agreement.(Incorporated by reference to Exhibit 10.3 contained in our Current Report on Form 8-K, as filed on January 5, 2016).10.34 Subordination Agreements dated as of December 30, 2015 among subordinated lenders, the Company and Midcap. (Incorporated byreference to Exhibit 10.4 contained in our Current Report on Form 8-K, as filed on January 5, 2016).10.35 Omnibus Amendment to 2014 Transaction Documents and 2015 Transaction Documents dated as of December 30, 2015 among theCompany and the holders of outstanding debentures under the 2014 and 2015 security purchase agreements. (Incorporated byreference to Exhibit 10.5 contained in our Current Report on Form 8-K, as filed on January 5, 2016). - 56 -10.36 Warrant to purchase shares of the Company's common stock issued January 29, 2016 to Lenders under the Credit Agreement.(Incorporated by reference to Exhibit 10.1 contained in our Current Report on Form 8-K, as filed on February 1, 2016).10.37 Omnibus Amendment to 2015 Transaction Documents dated as of August 3, 2015 by and among the Company and the purchasesidentified therein. (Incorporated by reference to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015, filedon August 14, 2015.).10.38 Amended and Restated Intellectual Property Security Agreement dated as of August 3, 2015 by and among the Company and theparties thereto. (Included in Exhibit 10.8 filed incorporated by reference to our Quarterly Report on Form 10-Q for the quarterly periodended June 30, 2015, filed on August 14, 2015.).10.39 Intercreditor Agreement dated as of August 3, 2015 by and among the Company and the parties thereto. (Incorporated by reference toour Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015, filed on August 14, 2015.).10.40* Extension Agreement dated as of July 20, 2016 between Strata Skin Sciences, Inc. and Jeffrey F. O'Donnell, Sr. (Incorporated byreference to Exhibit 10.1 contained in our Current Report on Form 8-K, as filed on July 22, 2016).10.41* Extension Agreement dated as of July 20, 2016 between Strata Skin Sciences, Inc. and Samuel E. Navarro. (Incorporated by referenceto Exhibit 10.2 contained in our Current Report on Form 8-K, as filed on July 22, 2016).10.42 First Amendment to Credit and Security Agreement dated as of August 9, 2016 among MidCap Financial Trust, as administrativeagent, the Lenders as listed on the signature pages thereto and the Company. (Incorporated by reference to our Form 10-Q quarterlyreport for the quarter ended September 30, 2015 filed on August 12, 2016).10.43 Amended and Restated Fee Letter Agreement dated as of August 9, 2016, by and between Midcap Financial Trust as Agent and theCompany. (Incorporated by reference to our Form 10-Q quarterly report for the quarter ended September 30, 2015 filed on August 12,2016).10.44* STRATA Skin Sciences 2016 Omnibus Option Plan. (Incorporated by reference to our Form 10-Q quarterly report for the quarter endedSeptember 30, 2015 filed on November 14, 2016).10.45* Employment Agreement between the Company and Frank J. McCaney dated as of October 31, 2016. . (Incorporated by reference toour Form 10-Q quarterly report for the quarter ended September 30, 2015 filed on November 14, 2016).10.46* Stock Option Agreement between the Company and Frank J. McCaney dated as of October 31, 2016. (Incorporated by reference to ourForm 10-Q quarterly report for the quarter ended September 30, 2015 filed on November 14, 2016).10.47* Severance and Release Agreement between the Company and Michael R. Stewart dated as of October 31, 2016. (Incorporated byreference to our Form 10-Q quarterly report for the quarter ended September 30, 2015 filed on November 14, 2016).10.48* Consulting Agreement between the Company and Michael R. Stewart dated as of October 31, 2016. (Incorporated by reference to ourForm 10-Q quarterly report for the quarter ended September 30, 2015 filed on November 14, 2016).10.49* Extension Agreement dated as of Dec. 6, 2016 between Strata Skin Sciences, Inc. and Jeffrey F. O'Donnell, Sr. (Incorporated byreference to Exhibit 10.1 contained in our Current Report on Form 8-K, as filed on December 9, 2016).10.50* Extension Agreement dated as of Dec. 6, 2016 between Strata Skin Sciences, Inc. and Samuel E. Navarro. (Incorporated by reference toExhibit 10.2 contained in our Current Report on Form 8-K, as filed on December 9, 2016). 10.51 Second Amendment to Credit and Security Agreement dated as of November 10, 2017 among MidCap Financial Trust, asadministrative agent, the Lenders as listed on the signature pages thereto and the Company. (Incorporated by reference to our Form10-Q quarterly report for the uarter ended September 30, 2017 filed on November 14, 2017). 10.52 Amended and Restated Fee Letter Agreement dated as of November 10, 2017, by and between MidCap Financial Trust as Agent andthe Company. (Incorporated by reference to our Form 10-Q quarterly report for the quarter ended September 30, 2017 filed onNovember 14, 2017).23.1 Consent of EisnerAmper LLP - 57 -31.1 Rule 13a-14(a) Certificate of Chief Executive Officer31.2 Rule 13a-14(a) Certificate of Chief Financial Officer32.1** Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002101.INS XBRL Instance Document101.SCH XBRL Taxonomy Schema101.CAL XBRL Taxonomy Calculation Linkbase101.DEF XBRL Taxonomy Definition Linkbase101.LAB XBRL Taxonomy Label Linkbase101.PRE XBRL Taxonomy Presentation Linkbase*Indicates management contract or compensatory plan.**The certifications attached as Exhibit 32.1 accompany this Quarterly Report on Form 10-Q pursuant to 18 U.S.C. Section 1350, as adoptedpursuant 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 theSecurities Exchange Act of 1934, as amended.AVAILABLE INFORMATIONWe are a reporting company and file annual, quarterly and special reports, proxy statements and other information with the Commission. You mayinspect and copy these materials at the Public Reference Room maintained by the Commission at Room 100 F Street, N.W., Washington, D.C. 20549. Pleasecall the Commission at 1‑800‑SEC‑0330 for more information on the Public Reference Room. You can also find our Commission filings at the Commission'swebsite at www.sec.gov. You may also inspect reports and other information concerning us at the offices of the Nasdaq Stock Market at 1735 K Street, N.W.,Washington, D.C. 20006. We intend to furnish our stockholders with annual reports containing audited financial statements and such other periodic reportsas we may determine to be appropriate or as may be required by law.Our primary Internet address is www.strataskinsciences.com (this website address is not intended to function as a hyperlink and the informationcontained on our website is not intended to be a part of this Report). Corporate information can be located by clicking on the three lines in the upper righthand corner of the page , then clicking on "Investors" link from the drop down menu, and then clicking on "SEC Filings" in the menu. We make our periodicCommission Reports (Forms 10-Q and Forms 10-K) and current reports (Form 8-K) available free of charge through our Web site as soon as reasonablypracticable after they are filed electronically with the Commission. We may from time to time provide important disclosures to investors by posting them inthe Investor Relations section of our Web site, as allowed by Commission's rules. The information on the website listed above is not and should not beconsidered part of this Annual Report on Form 10-K and is intended to be an inactive textual reference only. - 58 -SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Report to besigned on its behalf by the undersigned, thereunto duly authorized. STRATA SKIN SCIENCES, INC. Date: April 2, 2018 By: /s/ Francis J. McCaney Francis J. McCaney President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.Signature Capacity in Which Signed Date /s/ LuAnn Via Chairman of the Board of Directors April 2, 2018LuAnn Via /s/ Francis J. McCaney President, Chief Executive Officer and Director (PrincipalExecutive Officer), and Interim Chief Financial Officer(Principal Financial and Accounting Officer) April 2, 2018Francis J. McCaney /s/ James L. Coyne Director April 2, 2018James L. Coyne /s/ Samuel E. Navarro Director April 2, 2018Samuel E. Navarro /s/ David K. Stone Director April 2, 2018David K. Stone /s/ Kathryn Swintek Director April 2, 2018Kathryn Swintek /s/ Jeffrey F. O'Donnell, Sr. Director April 2, 2018Jeffrey F. O'Donnell, Sr. - 59 -STRATA SKIN SCIENCES, INC. AND SUBSIDIARYIndex to Consolidated Financial Statements Page Report of Independent Registered Public Accounting FirmF-2Consolidated Balance Sheets, December 31, 2017 and 2016F-3Consolidated Statements of Operations and Comprehensive Loss, Years ended December 31, 2017 and 2016F-4Consolidated Statement of Changes in Stockholders' Equity, Years ended December 31, 2017 and 2016F-5Consolidated Statements of Cash Flows, Years ended December 31, 2017 and 2016F-6Notes to Consolidated Financial StatementsF-8 F-1REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and StockholdersSTRATA Skin Sciences, Inc.Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of STRATA Skin Sciences, Inc. and Subsidiary (the "Company") as of December 31, 2017and 2016, and the related consolidated statements of operations and comprehensive loss, changes in stockholders' equity, and cash flows for each of the yearsthen ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all materialrespects, the consolidated financial position of the Company as of December 31, 2017 and 2016, and the consolidated results of their operations and theircash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.Basis for OpinionThese financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financialstatements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations ofthe Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, norwere we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding ofinternal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financialreporting. Accordingly, we express no such opinion.Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, andperforming procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures inthe financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well asevaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Emphasis of a Matter - Subsequent Financings Subject to Shareholders' Approval. As discussed in Notes 2 and 18 to the consolidated financial statements, on March 30, 2018, the Company entered into a series of equity financings, subjectto shareholders' approval, that will have a significant effect on the Company's management and financing structures. /s/ EisnerAmper LLPWe have served as the Company's auditor since 2005.EISNERAMPER LLPIselin, New JerseyApril 2, 2018F-2STRATA SKIN SCIENCES, INC. AND SUBSIDIARYCONSOLIDATED BALANCE SHEETS(In thousands, except share and per share amounts) December 31,2017 December 31,2016 ASSETS Current assets: Cash and cash equivalents $4,069 $3,928 Accounts receivable, net 3,141 3,390 Inventories 3,009 2,817 Prepaid expenses and other current assets 533 617 Total current assets 10,752 10,752 Property and equipment, net 7,703 10,180 Intangible assets, net 11,325 13,412 Goodwill 8,803 8,803 Other assets 48 46 Total assets $38,631 $43,193 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Note payable $357 $339 Current portion of long-term debt 2,387 1,714 Accounts payable 2,277 1,853 Other accrued liabilities 2,360 1,992 Deferred revenues 291 235 Total current liabilities 7,672 6,133 Long-term liabilities: Long-term debt, net 7,853 9,752 Senior secured convertible debentures, net - 12,028 Warrant liability 3 105 Deferred tax liability 414 359 Other liabilities 444 97 Total liabilities 16,386 28,474 Commitments and contingencies Stockholders' equity: Series B Convertible Preferred Stock, $.10 par value, 10,000,000 shares authorized; 0 and 6,000 shares issued andoutstanding as of December 31, 2017 and 2016, respectively - 1 Series C Convertible Preferred Stock, $.10 par value, 10,000,000 shares authorized; 36,182 and 0 shares issued andoutstanding as of December 31, 2017 and 2016, respectively 4 - Common Stock, $.001 par value, 150,000,000 shares authorized; 4,304,425 and 2,166,898 shares issued andoutstanding as of December 31, 2017 and 2016, respectively 4 2 Additional paid-in capital 251,643 225,289 Accumulated deficit (229,406) (210,575)Accumulated other comprehensive income - 2 Total stockholders' equity 22,245 14,719 Total liabilities and stockholders' equity $38,631 $43,193 The accompanying notes are an integral part of these consolidated financial statements. F-3STRATA SKIN SCIENCES, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS(In thousands, except share and per share amounts) For the Year Ended December 31, 2017 2016 Revenues $31,449 $30,707 Cost of revenues 13,498 12,636 Gross profit 17,951 18,071 Operating expenses: Engineering and product development 1,711 1,929 Selling and marketing 11,249 12,102 General and administrative 7,401 7,637 20,361 21,668 Loss from operations (2,410) (3,597) Other income (expense), net: Interest expense, net (4,612) (4,900)Change in fair value of warrant liability 102 5,396 Other income, net 17 21 Loss on extinguishment of debentures (11,799) - (16,292) 517 Loss before income taxes (18,702) (3,080) Income tax expense 129 255 Net loss $ (18,831) $ (3,335) Net loss per common share: Basic $ (2.85) $ (1.57)Diluted $ (2.85) $ (3.77) Shares used in computing net loss per common share: Basic 2,713,782 2,119,014 Diluted 2,713,782 2,315,715 Net loss per Preferred C share - basic and diluted $ (1,061.25) $- Shares used in computing net loss per basic and diluted Preferred C share 10,444 - Other comprehensive (loss) income: Foreign currency translation adjustments $ (2) $1 Comprehensive loss $ (18,833) $ (3,334)The accompanying notes are an integral part of these consolidated financial statements.F-4STRATA SKIN SCIENCES, INC. AND SUBSIDIARYCONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITYFOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016(In thousands, except share and per share amounts) Accumulated ConvertiblePreferredStock – Series B Convertible PreferredStock – Series C Common Stock AdditionalPaid-In Accumulated OtherComprehensive Shares Amount Shares Amount Shares Amount Capital Deficit Income Total BALANCE, JANUARY1, 2016 6,505 $1 - $- 2,056,679 $2 $223,323 $ (207,240) $1 $16,087 Stock-basedcompensation - - - - - - 113 - - 113 Conversion ofconvertible preferredstock (505) - - - 39,337 - - - - - Conversion of seniorsecured convertibledebentures - - - - 70,882 - 265 - - 265 Warrants issued inconnection with debt - - - - - - 47 - - 47 Reclassification ofwarrant liability tostockholders' equity - - - - - - 1,541 - - 1,541 Other comprehensiveincome - - - - - - - - 1 1 Net loss - - - - - - - (3,335) - (3,335)BALANCE,DECEMBER 31,2016 6,000 1 - - 2,166,898 2 225,289 (210,575) 2 14,719 Stock-basedcompensation - - - - - - 186 - - 186 Issuance of convertiblepreferred stock inexchange forconvertibledebentures - - 40,482 4 - - 25,906 - - 25,910 Conversion ofconvertible preferredstock into commonstock (6,000) (1) (4,300) - 2,066,182 2 - - - 1 Conversion of seniorsecured convertibledebentures into commonstock - - - - 70,000 - 262 - - 262 Issuance of commonstock for fractionalshares in reverse stocksplit - - - - 1,345 - - - - - Other comprehensiveloss (2) (2)Net loss - - - - - - - (18,831) - (18,831)BALANCE,DECEMBER 31,2017 - $- 36,182 $4 4,304,425 $4 $251,643 $ (229,406) $- $22,245 The accompanying notes are an integral part of these consolidated financial statements.F-5STRATA SKIN SCIENCES, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) For the Year EndedDecember 31, 2017 2016 Cash Flows From Operating Activities: Net loss $ (18,831) $ (3,335)Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 6,336 6,366 Provision for doubtful accounts 109 120 Gain on cancellation of distributor rights agreement (40) - Impairment of lasers placed-in-service 196 Impairment of intangible assets 523 - Stock-based compensation 186 113 Deferred taxes 55 240 Loss on disposal of property and equipment - 124 Loss on extinguishment of debentures 11,799 - Amortization of debt discount 2,360 2,473 Amortization of deferred financing costs 188 200 Change in fair value of warrant liability (102) (5,396)Changes in operating assets and liabilities: Accounts receivable 184 558 Inventories (193) 1,311 Prepaid expenses and other assets 475 224 Accounts payable 381 (2,605)Other accrued liabilities 298 (169)Other liabilities 159 36 Deferred revenues 57 62 Net cash provided by operating activities 4,140 322 Cash Flows From Investing Activities: Lasers placed-in-service, net (1,739) (1,008)Purchases of property and equipment, net (320) - Payments on distributor rights liability (135) - Restricted cash - 15 Return of acquisition purchase price from escrow - 125 Net cash used in investing activities (2,194) (868)The accompanying notes are an integral part of these consolidated financial statements.F-6STRATA SKIN SCIENCES, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) For the Year Ended December 31, 2017 2016 Cash Flows From Financing Activities: Proceeds from long-term debt - 1,500 Repayments of long-term debt (1,429) - Payments on notes payable (374) (333)Net cash (used in) provided by financing activities (1,803) 1,167 Effect of exchange rate changes on cash (2) 4 Net increase in cash and cash equivalents 141 625 Cash and cash equivalents, beginning of period 3,928 3,303 Cash and cash equivalents, end of period $4,069 $3,928 Supplemental information: Cash paid for interest $2,215 $2,054 Cash paid for income taxes $28 $15 Supplemental information of non-cash investing and financing activities: Conversion of senior secured convertible debentures into common stock $262 $265 Reclassification of warrant liability to stockholders' equity $- $1,541 Recognition of warrants issued with term note credit facility as debt discount $- $47 Prepaid insurance financed with notes payable $392 $372 Acquisition of distributor rights asset for license liability $286 $- Issuance of convertible Preferred C stock in exchange for convertible debentures $25,910 $- The accompanying notes are an integral part of these consolidated financial statementsF-7STRATA SKIN SCIENCES, INC. AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except share and per share amounts and number of lasers)Note 1The Company:BackgroundSTRATA Skin Sciences, Inc. (and its subsidiary in India) ("STRATA" or "we" or the "Company") is a medical technology company focused on the therapeuticand aesthetic dermatology market. STRATA sales include the following products: XTRAC ® laser and VTRAC ® excimer lamp systems utilized in thetreatment of psoriasis, vitiligo and various other skin conditions; the STRATAPEN® MicroSystem, a micropigmentation device; and Nordlys, a multi-technology aesthetic laser device for treating vascular and pigmented lesions.The XTRAC is an ultraviolet light excimer laser system utilized to treat psoriasis, vitiligo and other skin diseases. The XTRAC received FDA clearance in2000. As of December 31, 2017, there were 753 XTRAC systems placed in dermatologists' offices in the United States under the Company's recurring revenuebusiness model. The XTRAC systems employed under the recurring revenue model generate revenue on a per procedure basis or include a fixed payment foran agreed upon period not to exceed an agreed upon number of treatments. The per-procedure charge is inclusive of the use of the system and the servicesprovided by the Company to the customer which includes system maintenance, and other services. The VTRAC Excimer Lamp system, offered in addition tothe XTRAC system internationally, provides targeted therapeutic efficacy demonstrated by excimer technology with a lamp system.Effective March 1, 2017, the Company entered into an agreement to license the exclusive US distribution rights for the Ellipse family of products, Nordlys,from Ellipse USA ("Ellipse") through December 31, 2019. The agreement was to be renewed if certain minimum purchase requirements were achieved and anapproximate $33 monthly license fee was paid, for a contractual total license fee of $1.1 million over the Initial Term. On October 26, 2017, by mutualagreement of the three parties involved in the transaction, the Company, Ellipse USA and the manufacturer Ellipse A/S, cancelled the agreement with EllipseUSA retroactively effective to August 9, 2017, and the Company entered into two new agreements. Under the new agreements the Company will have theexclusive US distribution rights for the Ellipse family of products, Nordlys, from Ellipse A/S, the Danish manufacturer, through August 9, 2020. If certainsales targets are met, the new agreement will automatically be extended for two additional years. Under the terms of the new agreements, the Company will bethe exclusive US distributor of Ellipse lasers and will pay to Ellipse USA a monthly license fee of $10 through August 9, 2020, in addition to commissionsfor each system sold. The license fee amounts to approximately $355 over the Initial Term with a present value as of the effective date of the agreement of$286. As a result of the termination of the old agreement and the signing of the new agreements the Company reversed the intangible asset and correspondingliability recorded on March 1, 2017 (which resulted in a $40 gain) and recorded the distribution rights at the present value of the payments under the newagreements. See Note 5, Intangible Assets, net, for additional information.Effective February 1, 2017, the Company entered into an exclusive OEM distribution agreement with Esthetic Education, LLC to be the exclusive marketerand seller of private label versions of the SkinStylus MicroSystem and associated parts under the name of STRATAPen. This three-year agreement allows fortwo one-year extensions.Effective April 6, 2017, the Company completed a reverse stock split of its common stock at a ratio of 1-for-5 shares, and all data on common stock andequivalents was retroactively adjusted to be shown herein as reflective of this reverse stock split. F-8STRATA SKIN SCIENCES, INC. AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except share and per share amounts and number of lasers)Basis of Presentation:Accounting PrinciplesThe consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("USGAAP").Principles of ConsolidationThe consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany balances andtransactions have been eliminated in consolidation.ReclassificationCertain reclassifications from the prior year presentation have been made to conform to the current year presentation. These reclassifications did not havematerial impact on the Company's equity, net assets, results of operations or cash flows.Use of EstimatesThe preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affectamounts reported of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reportingperiods. Actual results could differ from those estimates and be based on events different from those assumptions. As of December 31, 2017, the moresignificant estimates include (1) revenue recognition, in regards to deferred revenues and the contract term and valuation allowances of accounts receivable,(2) the inputs used in the impairment analyses of intangible assets and goodwill, (3) the estimated useful lives of intangible assets and property andequipment, (4) the inputs used in determining the fair value of equity-based awards, (5) the valuation allowance related to deferred tax assets (6) the fair valueof financial instruments, including derivative instruments, and (7) the inventory reserves.Revenue RecognitionIn the Dermatology Recurring Procedures Segment the Company has two types of arrangements for its phototherapy treatment equipment as follows: (i) theCompany places its lasers in a physician's office at no charge to the physician, and generally charges the physician a fee for an agreed upon number oftreatments; or (ii) the Company places its lasers in a physician's office and charges the physician a fixed fee for a specified period of time not to exceed anagreed upon number of treatments; if number is exceeded additional fees will have to be paid.For the purposes of U.S. GAAP only, these two types of arrangements are treated as short term operating leases. While these are not contractually operatingleases these are viewed as operating leases for accounting purposes since in these arrangements the Company provides the customers the rights to use thetreatment equipment and the customers control physical access to the treatment equipment while controlling the utility and output of such equipment duringthe term of the arrangement. For the first type of arrangement, fees are recognized as revenue over the contract term, which equates to the usage period of theagreed upon number of treatments, as the treatments are being used. For the second type of arrangement fees are recognized as revenue ratably on a straightline basis over the term period specified in the agreement. Contingent amounts that will be paid only if customer exceeds the agreed upon number oftreatments are recognized only when such treatments are being exceeded and used. Pre-paid amounts are recorded in deferred revenue and recognized asrevenue over the lease term in the patterns described above.The fee charged is inclusive of the use of the system and the services provided by the Company to the customer which include system maintenance and otherservices. The Company considers the other service and support elements in the contract to be perfunctory and inconsequential.In the Dermatology Procedures Equipment segment the Company sells its products internationally through a distributor, and domestically directly to aphysician. For the product sales, the Company recognizes revenues when the following four criteria have been met: (i) the product has been delivered and theCompany has no significant remaining obligations; (ii) persuasive evidence of an arrangement exists; (iii) the price to the buyer is fixed or determinable; and(iv) collection is reasonably assured. Revenues from product sales are recorded net of provisions for expected returns and cash discounts.F-9STRATA SKIN SCIENCES, INC. AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except share and per share amounts and number of lasers)The Company ships most of its products FOB shipping point, although from time to time certain customers, for example governmental customers, will begranted FOB destination terms. Among the factors the Company takes into account when determining the proper time at which to recognize revenue are (i)when title to the goods transfers and (ii) when the risk of loss transfers. Shipments to distributors or physicians that do not fully satisfy the collection criteriaare recognized when invoiced amounts are fully paid or fully assured and included in deferred revenues until that time.The Company records co-pay reimbursements made to patients receiving laser treatments as a reduction of revenue. For the year ended December 31, 2016the Company reclassified such reimbursements in the amount of $1,050 from selling and marketing expenses to revenues. The Company has determined thatsuch reclassification did not have a material impact to the consolidated financial statements, quantitatively and qualitatively.Cash and Cash EquivalentsThe Company invests its excess cash in highly liquid short-term investments and credit card transactions with settlement terms of less than five days. TheCompany considers short-term investments that are purchased with an original maturity of three months or less to be cash equivalents. Proceeds due fromcredit card transactions were $353 and $60 as of December 31, 2017 and 2016, respectively. Cash and cash equivalents consisted of cash and money marketaccounts at December 31, 2017 and 2016.Accounts ReceivableThe majority of the Company's accounts receivable are due from physicians, distributors (international) and other entities in the medical field. Accountsreceivable are most often due within 30 to 90 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accountsoutstanding longer than the contractual payment terms are considered past due. The Company determines its allowance for doubtful accounts by consideringa number of factors, including the length of time trade accounts receivable are past due, the Company's previous loss history, the customer's current ability topay its obligation to the Company and available information about their credit risk, and the condition of the general economy and the industry as a whole.The Company writes off accounts receivable when they are considered uncollectible, and payments subsequently received on such receivables are credited tothe bad debt expense. The Company does not recognize interest accruing on accounts receivable past due. The allowance for doubtful accounts was $172and $135 at December 31, 2017 and 2016, respectively.InventoriesInventories are stated at the lower of cost or net realizable value. Cost is determined to be purchased cost for raw materials and the production cost (materials,labor and indirect manufacturing cost, including sub-contracted work components) for work-in-process and finished goods. For the Company's products, costis determined on the first-in, first-out method. Throughout the laser manufacturing process, the related production costs are recorded within inventory. Work-in-process is immaterial, given the typically short manufacturing cycle, and therefore is disclosed in conjunction with raw materials.The Company's equipment for the treatment of skin disorders (e.g. the XTRAC) will either (i) be placed in a physician's office and remain the property of theCompany (at which date such equipment is transferred to property and equipment) or (ii) be sold to distributors or physicians directly. The cost to build alaser, whether for sale or for placement, is accumulated in inventory.Reserves for slow moving and obsolete inventories are provided based on historical experience and product demand. Management evaluates the adequacy ofthese reserves periodically based on forecasted sales and market trends. As of December 31, 2017 and 2016, reserves on inventory were $234 and $257,respectively.Property, Equipment and DepreciationProperty and equipment are recorded at cost, net of accumulated depreciation and amortization. Excimer lasers-in-service are depreciated on a straight-linebasis over the estimated useful life of five years. For other property and equipment, depreciation is calculated on a straight-line basis over the estimateduseful lives of the assets, primarily three to seven years for computer hardware and software, furniture and fixtures, and machinery and equipment. Leaseholdimprovements are amortized over the lesser of the useful lives or lease terms. Expenditures for majorF-10STRATA SKIN SCIENCES, INC. AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except share and per share amounts and number of lasers)renewals and betterments to property and equipment are capitalized, while expenditures for maintenance and repairs are charged as an expense as incurred.Upon retirement or disposition, the applicable property amounts are deducted from the accounts and any gain or loss is recorded in the consolidatedstatements of operations and comprehensive loss. Useful lives are determined based upon an estimate of either physical or economic obsolescence or both.Management evaluates the realizability of property and equipment based on estimates of undiscounted future cash flows over the remaining useful life of theasset. If the amount of such estimated undiscounted future cash flows is less than the net book value of the asset, the asset is written down to fair value.Intangible AssetsIntangible assets consist of core technology, product technology, customer relationships, trademarks and distribution rights. Intangible assets are amortizedover the period of estimated benefit using the straight-line method and estimated useful lives ranging from three to ten years. (See Note 5, Intangible Assets,net).Accounting for the Impairment of GoodwillGoodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a businesscombination. The Company evaluates the carrying value of goodwill annually in December of each year in connection with the annual budgeting andforecast process and also between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of thereporting unit to which goodwill was allocated to below its carrying amount. Such circumstances could include, but are not limited to: (1) a significantadverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. When evaluatinggoodwill for impairment, we may first perform an assessment qualitatively whether it is more likely than not that a reporting unit's carrying amount exceedsits fair value, referred to as a "step zero" approach. Subsequently (if necessary after step zero), an entity should perform its goodwill impairment test bycomparing the fair value of a reporting unit with its carrying amount. Under Accounting Standards Update ("ASU") 2017-04, "Intangibles - Goodwill andOther (Topic 350): Simplifying the Test for Goodwill Impairment," Step 2 from the goodwill impairment test has been eliminated and goodwill impairment ismeasured as the excess of the carrying amount of the reporting unit over its fair value. Early application is permitted. No goodwill impairment was identifiedin the years ended December 31, 2017 and 2016.Impairment of Long-Lived Assets and IntangiblesLong-lived assets, such as property and equipment, and definite-lived intangibles subject to amortization, are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset to the undiscounted cash flows attributable to the asset. If the carrying amount of an asset exceeds itsundiscounted cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds its fair value.Functional CurrencyThe currency of the primary economic environment in which the operations of the Company are conducted is the US dollar ("$" or "dollars"). Substantially allof the Company's revenues are derived in dollars or in other currencies linked to the dollar. Purchases of most materials and components are carried out in, orlinked to the dollar.For foreign currency transactions, the exchange rates applicable to the relevant transaction dates are used. Transaction gains or losses arising from changes inthe exchange rates are carried to financing income or expenses.Assets and liabilities of the foreign subsidiary, whose functional currency is its local currency are translated from its functional currency to U.S. dollars at thebalance sheet date exchange rate. Income and expense items are translated at the average rate of exchange prevailing during the year. Translationadjustments are reflected in the consolidated balance sheets as a component of accumulated other comprehensive income.Fair Value MeasurementsThe Company measures and discloses fair value in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification820, Fair Value Measurements and Disclosures ("ASC Topic 820"). ASC Topic 820 defines fair value, establishes a framework and gives guidance regardingthe methods used forF-11STRATA SKIN SCIENCES, INC. AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except share and per share amounts and number of lasers)measuring fair value, and expands disclosures about fair value measurements. Fair value is an exit price, representing the amount that would be received tosell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-basedmeasurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for consideringsuch assumptions there exists a three-tier fair-value hierarchy, which prioritizes the inputs used in measuring fair value as follows: •Level 1 – unadjusted quoted prices are available in active markets for identical assets or liabilities that the Company has the ability to access as ofthe measurement date. •Level 2 – pricing inputs are other than quoted prices in active markets that are directly observable for the asset or liability or indirectly observablethrough corroboration with observable market data. •Level 3 – pricing inputs are unobservable for the asset or liability and only used when there is little, if any, market activity for the asset or liability atthe measurement date. The inputs into the determination of fair value require significant management judgment or estimation. Fair value isdetermined using comparable market transactions and other valuation methodologies, adjusted as appropriate for liquidity, credit, market and/orother risk factorsThis hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fairvalue.The Company's recurring fair value measurements at December 31, 2017 and 2016 are as follows: Fair Valueas of December31, 2017 Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1) SignificantotherObservableInputs(Level 2) SignificantUnobservableInputs(Level 3) Liabilities: Warrant liability (Note 11) $3 $- $- $3 Fair Valueas of December31, 2016 Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1) SignificantotherObservableInputs(Level 2) SignificantUnobservableInputs(Level 3) Liabilities: Warrant liability (Note 11) $105 $- $- $105 The fair value of cash and cash equivalents are based on their respective demand value, which are equal to the carrying value. The fair value of derivativewarrant liabilities is estimated using option pricing models that are based on the fair value of the Company's common stock as well as assumptions forvolatility, remaining expected life, and the risk-free interest rate. The derivative warrant liabilities are the only recurring Level 3 fair value measures. Thecarrying value of all other short-term monetary assets and liabilities is estimated to be approximate to their fair value due to the short-term nature of theseinstruments. As of December 31, 2017, the Company assessed its long-term debt (including the current portion) and determined that the fair value of totaldebt approximated its book value due to the rate on the debt being at market. As of December 31, 2016, the Company assessed its convertible debentures andlong-term debt and determined that the fair value of total debt was $20,082.Several of the warrants outstanding as of December 31, 2017 and 2016 have non-standard terms as they relate to a fundamental transaction and require a net-cash settlement upon change in control of the Company. Prior to December 31, 2016,other warrants contained full ratchet provisions that would reduce theexercise price of the warrants in the event of a transaction resulting in the issuance of equity below the existing exercise price of the warrants. All suchwarrants are classified as derivatives. As such they are recorded at their fair value using a binomial option pricing model and continue to be recorded at theirrespective fair value at each subsequent balance sheet date until such terms expire. See Note 11, Warrants, for additional discussion.F-12STRATA SKIN SCIENCES, INC. AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except share and per share amounts and number of lasers)Accrued Warranty CostsThe 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 warrantyclaims on the date the product is sold. Total accrued warranty is included in Other Accrued Liabilities and Other liabilities on the balance sheet. The activityin the warranty accrual during the years ended December 31, 2017 and 2016 is summarized as follows: December 31, 2017 2016 Accrual at beginning of year $115 $226 Additions charged to warranty expense 161 196 Expiring warranties/claimed satisfied (98) (307)Total 178 115 Less: current portion (109) (102)Total long-term accrued warranty costs $69 $13 Product Development CostsCosts of research, new product development and product redesign are charged to expenses as incurred in engineering and product development in theaccompanying consolidated statements of operations and comprehensive loss.Advertising CostsAdvertising costs are charged to expenses as incurred. Advertising expenses amounted to approximately $1,434 and $3,339 for the years ended December 31,2017 and 2016, respectively.Income TaxesThe Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based ondifferences between the financial reporting and tax basis of assets and liabilities, as well as on net operating loss carryforwards, and are measured usingenacted tax rates and laws that are expected to be in effect when the differences reverse. Any resulting net deferred tax assets are evaluated for recoverabilityand, accordingly, a valuation allowance is provided when it is not more likely than not that all or some portion of the deferred tax asset will be realized.The Company accounts for uncertain tax positions in accordance with an amendment to ASC Topic 740-10, Income Taxes (Accounting for Uncertainty inIncome Taxes), which clarified the accounting for uncertainty in tax positions. This amendment provides that the tax effects from an uncertain tax positioncan be recognized in the financial statements only if the position is "more-likely-than-not" to be sustained were it to be challenged by a taxing authority. Theassessment of the tax position is based solely on the technical merits of the position, without regard to the likelihood that the tax position may be challenged.If an uncertain tax position meets the "more-likely-than-not" threshold, the largest amount of tax benefit that is more than 50% likely to be recognized uponultimate settlement with the taxing authority is recorded. The Company has no uncertain tax positions.Concentration of Credit RisksFinancial instruments which subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. TheCompany deposits cash and cash equivalents in major financial institutions in the US. The Company performs periodic evaluations of the relative creditstanding of these institutions. The Company is of the opinion that the credit risk in respect of these balances is immaterial. In addition, the Companyperforms an ongoing credit evaluation and establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of customers (seealso Accounts receivable above).With the exception of the Company's international distributor, as described in Note 17, Significant Customer Concentrations, the balance of the Company'strade receivables do not represent a substantial concentration of credit risk. Most of the Company's sales are generated in North America, to a large number ofcustomers.F-13STRATA SKIN SCIENCES, INC. AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except share and per share amounts and number of lasers)Management periodically evaluates the collectability of the trade receivables to determine the amounts that are doubtful of collection and determine a properallowance for doubtful accounts.Earnings Per ShareThe Company calculates net income (loss) per share in accordance with ASC 260, Earnings per Share. Under ASC 260, basic net income (loss) per commonshare is calculated by dividing net income by the weighted-average number of common shares outstanding during the reporting period and excludes dilutionfor potentially dilutive securities. Diluted earnings per share gives effect to dilutive options, warrants and other potential common shares outstanding duringthe period.The Company's Series C Preferred Shares are subordinate to all other securities at the same subordination level as common stock and they participate in alldividends and distributions declared or paid with respect to common stock of the Company, on an as-converted basis. Therefore, the Series C Preferred Sharesmeet the definition of common stock under ASC 260. Earnings per share is presented for each class of security meeting the definition of common stock. Thenet loss is allocated to each class of security meeting the definition of common stock based on their contractual terms.The following table presents the calculation of basic and diluted net loss per share by each class of security for the year ended December 31, 2017: Year ended December 31, 2017 Commonstock Series CPreferred stock Net loss ($ 7,747) ($ 11,084) Weighted average number of shares outstanding during the period 2,713,782 10,444 Basic and Diluted net loss per share ($ 2.85) ($ 1,061.25)For the year ended December 31, 2017, diluted net loss per common share and Series C Preferred share is equal to the basic net loss per common share andSeries C Preferred share, respectively, since all potentially dilutive securities are anti-dilutive. The gain on the change in fair value of the warrant liability wasconsidered when calculating the diluted earnings per share and was deemed to be antidilutive.For the year ended December 31, 2016 diluted earnings per common share are computed by the numerator effected by the gain on the change in fair value ofthe warrant liability and the denominator is increased to include the number of additional potential common shares from the warrants underlying the warrantliability.Diluted earnings per common share were calculated using the following net loss and weighted average shares outstanding for the year ended December 31,2016: Year Ended December 31,2016 Net loss ($ 3,335)Gain on the change in fair value of the warrant liability (5,396)Diluted loss ($ 8,731) Weighted average number of common and common equivalent shares outstanding: Basic number of common shares outstanding 2,119,014Dilutive effect of warrants 196,701Diluted number of common and common stock equivalent shares outstanding 2,315,715F-14STRATA SKIN SCIENCES, INC. AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except share and per share amounts and number of lasers)The weighted average of potential common stock equivalents outstanding during the years ended December 31, 2017 and 2016 consist of common stockequivalents of common stock purchase warrants, senior secured convertible debentures, convertible preferred stock and common stock options, which aresummarized as follows: Year Ended December 31, 2017 2016Common stock equivalents of convertible debentures 6,622,821 9,231,570Common stock purchase warrants 2,406,625 3,739,037Common stock equivalents of convertible Preferred B stock 289,462 496,824Common stock options 876,373 613,773Total 10,195,281 14,081,204The convertible debenture shares, warrant shares (except for those related to the gain during the year ended December 31, 2016) and option shares wereexcluded from net loss per dilutive share because their effect would have been anti-dilutive for the years ended December 31, 2017 and 2016.Stock-Based CompensationThe Company accounts for stock-based compensation in accordance with ASC Topic 718, Compensation – Stock Compensation. Under the fair valuerecognition provision of this statement, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized asoperating expense over the requisite service period of the stock award on a straight line basis. Performance-based awards are recognized only when it isprobable that the vesting conditions will be met.Adoption of New Accounting StandardsIn January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-01, Business Combinations(Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities withevaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current guidance, there are threeelements of business: inputs, processes, and outputs. While an integrated set of assets and activities (collectively, a "set") that is a business usually hasoutputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if marketparticipants can acquire the set and continue to produce outputs, for example, by integrating the acquired set with their own inputs and processes. The newguidance provides a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assetsacquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. For public businessentities, the guidance is effective prospectively for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, but can beadopted early. The Company has adopted this ASU effective January 1, 2017 and has applied the rules with its sub-distribution license with Ellipse andconcluded that this transaction did not meet the definition of a business. As such, it has been accounted for as an asset acquisition. See Note 5, IntangibleAssets, net.In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718), to simplify various aspects ofthe accounting and presentation of share-based payments, including the income tax effects of awards and forfeiture assumptions. The new guidance permitsto elect to account for forfeitures as they occur. The Company has made this election upon the adoption of this standard. The guidance became effective forinterim and annual periods beginning after December 15, 2016. The adoption of this ASU did not have a significant impact on the consolidated financialstatements.In July 2015, The FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (Topic 330) ("ASU 2015-11"). ASU 2015-11 outlines that inventorywithin the scope of its guidance be measured at the lower of cost and net realizable value. Prior to the issuance of ASU 2015-11, inventory was measured atthe lower of cost or market (where market was defined as replacement cost, with a ceiling of net realizable value and floor of net realizableF-15STRATA SKIN SCIENCES, INC. AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except share and per share amounts and number of lasers)value less a normal profit margin). For a public entity, the amendments in ASU 2015-11 are effective, in a prospective manner, for annual reporting periodsbeginning after December 15, 2016, including interim periods within that reporting period (the first quarter of fiscal year 2017 for the Company). Theadoption of this ASU did not have a significant impact on the Company's consolidated financial statements.Recently Issued Accounting StandardsIn July 2017, the FASB issued a two-part ASU 2017-11, "(Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II)Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain MandatorilyRedeemable Non-controlling Interests with a Scope Exception." For public business entities, the amendments in Part 1 of ASU 2017-11 are effective for fiscalyears, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all entities, including adoption in aninterim period. The amendments in Part 2 of ASU 2017-11 do not require any transition guidance because those amendments do not have an accountingeffect. The Company is currently evaluating the impact of this guidance on the Company's consolidated financial statements.In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The newguidance eliminated Step 2 from the goodwill impairment test which was required in computing the implied fair value of goodwill. Instead, under the newamendments, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, however,the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. If applicable, an entity should consider income taxeffects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss. The amendments in thisguidance are effective for public business entities for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15,2019 with early adoption permitted after January 1, 2017. As the Company has not identified a goodwill impairment loss, currently this guidance does nothave an impact on the Company's financial statements.In February 2016 the FASB issued ASU 2016-02: Leases. The ASU introduces a lessee model that results in most leases impacting the balance sheet. UnderASU 2016-02, lessees will be required to recognize for all leases with terms longer than 12 months, at the commencement date of the lease, a lease liability,which is a lessee's obligation to make lease payments arising from a lease measured on a discounted basis, and a right-to-use asset, which is an asset thatrepresents the lessee's right to use or control the use of a specified asset for the lease term. Leases will be classified as either finance or operating, withclassification affecting the pattern of expense recognition. Also, the new standard aligns many of the underlying principles of the new lessor model withthose in ASC 606, the FASB's new revenue recognition model. The update is Effective for fiscal years beginning after December 15, 2018, including interimperiods within those fiscal years. While we continue to evaluate the effect of adopting this guidance on our consolidated financial statements and relateddisclosures, we expect our operating leases, as disclosed in Note 10, will be subject to the new standard. We will recognize right-of-use assets and operatinglease liabilities on our consolidated balance sheets upon adoption, which will increase our total assets and liabilities. With regard to the Company's revenuefrom short-term leases, we do not expect the new standard to have a material impact on our consolidated financial statements.In May 2014, The FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 outlines a single comprehensive model touse in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specificguidance. ASU 2014-09 also requires entities to disclose sufficient information, both quantitative and qualitative, to enable users of financial statements tounderstand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company will adopt this ASUeffective January 1, 2018 using the modified retrospective method with a cumulative adjustment that will increase its accumulated deficit by approximately$195. The cumulative adjustment will primarily relate to the promise to provide service type warranties related to sales of dermatology proceduresequipment. A portion of the transaction price of equipment sold with these service type warranties will be allocated to such warranties based on their stand-alone selling price, and the Company will begin to recognize revenue from these service type warranties ratably over the warranty term. Under currentguidance only separately priced extended warranties are required to be accounted for as separate elements and be recognized over the warranty term. Otherthan the above change related to warranties the Company does not expect the standard to have a material impact on its financial condition or results ofoperations. F-16STRATA SKIN SCIENCES, INC. AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except share and per share amounts and number of lasers)Note 2Liquidity and Going Concern:As of December 31, 2017, the Company had an accumulated deficit of $229,406 and had been incurring losses since inception through 2017 as well asnegative cash flows from operations until 2016. To date, the Company has dedicated most of its financial resources to research and development, sales andmarketing, and general and administrative expenses.On March 30, 2018 the Company entered into a Stock Purchase Agreement (the "Accelmed SPA") with Accelmed Growth Partners ("Accelmed"), pursuant towhich Accelmed has agreed to invest $13,000 into the Company in exchange for 12,037,037 shares of the Company's common stock at a per share purchaseprice of $1.08. In connection with the proposed Accelmed investment, the Company entered into two separate stock purchase agreements on March 30, 2018for $1,000 each with our current shareholders, Broadfin Capital ("Broadfin") and Sabby Management ("Sabby"). Upon closing of these transactions, each ofSabby and Broadfin will receive 925,926 shares of the Company's common stock at a per share purchase price of $1.08. Two separate subscriptionagreements were also executed on March 30, 2018 for $1,000 each to purchase 925,926 shares of our common stock at a per share purchase price of $1.08. Inaddition, Sabby and Broadfin have entered into a voting undertaking with the Company pursuant to which each of them has agreed (a) to increase theirrespective ownership interest to 9.99% of the outstanding shares of Company's common stock prior to the record date for the meeting of the shareholders, and(b) vote all their voting shares in the Company at the meeting to approve the proposed transaction. See Note 18 – Subsequent Events for additional detail.While management believes that its current cash and cash equivalents as of December 31, 2017, combined with the anticipated revenues from the sale of theCompany's products will be sufficient to satisfy its working capital needs, and capital asset purchases, for the next 12 months following the filing of this form10-K, there is a risk associated with the Company's ability to meet its debt obligations should the Company breach its debt covenants during 2018. Thecurrent MidCap agreement has financial covenants including a minimum monthly net revenue covenant. If the Company fails to meet the revenue covenant,it may be declared in breach of the credit facility agreement, and Midcap would have the option to call the full debt balance outstanding under the creditfacility agreement, which was $10,240 as of December 31, 2017. The Company has 30 days to report a default and upon notice from Midcap of a financialcovenant breach, the Company has an additional 10 business days to cure such default. The Company, however, cannot be certain that this default will becured in such period or at all. In connection with the proposed investment led by Accelmed, the Company entered into a non-binding letter of intent dated March 27, 2018 with MidcapFinancial Trust ("MidCap") pursuant to which the Company and MidCap will agree to terminate the Company's existing Midcap credit facility agreementand replace it with a new credit facility agreement with MidCap. This new credit facility agreement is contingent upon $14,000 in new equity financing andthe repayment of $3,000 on the current facility upon closing of the equity financing transactions described above.The equity financings described in this footnote are subject to shareholder approval. Therefore, there is uncertainty whether the Company will close on theequity purchase and subscription agreements as well as the MidCap non-binding letter of intent. While there is no guarantee of shareholder approval,management is confident that shareholders will reach both a quorum and a positive vote since Sabby and Broadfin, per the voting agreement describedabove, have proposed to increase their respective blockers to a combined 19.99% of the vote. Note 3Inventories: December 31,2017 December 31,2016 Raw materials and work in progress $2,490 $2,440 Finished goods 519 377 $3,009 $2,817 Work-in-process is immaterial, given the Company's typically short manufacturing cycle, and therefore is disclosed in conjunction with raw materials.Note 4Property and Equipment, net: December 31,2017 December 31,2016 Lasers placed-in-service $17,820 $16,712 Equipment, computer hardware and software 462 160 Furniture and fixtures 124 111 Leasehold improvements 31 25 18,437 17,008 Accumulated depreciation and amortization (10,734) (6,828)Property and equipment, net $7,703 $10,180 Depreciation and related amortization expense was $4,341 and $4,551 for the year ended December 31, 2017 and 2016, respectively. During the year endedDecember 31, 2017, the Company recorded an impairment loss of $196 to cost of revenues related to lasers placed-in-service at the Company's subsidiary inIndia. During the year ended December 31, 2016, the Company disposed of leasehold improvements, machinery and equipment and furniture and fixtureswith a recorded cost of $3,933 and accumulated depreciation and amortization of $3,809, related to the closing of its Irvington, New York facility. The netbook value of $124 was written off to general and administrative expense.Note 5Intangible Assets, net: December 31,2017 December 31,2016 Core technology $5,700 $5,974 Product technology 1,500 2,000 Customer relationships 6,900 6,900 Tradenames 1,500 1,500 Distribution rights 286 - 15,886 16,374 Accumulated amortization (4,561) (2,962)Intangible assets, net $11,325 $13,412 Related amortization expense was $1,995 and $1,815 for each of the years ended December 31, 2017 and 2016.During the year ended December 31, 2017, the Company wrote off core technology of $274 and accumulated amortization of $251 related to thediscontinuance of the MELAfind product. The value written off of $23 was recorded in cost of revenues.Definite-lived intangible assets are tested for impairment when events or changes in circumstances indicate that the carrying value of the asset may not berecoverable. The Company recognizes an impairment loss when and to theF-17STRATA SKIN SCIENCES, INC. AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except share and per share amounts and number of lasers)extent that the recoverable amount of an intangible asset is less than its carrying value. For the year ended December 31, 2017 the Company recognized atotal of $500 of intangible asset impairment charges with respect to product technology, which were recognized as cost of revenues charges on theCompany's consolidated statement of operations and comprehensive loss. The impairment charge equals the excess of the carrying value over the asset's fairvalue. The fair value of the product technology was determined based on Level 3 inputs, which included estimated revenues attributable to producttechnology, discount and growth rates, as well royalty rates acceptable in the market. As discussed in Note 1, effective January 1, 2017 the Company follows the guidance in ASU 2017-01, which provides a new framework for determiningwhether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the new guidance, companies are required to utilizean initial screening test to determine whether substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a singleidentifiable asset or a group of similar identifiable assets; if so, the asset is not a business. The Company has determined that its transaction with Ellipse in thefirst quarter of 2017 is considered to be an acquisition of a single asset, therefore, the acquisition is not considered to be an acquisition of a business. Thedistribution rights asset had been assigned a value of $900 which was comprised of the present value of the license fee payments. Effective August 2017 thetransaction was terminated and a new agreement was negotiated among the parties. See Note 1 for further details regarding these agreements. As a result of thetermination of the old agreement and the signing of the new agreements the Company reversed the intangible asset and corresponding liability recorded onMarch 1, 2017 and recorded the distribution rights at the present value of the payments under the new agreements, amounting to $286. The reversal of theaforementioned intangible asset and corresponding liability resulted in a $40 gain that was recognized in sales and marketing expense.Estimated amortization expense for the above amortizable intangible assets for the future periods is as follows:2018 $1,905 2019 1,605 2020 1,470 2021 1,410 2022 1,410 Thereafter 3,525 Total $11,325 Note 6Goodwill:Goodwill reflects the value or premium of the acquisition price in excess of the fair values assigned to identifiable tangible and intangible assets. Goodwill isnot amortized, but is reviewed annually for impairment. Goodwill was recorded on the acquisition of the XTRAC and VTRAC businesses on June 22, 2015 asthe purchase price exceeded the fair value of the identifiable net assets of the business.Balance at January 1, 2016 $8,928 Return of purchase price from escrow (125)Balance at December 31, 2016 and 2017 $8,803 The Company has no accumulated impairment losses of goodwill as of December 31, 2017.The goodwill was allocated among the reportable segments in accordance with the provisions of ASC Topic 350-20 and consisted of the following: December31, 2017and 2016 Dermatology Recurring Procedures segment $7,958 Dermatology Procedures Equipment segment 845 Total $8,803 F-18STRATA SKIN SCIENCES, INC. AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except share and per share amounts and number of lasers)Note 7Other Accrued Liabilities: December 31,2017 December 31,2016 Accrued warranty, current, see Note 1 $109 $102 Accrued compensation, including commissions and vacation 785 1,177 Accrued sales and other taxes 904 439 Distributor rights liability, current 85 - Accrued professional fees and other accrued liabilities 477 274 Total other accrued liabilities $2,360 $1,992 Included in accrued sales and other taxes are certain estimated sales and use taxes and related penalties and interest to taxing authorities. The Company hasbeen subject to audits performed by the taxing authorities. The Company uses estimates when accruing its sales and use tax liability, including interest andpenalties. All of the Company's tax positions are subject to audit. While the Company believes all of its estimates and assumptions are reasonable and will besustained upon audit, actual liabilities and credits may differ significantly. The Company believes its accruals cover all probable payments relating to salesand use taxes.Note 8Convertible Debentures:In the following table is a summary of the Company's convertible debentures. December31, 2016 Senior secured 2.25% convertible debentures, net of unamortizeddebt discount of $24,314; and deferred financingcosts of $524 $7,174 Senior secured 4% convertible debentures, net of unamortizeddebt discount of $3,469; and deferred financingcosts of $392 4,854 Total convertible debt $12,028 The total outstanding convertible debentures was exchanged for convertible Preferred C stock on September 20, 2017, thus there was no remainingoutstanding balance as of December 31, 2017.The Company issued $32,500 aggregate principal amount of Debentures (the "June 2015 Debentures") that, subject to certain ownership limitations andstockholder approval conditions, was convertible into 8,666,668 shares of Company common stock at an initial conversion price of $3.75 per share. TheDebentures were bearing interest at the rate of 2.25% per year, and, unless previously converted, were to mature on the five-year anniversary of the date ofissuance, June 22, 2020.The June 2015 Debentures included a beneficial conversion feature valued at $27,300 that was recorded as a discount to the debentures. On the date ofissuance the beneficial conversion feature value was calculated as the difference resulting from subtracting the conversion price of $3.75 from $6.90, theopening market value of the Company's common stock following the announcement of the transaction, multiplied by the number of common shares intowhich the June 2015 Debentures were convertible. This discount was being amortized over the five year life of the June 2015 Debentures using the effectiveinterest method. The embedded conversion feature contained an anti-dilution provision that allowed for downward exercise price adjustments in certainsituations. The embedded conversion feature was not bifurcated as it did not meet all of the elements of a derivative.On July 21, 2014, the Company entered into a definitive Securities Purchase Agreement (the "Purchase Agreement") with institutional investors (the"Investors") providing for the issuance of Senior Secured Convertible Debentures in the aggregate principal amount of $15,000, due, subject to the termstherein, in July 2019 (the "July 2014 Debentures"), and warrants (the "July 2014 Series A Warrants") to purchase up to an aggregate of 1,239,769 shares ofcommon stock, $0.001 par value per share, at an exercise price of $12.25 per share expiring in July 2019.F-19STRATA SKIN SCIENCES, INC. AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except share and per share amounts and number of lasers)The July 2014 Debentures were bearing interest at an annual rate of 4%, payable quarterly or upon conversion into shares of common stock. The Debentureswere convertible at any time into an aggregate of 1,169,595 shares of common stock at an initial conversion price of $12.825 per share. The Company'sobligations under the July 2014 Debentures were secured by a first priority lien on all of the Company's intellectual property pursuant to the terms of asecurity agreement ("Security Agreement") dated July 21, 2014 among the Company and the Investors. In connection with the Purchase Agreement, theCompany entered into a Registration Rights Agreement with the Investors pursuant to which the Company was obligated to file a registration statement toregister for resale the shares of Common Stock issuable upon conversion of the Series B Preferred Stock (See Note 11, Warrants) and Debentures and uponexercise of the Warrants. Under the terms of the Registration Rights Agreement, the Company filed a registration statement on August 19, 2014, which wasdeclared effective by the SEC on October 20, 2014 (File No. 333-198249).For financial reporting purposes, out of the $15,000 funded by the Investors on July 21, 2014 $5,296 was allocated first to the Warrants issued, then $4,565to the intrinsic value of the beneficial conversion feature on the July 2014 Debentures. The balance was further reduced by the fair value of warrants issued tothe placement agent for services rendered of $491, resulting in an initial carrying value of the Debentures of $4,647. The initial debt discount on the July2014 Debentures totaled $10,353 and was being amortized using the effective interest method over the five year life of the July 2014 Debentures.During the year ended December 31, 2017, the investors converted June 2015 Debentures amounting to $262 into 70,000 shares of common stock. The debtdiscount and deferred financing cost adjustment resulting from the conversions increased interest expense by $197 for the year ended December 31, 2017.As a condition of the new note facility (See Note 9, Long-term Debt) the Debentures from both the 2014 and 2015 financings were amended. The Debenturesholders' first priority lien was subordinated to the new term note facility. Additionally, as a condition of the term note facility, the maturity date of bothDebentures was extended to June 30, 2021 and treated as a modification.On June 6, 2017, the Company entered into a Securities Exchange Agreement (the "Agreement") with the holders of its 2.25% Senior Series A SecuredConvertible Debentures due June 30, 2021 and 4% Senior Secured Convertible Debentures due June 30, 2021, pursuant to which the holders have agreed toexchange all of such outstanding debentures into shares of newly created Series C Convertible Preferred Stock. The stockholders approved the exchange atthe stockholders' meeting held on September 14, 2017. The closing of the exchange was effective on September 20, 2017 and $40,465 of principal wasexchanged for 40,482 shares of Series C Preferred Stock. In accordance with ASC Topic 470, Debt, the aforementioned exchange was treated as anextinguishment of debt. As there was no intrinsic value for the conversion feature on the date of extinguishment, none of the proceeds were allocated to theextinguishment of the beneficial conversion feature. As such, the difference between the fair value of the convertible preferred stock issued (determined basedon the market value of the underlying common stock) and the net carrying value of the convertible debentures of $11,799 was recognized as a loss onextinguishment of debentures.Other than the limitations on conversions to keep each such holders beneficial ownership below 9.99%, the terms of the Series C Convertible Preferred Stockgenerally bestow the same rights to each holder as such holder would receive if they are common stock shareholder and are not redeemable by the holders,except the Series C Convertible Preferred Stock shares do not have voting rights. The Series C Convertible Preferred Stock have the same level ofsubordination as common stock. Each share of Series C Convertible Preferred Stock has a stated value of $1,000 and is convertible into 372 shares ofcommon stock (at a conversion price equal to $2.69) for a total of approximately 15,049,000 shares of common stock.Total interest expense related to these convertible debentures was $3,117 and $3,525 for the years ended December 31, 2017 and 2016, respectively.F-20STRATA SKIN SCIENCES, INC. AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except share and per share amounts and number of lasers)Note 9Long-term Debt: December 31,2017 December 31,2016 Term note, net of debt discount of $160 and $258, respectively; and deferred financing cost of $171 and $276,respectively $10,240 $11,466 Less: current portion (2,387) (1,714)Total long-term debt $7,853 $9,752 Term-Note Credit FacilityOn December 30, 2015, the Company entered into a $12,000 credit facility pursuant to a Credit and Security Agreement (the "Agreement") and relatedfinancing documents with MidCap Financial Trust ("MidCap") and the lenders listed therein. Under the Agreement, the credit facility may be drawn down intwo tranches, the first of which was drawn for $10,500 on December 30, 2015. The proceeds of this first tranche were used to repay $10,000 principal amountof short-term senior secured promissory notes, plus associated interest, loan fees and expenses. The second tranche was drawn for $1,500 on January 29, 2016.The Company's obligations under the credit facility are secured by a first priority lien on all of the Company's assets. This credit facility includes bothfinancial and non-financial covenants, including a minimum net revenue covenant, beginning in January 2016. On November 10, 2017, the minimum netrevenue covenant was amended prospectively. Additionally on November 10, 2017, the Company entered into an amendment to modify the principalpayments including a period of six months where there are no principal payments due. The interest rate on the credit facility is one month LIBOR plus 8.25%,subject to a LIBOR floor of 0.5% (9.61% as of December 31, 2017). On March 26, 2018, the Company further amended the minimum net revenue covenantretrospectively to the closing date of the loan in order for the Company to be in compliance with these covenants as of December 31, 2017. Refer to Note18 Subsequent Events for additional detail. Warrants to purchase shares of the Company's common stock that were issued in connection with the credit facility resulted in a discount to the debt. Thediscount is accreted using the effective interest rate method over the repayment term.The following table summarizes the future payments that the Company is obligated to make for the long-term debt for the future periods:2018 $2,387 2019 4,092 2020 4,092 $10,571 Note 10Commitments and Contingencies:LeasesThe Company has entered into various non-cancelable operating lease agreements for real property and several minor operating leases for personal property.These arrangements expire at various dates through 2022. Rent expense was $528 and $783 for the years ended December 31, 2017 and 2016, respectively.The future annual minimum payments under these leases are as follows:Year Ending December 31, 2018 $426 2019 174 2020 14 2021 14 2022 14 Total $642 F-21STRATA SKIN SCIENCES, INC. AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except share and per share amounts and number of lasers)For contingencies related to sales and use taxes, see Note 7.Note 11Warrants:The Company accounts for warrants that require net cash settlement upon change of control of the Company as liabilities instead of equity. Currently thereare 403,090 of such warrants with an exercise price of $3.75 per share and they expire between February 5, 2019 and April 30, 2019.The Company recognizes these liabilities at the fair value on each reporting date. The Company computed the value of the warrants using the binomialmethod. A summary of quantitative information with respect to the valuation methodology and significant unobservable inputs used for the Company'swarrant liabilities that are categorized within Level 3 of the fair value hierarchy as of December 31, 2017 and December 31, 2016 is as follows: December31, 2017 December31, 2016 Number of shares underlying the warrants 403,090 403,090 Stock price $1.23 $2.20 Volatility 48.60% 47.00%Risk-free interest rate 1.76% 1.22%Expected dividend yield 0% 0%Expected warrant life 1.12 – 1.35years 2.12 – 2.35years Recurring Level 3 Activity and ReconciliationThe tables below provide a reconciliation of the beginning and ending balances for the liability measured at fair value using significant unobservable inputs(Level 3).Fair Value Measurements Using Significant Unobservable Inputs (Level 3): Issuance Date December31, 2016 Decrease inFair Value December 31,2017 10/31/2013 $39 $ (37) $2 2/5/2014 66 ( 65) 1 Total $105 $ (102) $3 Issuance Date December31, 2015 Decrease inFair Value Reclassificationto Equity December31, 2016 10/31/2013 $379 $ (340) $- $39 2/5/2014 715 (649) - 66 7/24/2014 Series A 2,415 (1,573) (842) - 7/24/2014 Series B 1,726 (1,713) (13) - 6/22/2015 1,807 (1,121) (686) - Total $7,042 $ (5,396) $ (1,541) $105 F-22STRATA SKIN SCIENCES, INC. AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except share and per share amounts and number of lasers)Number of Warrants Subject to Remeasurement: Issuance DateDecember 31, 2017 10/31/2013137,143 2/5/2014265,947 Total403,090 Note 12Stockholders' Equity:Preferred StockThe Company is authorized to issue 10,000,000 shares of preferred stock with a par value of $0.10 per share with such designation, rights and preferences asmay be determined from time to time by the Company's Board of Directors. There were 36,182 and 0 shares of Series C convertible preferred stock issued andoutstanding on December 31, 2017 and 2016, respectively, and there were 0 and 6,000 shares of Series B convertible preferred stock issued and outstandingon December 31, 2017 and 2016, respectively.Other than the limitations on conversions to keep each such holders beneficial ownership below 9.99%, the terms of the Series C Convertible Preferred Stockgenerally bestow the same rights to each holder as such holder would receive if they are common stock shareholder and are not redeemable by the holders,except that the Series C Convertible Preferred Stock shares do not have voting rights. The Series C Convertible Preferred Stock have the same level ofsubordination as common stock. Each share of Series C Convertible Preferred Stock has a stated value of $1,000 and is convertible into shares of commonstock at a conversion price equal to $2.69 for a total of approximately 15,049,000 shares of common stock.During October 2017, investors converted Series C Preferred Stock into 1,598,346 shares of common stock.Common Stock and WarrantsThe Company is authorized to issue 150,000,000 shares of common stock with a par value of $0.001 per share. There were 4,304,425 and 2,166,898 issuedand outstanding at December 31, 2017 and 2016, respectively.Outstanding common stock warrants at December 31, 2017 consist of the following:Issue DateExpiration Date Total Warrants Exercise Price 4/26/20134/26/2018 13,865 $55.90 10/31/2013*4/30/2019 137,143 $3.75 2/5/2014*2/5/2019 265,947 $3.75 7/24/20147/24/2019 1,239,769 $3.75 - $ 12.25 6/22/20156/22/2020 600,000 $3.75 12/30/201512/30/2020 130,089 $5.65 1/29/20161/29/2021 19,812 $5.30 2,406,625 *These warrants are classified as liabilities (See Note 11, Warrants).F-23STRATA SKIN SCIENCES, INC. AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except share and per share amounts and number of lasers)Note 13Stock-based compensation:Stock OptionsOn October 27, 2016, the Company's stockholders approved the Company's adoption of the new 2016 Omnibus Incentive Stock Plan ("2016 Plan") having2,058,880 shares available for issuance in respect of awards made thereunder. The Company terminated the 2013 Stock Incentive Plan in October 2016. As ofDecember 31, 2017, the aggregate number of shares of common stock remaining available for issuance for awards under the 2016 Plan totaled 1,624,795.A summary of option transactions for all of the Company's stock options during the years ended December 31, 2017 and 2016 follows: Number ofStock Options WeightedAverageExercise Price Outstanding at December 31, 2015 536,904 $8.07 Granted 468,002 2.90 Exercised - - Expired/forfeited (104,767) 10.35 Outstanding at December 31, 2016 900,139 5.11 Granted 101,250 1.46 Exercised - - Expired/forfeited (135,667) 4.78 Outstanding at December 31, 2017 865,722 $4.74 Exercisable at December 31, 2017 542,905 $6.10 Options expected to vest at December 31, 2017 188,484 $2.24 The outstanding and exercisable options at December 31, 2017, have a range of exercise prices and associated weighted remaining contractual life andweighted average exercise price, as follows:Options Rangeof ExercisePrices OutstandingNumber ofShares Weighted AverageRemainingContractual Life(years) Weighted AverageExercise Price ExercisableNumber ofShares ExercisableWeighted Avg.Exercise Price $1.29 - $5.00 483,585 8.90 $2.58 160,867 $2.90 $5.01 - $10.00 372,500 7.62 6.19 372,500 6.19 $10.01 - $181.00 9,637 5.44 56.65 9,538 56.35 Total 865,722 8.31 $4.74 542,905 $6.10 The weighted average remaining contractual life of exercisable options was 7.84 years and 7.56 years at December 31, 2017 and 2016, respectively.As the share price as of December 31, 2017 was $1.23, the aggregate intrinsic value for options outstanding and exercisable was $0.Stock awards under the Company's stock option plans have been granted with exercise prices that are no less than the market value of the stock on the date ofthe grant. Options granted under the plans are generally time-based or performance-based options and vesting varies accordingly (see below for specificvesting conditions). Options under the plans expire up to a maximum of ten years from the date of grant. The fair value of each option award granted duringthe period is estimated on the date of grant using the Black-Scholes option valuation model and assumptions as noted in the following table:F-24STRATA SKIN SCIENCES, INC. AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except share and per share amounts and number of lasers) Years Ended December 31, 2017 2016Risk-free interest rate1.98 – 2.17% 1.51 – 2.18%Volatility46%-48% 50%Expected dividend yield0% 0%Expected life5.5 years 6.5 yearsEstimated forfeiture rate0% 0%The expected life of the options is based on the observed and expected time to full-vesting, forfeiture and exercise. Groups of employees that have similarhistorical exercise behavior are considered separately for valuation purposes. Volatility is based on the Company's historical stock prices matching theexpected term of the award. The risk-free rate is based on rates provided by the U.S. Treasury with a term equal to the expected life of the option. TheCompany has never paid dividends and does not currently anticipate paying any in the foreseeable future.On December 6, 2016, the Company granted an aggregate of 90,000 options to purchase common stock to the board directors with a strike price of $2.75. Theoptions vested over a one year period and expire ten years from the date of grant. The aggregate fair value of the options granted was $127.On October 31, 2016, the Company issued 108,501 options to purchase common stock to its Chief Executive Officer with a strike price of $2.75. The optionsvest over three years and expire ten years from the date of grant. The aggregate fair value of the options granted was $150. Additionally, the Company issued201,501 options to purchase common stock to its Chief Executive Officer with a strike price of $2.75. These options vest based on performance goalsdetermined by the board of directors for each of the years 2017 through 2019. The aggregate fair value of the options granted was $279. The 67,167 optionsassociated with 2017 performance goals were forfeited effective December 31, 2017 as the goals were not met, and it is not probable that the performancegoals for 2018 and 2019 will be met. Accordingly, no compensation expense has been recorded for these performance-based options.On June 7, 2016, the Company granted an aggregate of 68,000 options to purchase common stock to a number of employees with a strike price of $3.75. Theoptions vest over four years and expire ten years from the date of grant. The aggregate fair value of the options granted was $128.On May 10, 2017 the Company granted 11,250 options to purchase common stock to a new board director with a strike price of $2.78. The options vestedduring 2017 and expire ten years from the date of grant. The aggregate fair value of the options granted was $14.On December 1, 2017, The Company granted an aggregate of 90,000 options to purchase common stock to the board directors with a strike price of $1.29.The options vest over a one year period and expire ten years from the date of grant. The aggregate fair value of the options granted was $54.Stock-based compensation expense, which is included in general and administrative expense, for the years ended December 31, 2017 and 2016 was $186 and$113, respectively. As of December 31, 2017 there was $190 in unrecognized compensation expense, which will be recognized over a weighted averageperiod of 1 year.F-25STRATA SKIN SCIENCES, INC. AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except share and per share amounts and number of lasers)Note 14Income Taxes: Year Ended December 31, 2017 2016 Current: Federal $64 $- State 11 15 75 15 Deferred: Federal (24) 178 State 78 62 54 240 Income tax expense $129 $255 The provision for income taxes includes federal, state and local income taxes currently payable and deferred taxes resulting from net operating losscarryforwards and temporary differences between the financial statement and tax bases of assets and liabilities. Valuation allowances are recorded to reducedeferred tax assets when it is not more likely than not that a tax benefit will be realized.On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). TheTax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, reducing the U.S. federal corporate tax rate from 35 percent to21 percent; eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized; creating a new limitation ondeductible interest expense; changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December31, 2017; and limitations on the deductibility of certain executive compensation.In December 2017, the SEC issued Staff Accounting Bulletin No. 118 ("SAB 118"), which addresses situations where the accounting is incomplete for theincome tax effects of the Act. SAB 118 directs taxpayers to consider the impact of the Act as "provisional" when the Company does not have the necessaryinformation available, prepared or analyzed (including computations) to finalize the accounting for the change in tax law. Companies are provided ameasurement period of up to one year to obtain, prepare, and analyze information necessary to finalize the accounting for provisional amounts or amountsthat cannot be estimated as of December 31, 2017.With regards to the Tax Act impact on the tax provision as it relates to the Company for the year ended December 31, 2017, we have recognized theprovisional impact of tax reform related to the revaluation of deferred tax assets and liabilities from 35% to 21% of $23.8 million tax expense, which isalmost entirely offset by a reduction in the valuation allowance. With regards to the one-time transition tax, we did not record any tax liability as we estimate that the accumulated earnings and profits of our foreignsubsidiary will be in a deficit position. Because of the complexity of the new international tax provisions included in the Act that are not applicable to theCompany until 2018, the Company is continuing to evaluate these provisions of the Act and the application of ASC 740.We will continue to refine our calculations as additional analysis is completed related to the Act. Additional information that may affect our provisionalamounts would include further clarification and guidance on how the IRS will implement tax reform, including guidance with respect to the above, furtherclarification and guidance on how state taxing authorities will implement tax reform and the related effect on our state income tax returns, completion of our2017 tax return filings, and the potential for additional guidance from the SEC or the FASB related to tax reform.The difference between the actual income tax benefit and that computed by applying the U.S. federal income tax F-26STRATA SKIN SCIENCES, INC. AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except share and per share amounts and number of lasers)rate of 34% to pretax loss from continuing operations is summarized below: For the Years Ended December 31, 2017 2016 Computed expected tax benefit $ (6,359) $ (1,047)State tax benefit, net of federal effect (1,113) (499)Warrant value fluctuation (34) (1,835)Tax Cuts and Jobs Act impact 23,834 - Net (decrease) increase in valuation allowance (16,199) 3,636 Provision for income taxes $129 $255 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of December 31, 2017 and 2016 are asfollows: December 31, 2017 2016 Deferred tax assets/(liabilities): Net operating loss carryforward $50,472 $72,870 Intangible assets 4,595 8,711 Inventory 66 149 Reserves & accrued expenses 228 291 Convertible debt discount - (11,097) Property & equipment 130 432 Non-cash compensation 793 1,127 Goodwill (414) (359)Total deferred tax assets 55,870 72,124 Less: valuation allowance (56,284) (72,483)Net deferred tax assets/(liabilities) $(414) $(359)The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporarydifferences become deductible. Based on the Company's historical net losses, management does not believe that it is more-likely-than not that the Companywill realize the benefits of these deferred tax assets and, accordingly, a full valuation allowance has been recorded against the deferred tax assets as ofDecember 31, 2017 and 2016. The Company's valuation allowance against its deferred tax assets decreased by $16,199 for the year ended December 31,2017.At December 31, 2017 and 2016, the Company has federal net operating loss carryforwards of approximately $181,413 and $183,658, respectively, to offsetfuture taxable income. The Company has experienced certain ownership changes which, under the provisions of Section 382 of the Internal Revenue Code of1986, 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 andJune 2015 equity raises by the Company, will likely limit the annual use of these net operating loss carryforwards. Although the Company has not performeda 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 havean equal and offsetting adjustment to the valuation allowance.FASB ASC 740 "Income Taxes" contains guidance with respect to uncertain tax positions which applies to all tax positions and clarifies the recognition oftax benefits in the financial statements by providing for a two-step approach of recognition and measurement. The first step involves assessing whether thetax position is more-likely-than-not to be sustained upon examination based upon its technical merits. The second step involves measurement of the amountto recognize. Tax positions that meet the more likely than not threshold are measured at the largest amount of tax benefit that is greater than 50% likely ofbeing realized upon ultimate finalization with the taxing authority. F-27STRATA SKIN SCIENCES, INC. AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except share and per share amounts and number of lasers)The Company does not have any uncertain tax positions or accrued penalties and interest. If such matters were to arise, the Company would recognizeinterest and penalties related to income tax matters in income tax expense. The Company files tax returns as prescribed by the tax laws of the jurisdictions inwhich it operates. In the normal course of business, the Company is subject to examination by federal, state, and foreign jurisdictions, where applicable. Thecompany's tax years are still under open status from 2014 to present. All open years may be examined to the extent that net operating loss carryforward areused in future periods.Note 15Business Segments and Geographic Data:The Company organized its business into three 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 fromthe usage of its equipment by dermatologists to perform XTRAC procedures. The Dermatology Procedures Equipment segment generates revenues from thesale of equipment, such as lasers and lamp products. The Dermatology Imaging segment generated revenues from the sale and usage of imaging devices. TheCompany has announced that it will no longer support the imaging devices effective September 30, 2017 thus there will be minimal continuing revenues forthis segment. Management reviews financial information presented on an operating segment basis for the purposes of making certain operating decisions andassessing 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 foradministrative and accounting staff, general liability and other insurance, professional fees and other similar corporate expenses. Interest and other financingincome (expense), net is also not allocated to the operating segments.The following tables reflect results of operations from our business segments for the periods indicated below:Year Ended December 31, 2017 DermatologyRecurringProcedures DermatologyProceduresEquipment DermatologyImaging TOTAL Revenues $22,640 $8,792 $17 $31,449 Costs of revenues 8,744 4,529 225 13,498 Gross profit 13,896 4,263 (208) 17,951 Gross profit % 61.4% 48.5% -1223.5% 57.1% Allocated operating expenses: Engineering and product development 1,431 279 1 1,711 Selling and marketing expenses 9,454 1,795 0 11,249 Unallocated operating expenses - - - 7,401 10,885 2,074 1 20,361 Income (loss) from operations 3,011 2,189 (209) (2,410) Interest expense, net - - - (4,612)Change in fair value of warrant liability - - - 102 Other income (expense), net - - - 17 Loss on extinguishment of debentures - - - (11,799) Income (loss) before income taxes $3,011 $2,189 $ (209) $ (18,702) F-28STRATA SKIN SCIENCES, INC. AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except share and per share amounts and number of lasers)Year Ended December 31, 2016 DermatologyRecurringProcedures DermatologyProceduresEquipment DermatologyImaging TOTAL Revenues $23,508 $7,065 $134 $30,707 Costs of revenues 8,763 3,506 367 12,636 Gross profit 14,745 3,559 (233) 18,071 Gross profit % 62.7% 50.4% (173.9%) 58.8% Allocated operating expenses: Engineering and product development 1,288 210 431 1,929 Selling and marketing expenses 11,541 375 186 12,102 Unallocated operating expenses - - - 7,637 12,829 585 617 21,668 Income (loss) from operations 1,916 2,974 (850) (3,597) Interest expense, net - - - (4,900)Change in fair value of warrant liability - - - 5,396 Other income (expense), net - - - 21 Income (loss) before income taxes $1,916 $2,974 $ (850) $ (3,080)For the year ended December 31, 2017 and 2016 there were no material net revenues attributable to any individual foreign country. Net revenues bygeographic area were, as follows: Years EndedDecember 31, 2017 2016 Domestic $26,178 $24,486 Foreign 5,271 6,221 $31,449 $30,707 As of December 31, 2017 and 2016, total assets by reportable segment were as follows: December 31, Assets: 2017 2016 Dermatology Recurring Procedures $29,722 $34,612 Dermatology Procedures Equipment 4,403 3,980 Dermatology Imaging - 265 Other unallocated assets 4,506 4,336 Consolidated total $38,631 $43,193 Substantially all long lived assets were located in domestic markets for both of the years ended December 31, 2017 and 2016.Note 16Related Parties:On June 22, 2015, the Company entered into a securities purchase agreement with the Purchasers, including certain funds managed by Sabby Management,LLC and Broadfin Capital LLC (existing Company shareholders), in connection with a private placement. The Purchasers were issued Warrants to purchasean aggregate of 0.6 millionF-29STRATA SKIN SCIENCES, INC. AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except share and per share amounts and number of lasers)shares of common stock, having an exercise price of $3.75 per share. We also issued $32.5 million aggregate principal amount of Debentures that, subject tocertain ownership limitations and stockholder approval conditions, were convertible into 8,666,668 shares of common stock at an initial conversion price of$3.75 per share. The Debentures were bearing interest at the rate of 2.25% per year, and, unless previously converted, were to mature on the five-yearanniversary of the date of issuance. Refer to Note 8 for additional information on the terms of the Debentures and for information on the interest expenserelating to the Debentures. On September 30, 2015, the Company repriced outstanding Warrants held by certain investors to reduce the exercise price to$3.75 per share.On June 6, 2017, the Company entered into a Securities Exchange Agreement (the "Agreement") with the holders of its 2.25% Senior Series A SecuredConvertible Debentures due June 30, 2021 and 4% Senior Secured Convertible Debentures due July 30, 2021, pursuant to which the holders have agreed toexchange all of such outstanding debentures into shares of newly created Series C Convertible Preferred Stock. The stockholders approved the exchange atthe stockholders' meeting held on September 14, 2017. The closing of the exchange was effective on September 20, 2017 and $40,465 of principal wasexchanged for 40,482 shares of Series C Preferred Stock. In accordance with ASC Topic 470, Debt, the aforementioned exchange was treated as anextinguishment of debt. As there was no intrinsic value for the conversion feature on the date of extinguishment, none of the proceeds were allocated to theextinguishment of the beneficial conversion feature. As such, the difference between the fair value of the convertible preferred stock issued (determined basedon the market value of the underlying common stock) and the net carrying value of the convertible debentures (adjusted for unamortized premium discount),of $11,799 was recognized as a loss on extinguishment of debentures. See Note 12 for additional information on Series C Convertible Preferred Stock.On November 4, 2015, the Company entered into consulting agreements with two of its directors, Jeffrey F. O'Donnell, Sr. and Samuel E. Navarro, the terms ofwhich are the same. Under the terms of their respective agreements, each director agrees to provide strategic support, advice and guidance to the Companyand its management team in connection with the integration and operation of the expanded business, investor relations and internal and external businessdevelopment activities. The consultant will make himself available to the Company's President and Chief Executive Officer and the management team onrequest at mutually convenient times and will report to the Board of Directors quarterly and otherwise when requested by the Board. The agreements hadbeen extended through June 30 and December 31, 2017 for Mr. Navarro and Mr. O'Donnell, respectively. The directors were each to be paid an up-front fee of$40 for advice and services rendered prior to the date of the agreement, including advice related to the acquisition of the XTRAC and VTRAC assets and thestructuring of the financing for that acquisition, a retainer of $10 per month, commencing November 10, 2015 and continuing on the tenth day of each monththrough the expiration of their respective agreements, and reimbursement of pre-approved, out-of-pocket expenses. The agreements expired per their terms onJune 30, 2017 and December 31, 2017, respectively, and no extensions or renewals of the agreement were entered into. The Company expensed $180 and$240 related to these agreements during the years ended December 31, 2017 and 2016, respectively. These amounts are included in general andadministrative expenses in the accompanying consolidated statements of operations and comprehensive loss.During 2017, Modevity LLC ("Modevity"), the developer of the ARALOC Secure Content Distribution Platform, a software system for sharing proprietaryand / or confidential content files over the internet and allowing its users to collaborate securely from any mobile or desktop device, has provided certainconsulting services to the Company advising on the development of our digital media and marketing initiatives, including providing assistance in our firstlimited test of targeted advertising using Facebook. Our Board member, James Coyne, has been the Chief Executive Officer of Modevity since helping tofound the company in April 2004. To date, Modevity has provided this assistance without charge to the Company. Independent of these services providedby Modevity, in November 2017 the Company entered into an agreement with Olympic Media, a company founded by Ryan Coyne, the son of James Coyne,to create and execute a focused tactical plan to leverage new and existing digital assets across social and digital platforms to drive psoriasis and vitiligosufferers to the Company's website and call center for conversion to new patient appointments. The agreement with Olympic Media provides for no minimumpayments or other financial commitments and is terminable by either party without penalty on ten days written notice. During December 2017, the Companymade a $30 payment to Olympic Media. James Coyne has no financial interest in Olympic Media. F-30STRATA SKIN SCIENCES, INC. AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except share and per share amounts and number of lasers)Note 17Significant Customer Concentration:For the year ended December 31, 2017, revenues from sales to the Company's international master distributor (GlobalMed Technologies) were $5,264, or16.7%, of total revenues for such period. At December 31, 2017, the accounts receivable balance from GlobalMed Technologies was $475, or 15.1%, of totalnet accounts receivable. For the year ended December 31, 2016, revenues from sales to the Company's international master distributor were $6,093, or 19.8%of total revenues for such period. No other customer represented more than 10% of total company revenues for the year ended December 31, 2017 and 2016.No other customer represented more than 10% of total accounts receivable as of December 31, 2017.Note 18Subsequent Events:Series C Preferred Stock ConversionDuring January 2018, investors converted Series C Preferred Stock into 75,000 shares of common stock.Third Amendment – MidCap Credit and Security AgreementOn March 26, 2018 we entered into a Third Amendment to Credit and Security Agreement with Midcap. For the period beginning on the Closing Date andending on January 31, 2018, the gross revenue in accordance with GAAP for the twelve-month period ending on the last day of the most recently completedcalendar month was amended to be less than the minimum amount on the Covenant Schedule. The Amendment waives the event of default related to therevenue covenant for period ending February 2018. The Amendment also amends a monthly net revenue covenant for March and April 2018.MidCap Non-binding Letter of IntentIn connection with the proposed investment led by Accelmed Growth Partners L.P. ("Accelmed") described below, we entered into a non-binding letter ofintent dated March 30, 2018 with Midcap to terminate the existing Midcap loan agreement and replace it with a new agreement. This new agreement iscontingent upon our raising $14,000 in new equity financing and the repayment of $3,000 on the current facility. Under the new agreement among otherterms, the base amount of the loan is to be $7,571; the term is for 48 months; interest only payments for the first 18 months; and straight-line principalpayments for the remaining 30 months. This loan will be collateralized by substantially all the assets of the Company and will contain certain financial andnon-financial covenants.Stock Purchase and Subscription AgreementsAccelmed Stock Purchase AgreementOn March 30, 2018 we entered into a Stock Purchase Agreement (the "Accelmed SPA") and a Registration Rights Agreement with Accelmedinvesting $13,000 into the Company at a price per share of $1.08, upon closing Accelmed will receive 12,037,037shares of our common stock.The Company may incur additional expenses, or Acclemed may receive additional shares in the event of certain contingencies. The Company isrequired to reimburse Accelmed for its legal, consulting, due diligence and administrative costs related to the proposed stock purchase, includingthe reasonable legal fees, disbursements and related charges of Accelmed's counsel in an aggregate amount not to exceed $400 (or up to $500 in theevent of certain contingencies, and subject to no cap in the event the Company's stockholders do not approve the transaction) at the earliest of (i) theclosing, or (ii) the termination of Accelmed SPA for any reason other than by reason of a breach of the Accelmed SPA by Accelmed. The Companymay also be obligated to pay a breakup fee of $600 in the event the Company's board of directors makes a recommendation against the approval ofthe transaction. The Accelmed SPA also requires that the Company indemnify Accelmed for certain items as defined in SPA.F-31STRATA SKIN SCIENCES, INC. AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except share and per share amounts and number of lasers) In connection with the Accelmed investment, the Company has agreed to pay a fee equal to 4% of the amount paid at closing to HC Wainwright, theCompany's placement agent. This fee is in addition to the fees that will be owed to Fairmount Partners, the Company's financial advisor. Upon theclosing of the Accelmed transaction, the Company is obligated to pay Fairmount Partners a fee of $680 of which $100 has been paid as a retainer,leaving a balance to be paid at closing of $580. In the event the Company becomes obligated to pay additional investment advisors fees, theCompany is obligated to indemnify Accelmed for the additional payment.Broadfin Capital and Sabby Management Stock Purchase AgreementsIn connection with the proposed Accelmed investment, we entered into two separate stock purchase agreements on March 30, 2018, each forapproximately $1,000 with our current shareholders, Broadfin Capital ("Broadfin") and Sabby Management ("Sabby"). Upon closing of thesetransactions, each of Sabby and Broadfin will receive 925,926 shares of our common stock at a price per share of $1.08.In further consideration of entering into their respective stock purchase agreements, Sabby and Broadfin have each entered into separate agreementsrestricting their abilities to sell their holdings (the "Leak-Out Agreements"). Under the terms of each of the respective Leak-Out Agreements, thestockholder has agreed that from the later of (a) the date that the approval by the shareholders of the transactions and deemed effective and (b) theclosing of the transactions contemplated pursuant to the SPA, the stockholder shall not sell dispose or otherwise transfer, directly or indirectly,(including, without limitation, any sales, short sales, swaps or any derivative transactions that would be equivalent to any sales or short positions)any shares of Common Stock of the Company held by the Stockholder on the date hereof or issuable to the Stockholder upon conversion of sharesof the Company's Preferred Stock held by the Stockholder on the date hereof, (a) if prior to April 1, 2019, at a price per Company Share less than$1.296, subject to adjustment for reverse and forward stock splits and the like, or (b) thereafter, at a price per share reflecting less than the price setforth on the schedule in the Leak-Out Agreements subject to adjustment for reverse and forward stock splits and the like, unless, (1) in the case ofeither clauses (a) or (b), otherwise approved by the Company's Board of Directors, (2) in the case of either clause (b), under a shelf prospectus or suchother controlled offering as may be agreed to by the Principal Stockholders (as defined in the Stock Purchase Agreement) or (3) in the case of eitherclauses (a) or (b), in a sale pursuant to which any other stockholder(s) of the Company are offered the same terms of sale, including in a merger,consolidation, transfer or conversion involving the Company or any of its subsidiaries.Subscription AgreementsTwo separate subscription agreements were also executed on March 30, 2018 in connection with the Accelmed investment: (i) a subscriptionagreement with Gohan Investments, Ltd. for $1,000 to purchase 925,926 shares of our common stock at $1.08 per share; and (ii) a subscriptionagreement with Dr. Dolev Rafaeli for $1,000 to purchase 925,926 shares of our common stock at $1.08 per share.Change in Executive Leadership and Board MembersPursuant to the Accelmed SPA, on April 10, 2018, we will have a change in administration by which, Dr. Dolev Rafaeli will become Interim Chief ExecutiveOfficer and Frank J McCaney, our current CEO, will become Interim Chief Financial Officer. Additionally, effective after the closing of the investment at leastfive of the current board members will resign Accelmed shall have the right to fill all the remaining vacancies effective as of the Closing. F-32STRATA SKIN SCIENCES, INC. AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except share and per share amounts and number of lasers) The transaction is subject to shareholder approval. Sabby and Broadfin have delivered to the Company a voting undertaking obligating Broadfin and Sabbyto (a) increase their respective "blocker" to 9.99% prior to the record date for the meeting of the shareholders, and (b) vote all their voting shares in theCompany at the meeting to approve the proposed transaction. The Company intends to schedule a special meeting of the shareholders as soon as practical and within the time limits set forth in the Accelmed SPA. F-33 EXHIBIT 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in the Registration Statements of STRATA Skin Sciences, Inc. and Subsidiary on Form S-3 (Nos. 333-194649and 333-198249) and Form S-8 (Nos. 333-136183, 333-161286, 333-189119, 333-208397, and 333-216712) of our report dated April 2, 2018, on our auditsof the consolidated financial statements as of December 31, 2017 and 2016 and for each of the years then ended, which report is included in this AnnualReport on Form 10-K to be filed on or about April 2, 2018./s/ EisnerAmper LLPEISNERAMPER LLPIselin, New JerseyApril 2, 2018  EXHIBIT 31.1CERTIFICATION OF CHIEF EXECUTIVE OFFICERI, Frank McCaney, certify that:(1)I have reviewed this annual report on Form 10-K of STRATA Skin Sciences, Inc.;(2)Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periodcovered by this report;(3)Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;(4)The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules13a-15(f) and 15d-15(f)) for the registrant and have:(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known tous by others within those entities, particularly during the period in which this report is being prepared;(b)designed such internal control over financial reporting or caused such internal control over financial reporting to be designed underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally accepted accounting principles;(c)evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant'smost recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or isreasonably likely to materially affect, the registrant's internal control over financial reporting; and(5)The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalentfunctions):(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant'sinternal control over financial reporting. STRATA SKIN SCIENCES, INC. April 2, 2018 By: /s/ Frank J. McCaney Frank J. McCaney President & Chief Executive Officer E-31.1  Exhibit 31.2CERTIFICATION OF CHIEF FINANCIAL OFFICERI, Frank J. McCaney, certify that:(1)I have reviewed this annual report on Form 10-K of STRATA Skin Sciences, Inc.;(2)Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periodcovered by this report;(3)Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;(4)The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules13a-15(f) and 15d-15(f)) for the registrant and have:(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known tous by others within those entities, particularly during the period in which this report is being prepared;(b)designed such internal control over financial reporting or caused such internal control over financial reporting to be designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles;(c)evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant'smost recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or isreasonably likely to materially affect, the registrant's internal control over financial reporting; and(5)The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalentfunctions):(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting whichare reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant'sinternal control over financial reporting. STRATA SKIN SCIENCES, INC. Dated: April 2, 2018 By: /s/ Frank J. McCaney Frank J. McCaney Interim Chief Financial Officer E-31.2  Exhibit 32.1SECTION 906 CERTIFICATIONCERTIFICATION (1) Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350, as adopted), Frank J. McCaney, the President and Chief ExecutiveOfficer and Chief Financial Officer of STRATA Skin Sciences, Inc. (the "Company"), hereby certifies that, to the best of his knowledge: 1.The Company's Annual Report on Form 10-K for the year ended December 31, 2017, to which this Certification is attached as Exhibit32.1 (the "Periodic Report"), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of1934, as amended, and 2.The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results ofoperations of the Company. Dated: April 2, 2018 /s/ Frank J. McCaney Frank J. McCaneyPresident & Chief Executive Officer & Interim Chief Financial Officer (1)This certification accompanies the Quarterly Report on Form 10-Q to which it relates, is not deemed filed with the Securities and ExchangeCommission and is not to be incorporated by reference into any filing of STRATA Skin Sciences, Inc. under the Securities Act of 1933, as amended,or the Exchange Act (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in suchfiling. A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to STRATA SkinSciences, Inc. and will be retained by STRATA Skin Sciences, Inc. and furnished to the Securities and Exchange Commission or its staff uponrequest. E-32.1 

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