UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-11635
STRATA SKIN SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction of
incorporation or Organization)
5 Walnut Grove Drive, Suite 140 Horsham, Pennsylvania
(Address of principal executive offices)
13-3986004
(I.R.S. Employer
Identification No.)
19044
(Zip code)
Registrant’s telephone number, including area code: (215) 619-3200
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.001 Par Value
Trading Symbol(s)
SSKN
Name Of Each Exchange On Which Registered
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically; every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.0405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☒
Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new
or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the
filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received
by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of our common stock as of June 30, 2022 was 34,723,046 shares. The aggregate market value of voting and non-voting
common equity held by non-affiliates on the registrant was $17,222,777, computed by reference to the closing market price of $0.96 of the common stock
as of June 30, 2022 and 17,940,393 shares held by non-affiliates. As of March 15, 2023, the number of shares outstanding of our common stock was
34,881,453.
Documents incorporated by reference:
Portions of the proxy statement relating to STRATA Skin Sciences, Inc.’s 2023 Annual Meeting of Stockholders are incorporated by reference into Part III
of this Annual Report on Form 10-K.
TABLE OF CONTENTS
PART I
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
[Reserved]
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
PART III
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15.
Item 16.
Exhibits and Financial Statement Schedules
Form 10-K Summary
PART IV
i
Page
4
4
15
39
39
39
40
40
40
41
41
55
56
56
56
56
56
57
57
57
57
57
57
58
58
59
Table of Contents
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Report, including the sections entitled “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and “Business”, includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements relate to, among
others, our plans, objectives and expectations for our business, operations and financial performance and condition, and can be identified by terminology
such as “may,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “will,” “could,” “project,” “target,” “potential,”
“continue” and similar expressions that do not relate solely to historical matters. Forward-looking statements are based on management’s belief and
assumptions and on information currently available to management. Although we believe that the expectations reflected in forward-looking statements are
reasonable, such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or
achievements to be materially different from any future results, performance or achievements expressed or implied by forward-looking statements.
Forward-looking statements include, but are not limited to, statements about:
● forecasts of future business performance, consumer trends and macro-economic conditions;
● descriptions of market, competitive conditions, and competitive product introductions;
● descriptions of plans or objectives of management for future operations, products or services;
● actions by the FDA or other regulatory agencies with respect to our products or product candidates;
● changes to third-party reimbursement of laser treatments using our devices;
● our estimates regarding the sufficiency of our cash resources, expenses, capital requirements and needs for additional financing and our ability to
obtain additional financing;
● our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;
● anticipated results of existing or future litigation or government actions;
● health emergencies, the spread of infectious disease or pandemics; 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 Report
might 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, even
if subsequently made available by us on our website or otherwise. We are not under any obligation, and we expressly disclaim any obligation, to update or
alter any forward-looking statements, whether as a result of new information, future events or otherwise. You should not regard these statements as a
representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. All subsequent
forward-looking statements attributable to us or to any person acting on our behalf are expressly qualified in their entirety by the cautionary statements
contained or referred to in this section.
You should read this Annual Report and the documents that we reference in this Annual Report as exhibits with the understanding that our actual
future results, performance, and events and circumstances may be materially different from what we expect.
Table of Contents
PART I
ITEM 1. BUSINESS
Our Company
Overview
We are a medical technology company in dermatology dedicated to developing, commercializing and marketing innovative products for the
treatment of dermatologic conditions. Our products include the XTRAC® and now Pharos® excimer lasers and VTRAC® lamp systems utilized in the
treatment of psoriasis, vitiligo and various other skin conditions. Our products also include the TheraClear® Acne Therapy System utilized in the
treatment of mild to moderate inflammatory, comedonal and pustular acne.
Corporate Overview
We were incorporated in the State of New York in 1989 under the name Electro-Optical Sciences, Inc. and subsequently reincorporated under the
laws of the State of Delaware in 1997. In April 2010, we changed our name to MELA Sciences, Inc. On January 5, 2016, we changed our name to
STRATA Skin Sciences, Inc. In June 2015, we completed the acquisition of the XTRAC® Excimer Laser and the VTRAC® excimer lamp businesses from
PhotoMedex, Inc. (the “Acquisition”). Prior to the Acquisition, the Company’s only product was the MelaFind® system, or MelaFind, a device for aiding
dermatologists in the evaluation of clinically atypical pigmented skin lesions. We have discontinued the MelaFind business.
In August 2021 and January 2022, we acquired the Pharos U.S. dermatology business and the TheraClear acne treatment business, respectively.
Impact of COVID-19 Pandemic
In late 2019, there was an outbreak of a new strain of coronavirus (“COVID-19”) which became a global pandemic. While many of COVID-19’s
initial disruptions and damage to the global economy have been mitigated, the COVID-19 pandemic has continued to negatively impact the economy,
disrupted global supply chains, constrained workforce participation and created significant volatility and disruption of financial markets. The pandemic led
to the suspension of elective procedures in the U.S. and to the temporary closure of many physician practices, which are our primary customers. While
most offices have reopened, some physician practices closed and never reopened, and the impact of the ongoing COVID-19 pandemic and its variants on
our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frames, will depend
on future developments, including, but not limited to, the ongoing mutations and spread of the COVID-19 virus, impact on business operations, supply
chains, and transport, and governmental and societal responses thereto, all of which are uncertain and cannot be predicted.
The ongoing COVID-19 pandemic has had a negative impact on our results of operations and financial performance through fiscal 2022, and we
expect it will continue to have a negative impact on revenues, earnings and cash flows until such time as our customers adjust to the pandemic’s
ramifications. Some physician offices continue to experience staffing issues, and we believe these shortages of trained personnel have negatively impacted
our business. Accordingly, current results and financial conditions discussed herein may not be indicative of future operating results and trends.
Russia-Ukraine War
Prior to the outbreak of the Russia-Ukraine War, Ukraine was the largest exporter of noble gases including neon, krypton, and xenon. Historically,
Ukraine has been the source of a significant amount of gas supplied to the Company by our contract suppliers. Neon gas is essential to the proper
functioning of our lasers. Our supporters have been resourceful in continuing to supply gases to us but cannot assure us that the supply will not remain
uninterrupted. The reduced supply and war have raised the price of gas significantly worldwide. Additionally, the Creating Helpful Incentives to Produce
Semiconductors and Science Act of 2022 has led to a further tightening of rare gas supplies as chip manufacturers reconfigure their supply chains to
address the need to secure their own supplies of rare gases for use in the manufacture of computer chips, while struggling with the disruptions caused by
this war.
XTRAC and Pharos Systems and VTRAC Systems
The XTRAC and Pharos excimer laser technology emits highly concentrated UV light targeted primarily towards autoimmune dermatological skin
disorders such as psoriasis, vitiligo, atopic dermatitis, and eczema, among others. The XTRAC system received U.S. Food and Drug Administration
(“FDA”) clearance in 2000 and the Pharos in 2004, and excimer laser has since become a widely recognized treatment for psoriasis, vitiligo and other skin
diseases. Psoriasis and vitiligo alone affect up to 13 million people in the U.S. and 195 million people worldwide. VTRAC is a UV light lamp system that
works in much the same way as the XTRAC. It received FDA clearance in August 2005 and Conformité Européenne (“CE”) mark approval in January
2006 and has been marketed exclusively in international markets.
4
Table of Contents
Present in natural sunlight, ultraviolet B (“UVB”) is an accepted psoriasis treatment that penetrates the skin to slow the growth of damaged skin
cells thereby placing the disease into remission for a period of time. Studies have shown that the remission time can last three to six months or longer. In
our XTRAC system, our targeted therapy approach delivers optimum amounts of UVB light directly to skin lesions, sparing healthy tissue. Many peer
reviewed studies have proven that the XTRAC excimer laser can clear psoriasis faster and produce longer remissions than other UVB modalities, resulting
in fewer treatments to produce the desired result.
We currently market four XTRAC excimer models. In October 2018, we announced the launch of XTRAC S3®, which, as compared to previous
XTRAC generations, is smaller, faster and has a new user interface. In January 2020, we announced the FDA granted clearance for our XTRAC
Momentum Excimer Laser System platform. This clearance is the first full platform clearance since 2008. Momentum has an increased power range to
improve patient safety and treatment efficiency; a new and exclusive proprietary short-hair tip, providing ease of use in difficult-to-treat scalp psoriasis; and
an enhanced user interface and database. In February 2022, we announced the commercial launch of our next generation excimer laser system, XTRAC
MomentumTM 1.0, which delivers higher power and a faster repetition rate than the current models, along with a new user interface and slim design. We
continue to market the XTRAC Velocity, our third-generation laser and the XTRAC Ultra Plus, which is also a highly effective model marketed primarily
in certain international markets. The Momentum, S3, Velocity and the Ultra Plus are capable of treating mild, moderate and severe psoriasis, vitiligo,
atopic dermatitis and leukoderma.
The XTRAC excimer laser 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 upfront charge and generate our revenue on a per-use basis (referred to herein as the dermatology recurring procedures model or segment). We
estimate that there are over 1,000 XTRAC lasers in use in the U.S., of which 909 systems were, as of December 31, 2022, included in our dermatology
recurring procedures revenue model. The Pharos business provides the opportunity for us to convert the customer base to our XTRAC excimer laser
system. The target U.S. audience for XTRAC lasers comprises approximately 3,500 dermatologists who perform disease management. Until 2019, in
markets outside the U.S. the XTRAC laser had been marketed primarily as dermatology procedures equipment sales through distributors in over twenty-
five countries. The VTRAC is marketed exclusively in international markets through the same distributors.
Since 2019, we have been transitioning our international dermatology procedures equipment sales through our master distributor to a direct
distribution model for equipment sales and recurring revenue on a country by country basis. In January 2022, our agreement with our master distributor
expired. We have signed distributor contracts by year as follows: 2019 – Korea, 2020 – Japan, 2021 – China, Israel, Saudi Arabia, Kuwait, Oman, Qatar,
Bahrain, UAE, Jordan, Iraq and 2023 – Mexico.
Studies have concluded that XTRAC treatment leads to significant improvement in psoriasis plaques and severity scores in as few as six to ten
treatments. Treatment protocols recommend that patients receive two treatments per week with a minimum of 48 hours between treatments. Our data
shows that treatment with XTRAC excimer lasers has 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 45 clinical studies and research programs, with findings published in peer-reviewed medical journals
around the world. The XTRAC excimer laser has also been endorsed by the National Psoriasis Foundation, and its use for psoriasis is covered by nearly all
major insurance companies, including Medicare. XTRAC treatment is a reimbursable procedure for psoriasis under three Current Procedural Terminology
(“CPT”) codes. There are three applicable CPT codes that differ based on the total skin surface area being treated. Insurance Reimbursement to physicians
varies based upon insurance company and location. The national CPT code reimbursement established by the Center for Medicaid Services (“CMS”),
which forms the basis for most insurance companies’ reimbursement levels, ranges for the three codes between $162 per treatment to $240 per treatment.
(See “Third Party Reimbursement” below.)
5
Table of Contents
Psoriasis, the Disease
The World Health Organization describes psoriasis as a chronic, noncommunicable, painful, disfiguring and disabling disease for which there is no
cure, and which generates a great negative impact on patients’ quality of life. It manifests itself in many forms and typically causes raised, red, scaly
patches that appear on the skin and may cause itchiness, burning or stinging. Psoriasis is also associated with other serious health conditions such as
diabetes, heart disease and depression.
Psoriasis Treatment Options
There 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 a
cream, gel, liquid, spray, or ointment. The efficacy of topical agents varies from person to person, although these products are commonly 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 exhibit none
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 are growing significantly, notwithstanding their cost and their potentially severe side-effects.
XTRAC excimer lasers are particularly significant and beneficial for mild to moderate psoriasis patients who prefer a noninvasive treatment
approach without the side effects of invasive, systemic agents, or to patients who have developed a resistance to topical agents. In many cases, patients
treated with topical or systemic therapies are also candidates for phototherapy.
Using the XTRAC and Pharos Excimer Lasers to Treat Vitiligo and Other Skin Diseases
UV light therapy is considered to be an effective and safe treatment for many skin disorders beyond psoriasis. To this effect, the XTRAC
technology is FDA cleared for the treatment of not only psoriasis but also vitiligo (a skin pigment deficiency), atopic dermatitis (eczema) and leukoderma,
which is a localized 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.
In the treatment of vitiligo, we believe 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, we believe 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 the past several years, there has been a significant increase in insurance coverage
for these procedures and we estimate that currently approximately 76% of insurers 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 treatment regimen requiring sometimes up to 12 or more treatments has limited XTRAC use to certain patient populations. Addressing the lack of
knowledge issue, we have a direct to patient advertising campaign aimed at motivating psoriasis and vitiligo patients to seek out XTRAC treatments from
our physician partners. Specific advertisements encourage prospective patients to contact our patient advocacy center via telephone or web site, wherein
we provide information on the treatment and insurance coverage, and ultimately we can schedule an appointment for the prospective patient to be evaluated
by a physician within our customer network, convenient to their location, to determine if they would benefit from XTRAC treatments.
6
Table of Contents
STRATAPEN
In January 2017, we entered into an OEM agreement with Esthetic Education, LLC to private label the STRATAPEN device. STRATAPEN®
MicroSystems is a micropigmentation device that provides advanced technology offering exceptional results. This contract expired in January 2020, but
we continue to sell this product on a purchase order basis.
THERACLEAR
In January 2022, we acquired the TheraClear assets from Theravant Corporation. The TheraClear Acne Therapy System delivers a two-part
process for treating inflammatory acne, pustular acne and comedonal acne that combines a vacuum and broadband light that has been proven to clear skin
rapidly for fast and visible reduction in acne and associated redness. Treatments are very comfortable, take 10 minutes to perform, are highly effective, and
can be used on all skin types.
Competition
Our XTRAC product line competes with pharmaceutical compounds and methodologies used to treat an array of skin conditions. Such alternative
treatments may be in the form of topical products, systemic medications, and phototherapies from both large pharmaceutical and smaller devices
companies. Our major competitors for dermatological solutions include The Daavlin Company, National Biologic Corporation, and pharmaceutical
companies producing topical products and systemic and biologic medications. Currently, our XTRAC system is believed to be a competitive therapy to
alternative treatments on the basis of its recognized clinical effect, minimal side effect profile, cost-effectiveness and reimbursement.
Our TheraClear device competes with a range of over the counter treatment methodologies, as well as prescription only medications, and in-office
treatment methodologies.
Manufacturing
We manufacture our XTRAC products at our 17,000 sq. ft. facility in Carlsbad, California. Our California facility is certified as ISO 13485
compliant. ISO 13485 is an International standardization written by the International Organization for Standardization, which publishes requirements for a
comprehensive quality management system for the design and manufacture of medical devices. Certification to the standard is awarded by accredited third
parties. We believe that our present manufacturing capacity at these facilities is sufficient to meet foreseeable demand for our products.
Research and Development Efforts
Our research and development team, including engineers, consists of approximately four employees. We conduct research and development
activities at our facility located in Carlsbad, California. Our research and development efforts are focused on the application of our XTRAC system for the
treatment of inflammatory skin disorders.
Intellectual Property
Our policy is to protect our intellectual property by obtaining U.S. and foreign patents to protect technology, inventions and improvements
important to the development of our business. As of December 31, 2022, 28 issued U.S. patents are in force, and many of these patents have foreign
counterparts issued and pending. The Company maintains 15 patents from Mela Sciences, Inc. related to the MelaFind product.
7
Table of Contents
We also rely on trade secrets and technical know-how in the manufacture and marketing of our products. We require our employees, consultants
and contractors to execute confidentiality agreements with respect to our proprietary information.
In February 2021, the license for the exclusive rights for patents related to the delivery of treatment to vitiligo with the Icahn School of Medicine
at Mount Sinai expired. We do not believe that this will have a material impact on our business.
We believe that our patented methods and apparatus, together with proprietary trade-secret technology and registered trademarks, give us a
competitive advantage; 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 and law, and therefore, we cannot be certain that, if challenged, our patented methods and apparatus and/or trade-secret technology would be
upheld. If one or more 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.
Government Regulation
Regulations Relating to Products and Manufacturing
Our products and research and development activities are regulated by numerous governmental authorities, principally the FDA and corresponding
state and foreign regulatory agencies. Any medical device or cosmetic we manufacture and/or distribute will be subject to pervasive and continuing
regulation 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 and
clinical testing, design, manufacture, use, labeling and promotion of medical devices, including our XTRAC, VTRAC, STRATAPEN and TheraClear
devices. Product development and approval for medical devices within this regulatory framework takes a number of years and involves the expenditure of
substantial resources.
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 a
reasonable assurance of the safety and effectiveness of the device. Class I devices are subject to general controls, such as facility registration, medical
device listing, labeling requirements, premarket notification (unless the medical device has been specifically exempted from this requirement), adherence to
the FDA’s Quality System Regulation, and requirements concerning the submission of device-related adverse event reports to the FDA. Class II devices are
subject to general and special controls, such as performance standards, premarket notification (510(k) clearance), post-market surveillance, and FDA
Quality System Regulations. Generally, Class III devices are those that must receive premarket approval by the FDA to provide a reasonable assurance of
their safety and effectiveness, such as life-sustaining, life-supporting and implantable devices, or new devices that have been found not to be substantially
equivalent to existing legally marketed devices. Both XTRAC and TheraClear are Class II devices.
With limited exceptions, before a new medical device can be distributed in the U.S., marketing authorization typically must be obtained from the
FDA through a premarket notification under Section 510(k) of the FD&C Act, or through a premarket approval application under Section 515 of the FD&C
Act. The FDA 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
marketed Class 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
these clearances 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 of the 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.
8
Table of Contents
These approvals were originally granted to PhotoMedex, Inc. and acquired by us in the June 2015 acquisition described above. In January 2020,
we announced the FDA granted clearance of our XTRAC Momentum Excimer Laser platform.
The TheraClear device has been cleared by the FDA through the 510(k) process.
We are subject to routine inspection by the FDA and, as noted above, must comply with a number of regulatory requirements applicable to firms
that manufacture medical devices and other FDA-regulated products for distribution within the U.S., including requirements related to device labeling
(including prohibitions against promoting products for unapproved or off-label uses), facility registration, medical device listing, adherence to the FDA’s
Quality System Regulation, good manufacturing processes and requirements for the submission of reports regarding certain device-related adverse events
to the FDA.
We are also subject to the radiological health provisions of the FD&C Act and the general and laser-specific radiation safety regulations
administered by the Center for Devices and Radiological Health, or CDRH, of the FDA. These regulations require laser manufacturers to file initial, new
product, supplemental and annual reports, to maintain quality control, product testing and sales records, to incorporate certain design and operating features
(depending on the class of 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 four classes, 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 certain electronic products that are found to fail to comply with applicable federal standards or otherwise are found to be defective. The
CDRH is empowered to seek fines and other remedies for violations of the regulatory requirements. To date, we have filed the documentation with the
CDRH for our laser products requiring such filing and have not experienced any difficulties or incurred significant costs in complying with such
regulations.
We are approved by the European Union to affix the CE mark to our XTRAC laser and VTRAC lamp systems. This certification is a mandatory
conformity 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
to market our approved products in all of the member countries that accept the CE mark. We also are required to comply with additional individual national
requirements that are in addition to those required by these nations. Our products have also met the requirements for marketing in various other countries.
Our TheraClear device is being manufactured for us by a third party and we purchase our STRATAPEN devices from third parties, who are
subject to the same regulations. We rely on these third parties to ensure compliance with the regulations. Failure to comply with applicable regulatory
requirements can result in fines, injunctions, civil penalties, recalls or seizures of products, total or partial suspensions 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, safe working conditions, good laboratory practices and the use and disposal of hazardous or
potentially hazardous substances used in connection with research and development.
9
Table of Contents
Fraud and Abuse Laws
Because of the significant federal funding involved in Medicare and Medicaid, Congress and the states have enacted, and actively enforce, a
number of laws whose purpose is to eliminate fraud and abuse in federal health care programs. Our business is subject to compliance with these laws.
Anti-Kickback Laws
In the U.S., there are federal and state anti-kickback laws that generally prohibit the payment or receipt of kickbacks, bribes or other remuneration
in exchange for the referral of patients or other health-related business. The U.S. federal healthcare programs’ Anti-Kickback Statute makes it unlawful for
individuals or entities knowingly and willfully to solicit, offer, receive or pay any kickback, bribe or other remuneration, directly or indirectly, in exchange
for or to induce the purchase, lease or order, or arranging for or recommending purchasing, leasing, or ordering, any good, facility, service, or item for
which payment may be made in whole or in part under a federal healthcare program such as Medicare or Medicaid. The Anti-Kickback Statute covers “any
remuneration,” which has been broadly interpreted to include anything of value, including for example gifts, certain discounts, the furnishing of free
supplies, equipment or services, credit arrangements, payments of cash and waivers of payments. Several courts have interpreted the statute’s intent
requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the
arrangement can be found to violate the statute. Penalties for violations include criminal penalties and civil sanctions such as fines, imprisonment and
possible exclusion from Medicare, Medicaid and other federal healthcare programs. In addition, several courts have permitted kickback cases brought
under the 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
other things, amends the intent requirement of the federal Anti-Kickback Statute. Pursuant to the statutory amendment, a person or entity no longer needs
to have actual 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 may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or
fraudulent claim for purposes of the civil False Claims Act (discussed below) or the civil monetary penalties statute, which imposes penalties against any
person who is determined 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 that was 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
of Inspector 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,
there are regulatory safe harbors for payments to bona fide employees, properly reported discounts and rebates, and for certain investment interests.
Although an arrangement that fits into one or more of these exceptions or safe harbors is immune from prosecution, arrangements that do not fit squarely
within an exception 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 exceptions or safe harbors does not necessarily mean that it is illegal or that prosecution will be pursued. However, conduct and business arrangements
that arguably implicate the Anti-Kickback Statute but do not fully satisfy all the elements of an exception or safe harbor may be subject to increased
scrutiny by government enforcement 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,
regardless of 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 recently have brought cases against
companies, and certain sales, marketing and executive personnel, for allegedly offering unlawful inducements to potential or existing customers in an
attempt to procure their business.
Federal Civil False Claims Act and State False Claims Laws
The federal civil False Claims Act imposes liability on any person or entity who, among other things, knowingly and willfully presents, or causes
to be presented, 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 a false claim to the federal government, and to share in any monetary recovery. In recent years, the number of suits brought against
healthcare providers by private individuals has increased dramatically. Medical device companies, like us, can be held liable under false claims laws, even
if they do not submit claims to the government, when they are deemed to have caused submission of false claims by, among other things, providing
incorrect coding or billing advice about their products to customers that file claims, or by engaging in kickback arrangements with customers that file
claims.
10
Table of Contents
The False Claims Act also has been used to assert liability on the basis of misrepresentations with respect to the services rendered and in
connection with 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 the reporting of discount and rebate information and other information affecting federal, state and third-party reimbursement of our
products, and the sale and marketing 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
the government, 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. A number 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
submitted to any state or private third-party payer. In this environment, our engagement of physician consultants in product development and product
training and education 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 state law, or the impact of such actions. However, the costs of defending such claims, as well as any sanctions imposed, could significantly affect
our financial performance.
HIPAA Fraud and Other Regulations
The Health Insurance Portability and Accountability Act of 1996, or HIPAA, created a class of federal crimes known as the “federal health care
offenses,” 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
or fraudulent pretenses, any money under the control of any health care benefit program, including private payers. A violation of this statute is a felony and
may result 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 or
representation 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
in fines 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
to have committed the offense and are punishable as a principal.
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
prohibit companies 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 be with governmental entities and therefore subject to such anti-bribery laws.
Effective January 1, 2020, The California Consumer Privacy Act (CCPA) became effective. The CCPA provides certain privacy protections for
California residents not generally available to citizens of any other state. The law provides California residents with the right to know that their personal
data is being collected; know whether that data is being sold or disclosed; to prevent the sale of their personal information; to access their personal data; to
request that a business delete their personal information; and to not be discriminated against for exercising these rights.
HIPAA and Other Privacy Regulations
The regulations that implement HIPAA also establish uniform standards governing the conduct of certain electronic healthcare transactions and
protecting the security and privacy of individually identifiable health information maintained or transmitted by healthcare providers, health plans and
healthcare clearinghouses, which are referred to as “covered entities.” Several regulations have been promulgated under HIPAA’s regulations including: the
Standards for Privacy of Individually Identifiable Health Information, or the Privacy Rule, which restricts the use and disclosure of certain individually
identifiable health information; the Standards for Electronic Transactions, or the Transactions Rule, which establishes standards for common healthcare
transactions, such as claims information, plan eligibility, payment information and the use of electronic signatures; and the Security Standards for the
Protection of Electronic Protected Health Information, or the Security Rule, which requires covered entities to implement and maintain certain security
measures to safeguard certain electronic health information. Although we do not believe we are a covered entity and therefore are not currently directly
subject to these standards, we expect that our customers generally will be covered entities and may ask us to contractually comply with certain aspects of
these standards by entering into requisite business associate agreements. While the government intended this legislation to reduce administrative expenses
and burdens for the healthcare industry, our compliance with certain provisions of these standards entails significant costs for us.
11
Table of Contents
The Health Information Technology for Economic and Clinical Health, or HITECH, Act 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 strengthens enforcement. It requires the Department of Health & Human
Services (“HHS”) to conduct periodic audits to confirm compliance and to investigate any violation that involves willful neglect which carries mandatory
penalties. Additionally, state attorneys general are authorized to bring civil actions seeking either injunctions or damages in response to violations 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,
are more stringent than those issued under HIPAA. In those cases, it may be necessary to modify our planned operations and procedures to comply with the
more stringent 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
attorneys general to regulate the collection, use, storage and disclosure of personal or patient information, through websites or otherwise, and to regulate the
presentation 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 or patient information.
HIPAA as well as other federal and state laws apply to our receipt of patient identifiable health information in connection with research and
clinical trials. We collaborate with other individuals and entities in conducting research and all involved parties must comply with applicable laws.
Therefore, the compliance of the physicians, hospitals or other providers or entities with whom we collaborate also impacts our business.
Third-Party Reimbursement
Our ability to market our phototherapy products successfully depends in large part on the extent to which various third parties are willing to
reimburse patients or providers for the cost of medical procedures utilizing our treatment products. These third parties include government authorities,
private health insurers and other organizations, such as health maintenance organizations. Third-party payers are systematically challenging the prices
charged for medical products and services. They may deny reimbursement if they determine that a prescribed device is not used in accordance with cost-
effective treatment methods as determined by the payer, or is experimental, unnecessary or inappropriate. Accordingly, if less costly drugs or other
treatments are available, third-party payers may not authorize, or may limit, reimbursement for the use of our products, even if our products are safer or
more effective than the alternatives. 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
must be obtained on a country-by-country basis. Many international markets have government-managed healthcare systems that control reimbursement for
new devices and procedures. In most markets, there are private insurance systems, as well as government-managed systems. Our XTRAC products remain
substantially without approval for reimbursement in many international markets under either government or private reimbursement systems. To date,
patients of the TheraClear products have had limited success in obtaining third party reimbursement for such treatments.
12
Table of Contents
Many private plans key their reimbursement rates to rates set by the CMS under three distinct CPT codes based on the total skin surface area being
treated.
As of December 31, 2022, the national rates were as follows:
•
•
•
96920 – designated for: the total area less than 250 square centimeters. CMS assigned a 2022 national payment of $162 per treatment;
96921 – designated for: the total area 250 to 500 square centimeters. CMS assigned a 2022 national payment of $176 per treatment; and
96922 – designated for: the total area over 500 square centimeters. CMS assigned a 2022 national payment of $240 per treatment.
The national rates are adjusted by overhead factors applicable to each state.
Employees
As of December 31, 2022, we had 114 full-time employees, which consisted of 2 executive officers, 3 vice presidents, 60 sales and marketing staff,
17 people engaged in manufacturing of lasers, 16 customer-field service personnel, 4 engaged in research and development and 12 finance and
administration staff.
Customers
Domestically, our XTRAC customers consist of dermatologists and dermatological group clinics who partner with us primarily in our dermatology
procedures recurring revenue model. As of December 31, 2022, we have 909 partner clinics throughout the United States. Internationally, we have been
transitioning our international dermatology procedures equipment sales through our master distributor to a direct distribution model for equipment sales
and recurring revenue on a country by country basis. We have signed distributor contracts by year as follows: 2019 – Korea, 2020 – Japan, 2021 – China,
Israel, Saudi Arabia, Kuwait, Oman, Qatar, Bahrain, UAE, Jordan, Iraq and 2023 – Mexico.
13
Table of Contents
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the Commission. These filings are available to the public
on the Internet at the Commission’s website at http://www.sec.gov.
Our Internet address is http://www.strataskinsciences.com (this website address is not intended to function as a hyperlink and the information
contained on our website is not intended to be a part of this Report). We make available free of charge on https://strataskinsciencesinc.gcs-web.com/sec-
filings our annual, quarterly and current reports, and amendments to those reports, as soon as reasonably practical after we electronically file such material
with, or furnish it to, the Commission. We may from time to time provide important disclosures to investors by posting them in the Investor Relations
section of our website, as allowed by the Commission’s rules. The information on the website listed above is not and should not be considered part of this
Report and is intended to be an inactive textual reference only.
14
Table of Contents
ITEM 1A. RISK FACTORS
In addition to the other information contained in this Report and the exhibits hereto, the following risk factors should be considered carefully in
evaluating 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 or
results of operations. The following discussion of risk factors contains forward-looking statements as discussed on page 1. Our business routinely
encounters and addresses risks, some of which may cause our future results to be different – sometimes materially different – than we presently anticipate.
Risk Factor Summary
Risks Relating to Our Business Operations
• We have incurred losses for a number of years and anticipate that we will incur continued losses for the foreseeable future.
• Our results of operations have been, and may continue to be, negatively impacted by COVID-19 or other future outbreak of any other highly
infectious or contagious diseases.
• We may not be able to maintain an uninterrupted supply of the gases used to power our lasers, as the Russia-Ukraine War has disrupted supplies of
rare gases.
• We may acquire other assets or businesses, or form collaborations or make investments in other companies or technologies that could harm our
operating results, dilute our stockholders’ ownership, increase our debt or cause us to incur significant expense.
• We may not be able to successfully integrate newly acquired businesses, joint ventures and other partnerships into our operations or achieve
expected profitability from our acquisitions.
• Our laser treatments of psoriasis, vitiligo, atopic dermatitis and leukoderma and/or any of our future products or services may fail to gain market
acceptance or be impacted by competitive products, services or therapies which could adversely affect our competitive position.
• The success of our products depends on third-party reimbursement of patients’ costs, which could result in potentially reduced prices or reduced
demand and adversely affect our revenues and business operations.
• The continuing development of our products depends upon our developing and maintaining strong working relationships with physicians.
• Any failure in our customer education efforts could have a material adverse effect on our revenue and cash flow.
•
•
If revenue from significant distributors declines, we may have difficulty replacing the lost revenue, which would negatively affect our results and
operations.
If we fail to manage our sales and marketing force or to market and distribute our products effectively, we may experience diminished revenues and
profits.
• We are reliant on a limited number of suppliers for production of our products.
• Our indebtedness could materially adversely affect our financial condition and our ability to operate our business, react to changes in the economy
or industry or pay our debts and meet our obligations under our debt and could divert our cash flow from operations for debt payments.
15
Table of Contents
•
If our actual liability for state sales and use taxes is higher than our accrued liability, it could have a material impact on our financial condition.
• Our failure to respond to rapid changes in technology and other applications in the medical devices industry or the development of a cure for skin
conditions treated by our products could make our treatment system obsolete.
• Our customers, or physicians and technicians, as the case may be, may misuse certain of our products, and product liability lawsuits and other
damages imposed on us may exceed our insurance coverage, or we may be subject to claims that are not covered by insurance.
• We must comply with complex statutes prohibiting fraud and abuse, and both we and physicians utilizing our products could be subject to
significant penalties for noncompliance.
• We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws and regulations and could face substantial penalties if
we are unable to fully comply with such laws.
•
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 not increase or is not maintained, our revenues could decline.
• Our failure to obtain or maintain necessary FDA clearances and approvals, or to maintain continued clearances, or equivalents thereof in the U.S.
and relevant foreign markets, could hurt our ability to distribute and market our products.
•
If required, clinical trials necessary to support a 510(k) notice or PMA application, for new or modified products, will be expensive and will
require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit.
• Our medical device operations are subject to FDA regulatory requirements.
• Healthcare policy changes may have a material adverse effect on us.
• Our market acceptance in international markets requires regulatory approvals from foreign governments and may depend on third party
reimbursement of participants’ cost.
• We face substantial competition, which may result in others discovering, developing or commercializing products more successfully than us.
• Consolidation in the medical device industry could have an adverse effect on our revenue and results of operations.
• We actively employ social media as part of our marketing strategy, which could give rise to regulatory violations, liability, breaches of data security
or reputational damage.
•
Social media companies on which we rely for advertising may change their policies limiting our ability to reach our target markets.
• We may become subject to claims of infringement or misappropriation of the intellectual property rights of others, which could prohibit us from
shipping affected products, require us to obtain licenses from third parties or to develop non-infringing alternatives, and subject us to substantial
monetary damages and injunctive relief. Our patents may also be subject to challenge on validity grounds, and our patent applications may be
rejected.
16
Table of Contents
•
•
If we or our third-party manufacturers or suppliers fail to comply with the FDA’s Quality System Regulation or any applicable state equivalent, our
manufacturing operations could be interrupted and our potential product sales and operating results could suffer.
If we fail to comply with ongoing regulatory requirements, or if we experience unanticipated problems with products, these products could be
subject to restrictions or withdrawal from the market.
• Our medical products may in the future be subject to product recalls that could harm our reputation, business and financial results.
•
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
device reporting regulations, which can result in voluntary corrective actions or agency enforcement actions.
• We may have a need for additional funds in the future and there is no guarantee that we will be able to generate those funds from our business.
•
If we do not have enough capital to fund operations, then we will have to cut costs or raise funds.
• We may be subject to disruptions or failures in our information technology systems and network infrastructures, including through cyber-attacks or
other third-party breaches that could have a material adverse effect on our business.
• Environmental and health safety laws may result in liabilities, expenses and restrictions on our operations.
Risks Relating to Our Common Stock
•
•
•
Our shares of common stock could be delisted from the Nasdaq Capital Market which could result in, among other things, a decline in the price of
our common stock and less liquidity for holders of shares of our common stock.
Your percentage ownership will be further diluted.
In the event of certain contingencies, the investors in the May 2018 Equity Financing may receive additional shares issued pursuant to the Retained
Risk Provisions as defined in the purchase agreements.
• Our stock price may be volatile, meaning purchasers of our common stock could incur substantial losses.
• Our charter documents and Delaware law may inhibit a takeover that stockholders consider favorable and could also limit the market price of our
stock.
Risks Relating to Our Business Operations
We have incurred losses for a number of years and anticipate that we will incur continued losses for the near future.
Since 2015, we have devoted substantially all of our resources in the commercialization and sales of the XTRAC products. Our net loss for the
year ended December 31, 2022 was approximately $5.5 million, and as of December 31, 2022, we had an accumulated deficit of approximately $227
million. Our losses, among other things, have had and may continue to have an adverse effect on the adequacy of our capitalization and cash flow. We
believe that our cash and cash equivalents as of December 31, 2022, combined with the anticipated revenues from the sale of our product and operating
expense management, will be sufficient to satisfy our working capital needs, lasers placed-in-service, capital asset purchases, outstanding commitments and
other liquidity requirements associated with our existing operations through at least the next 12 months following the filing of this Report.
17
Table of Contents
Our results of operations have been, and may continue to be, negatively impacted by COVID-19 or other future outbreak of any other highly infectious
or contagious diseases.
In December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China. COVID-19 has since spread to over
100 countries, including every state in the United States. In the last 36 months, the United States and the world have experienced various levels of
government shutdowns, closures and quarantines.
The outbreak of COVID-19 has severely impacted global economic activity and caused significant volatility and negative pressure in financial
markets, global supply chains, labor supply and inflation. This outbreak has triggered a period of global economic slowdown and a change in the behavior
of the ultimate consumer of our products and services, which could continue for some time which cannot be predicted. COVID-19 or another pandemic has
or could have material and adverse effects on our ability to successfully operate our business due to, among other factors:
•
•
•
•
•
•
a general decline in business activity;
the destabilization of the markets and negative impacts on the healthcare system globally could negatively impact our ability to market and sell our
products, including through the disruption of health care activities in general and elective health care procedures in particular, the inability of our
sales team to contact and/or visit doctors in person, patients’ interest in starting or continuing procedures involving our products and our ability to
support patients that presently use our products;
difficulty accessing the capital and credit markets on favorable terms, or at all, and a severe disruption and instability in the global financial
markets, or deteriorations in credit and financing conditions which could affect our access to capital necessary to fund business operations;
the potential negative impact on the health of our employees, especially if a significant number of them are impacted;
the impact of the pandemic on our customers, which may result in a decrease in the use of our products and services as well as an increase in past
due accounts receivable, write-offs and customer bankruptcies; and
a deterioration in our ability to ensure business continuity during a disruption.
We may not be able to maintain an uninterrupted supply of the gases used to power our lasers, as the Russia-Ukraine War has disrupted supplies of
rare gases.
Prior to the outbreak of the Russia-Ukraine War, Ukraine was the world’s largest exporter of noble gases including neon, krypton and xenon.
Historically, Ukraine has been the source of a significant amount of gas supplied to the Company by our contract suppliers. Neon gas is essential to the
proper functioning of our lasers. Our suppliers have been resourceful in continuing to supply gases to us but cannot assure us that the supply will remain
uninterrupted. The reduced supply and war have raised the price of gas significantly worldwide. Additionally, the Creating Helpful Incentives to Produce
Semiconductors and Science Act of 2022 has led to a further tightening of rare gas supplies as chip manufacturers reconfigure their supply chains to
address the need to secure their own supplies of rare gases for use in the manufacture of computer chips, while struggling with the disruption caused by this
war.
18
Table of Contents
We may acquire other assets or businesses, or form collaborations or make investments in other companies or technologies that could harm our
operating results, 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 product
candidates, or businesses, or strategic alliances and collaborations, to expand our existing technologies and operations. We may not identify or complete
these 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
which could 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
acquisition candidates, and if we make any acquisitions, we may not be able to integrate these acquisitions successfully into our existing business and we
may incur additional debt or assume unknown or contingent liabilities in connection therewith. Integration of an acquired company or assets may also
disrupt ongoing operations, require the hiring of additional personnel and the implementation of additional internal systems and infrastructure, especially
the acquisition of commercial assets, and require management resources that would otherwise focus on developing our existing business. We may not be
able to find suitable strategic 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
would dilute 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 fund a transaction using our stock as consideration. Alternatively, it may be necessary for us to raise additional funds for acquisitions through
public or private financings. 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 expected
profitability from our acquisitions.
If we cannot successfully integrate acquisitions (including the Pharos and TheraClear businesses), joint ventures and other partnerships on a timely
basis, we may be unable to generate sufficient revenue to offset acquisition costs, we may incur costs in excess of what we anticipate, and our expectations
of future results of operations, including certain cost 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; and
potential loss of customers.
In addition, if we finance acquisitions by issuing equity securities or securities convertible into equity securities, our existing stockholders’ interests would
be diluted, which, in turn, could adversely impact the market price of our stock. Moreover, we could finance an acquisition with debt, resulting in higher
leverage and interest costs and could increase losses and losses per share which could impact the price of our stock.
Our laser treatments of psoriasis, vitiligo, atopic dermatitis and leukoderma and/or any of our future products or services may fail to gain market
acceptance or be impacted by competitive products, services or therapies 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 placed at physician
offices at no upfront charge to the physician and we are generally paid on a per-usage method where we retain ownership of the system. We cannot assure
you that our products 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
overall financial return and therefore compromise our ability to increase our installed base of users and ensure they engage in optimal usage of our
products. If, for example, such other companies have products or medical devices that require less time commitment from the dermatologist 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.
19
Table of Contents
We also face a risk that the overall cost of systemic or biologic medications or treatment modalities become less expensive through the
development of generics or other means. We may be faced with pressure to reduce our costs to be competitive which may negatively impact our business.
In addition, our business could be negatively impacted if these medications are prescribed for less severe cases of the diseases or if new, more effective or
less expensive medications are developed.
CPT codes for all procedures are subject to continued reevaluation. Should CMS reduce reimbursement for the CPT codes for XTRAC treatment
or raise reimbursement for competitive products we may see a decline in our recurring revenue business as well as a decline in new XTRAC installations.
Whether a treatment may be delegated to non-physician staff members and, if so, to whom and to what extent, are matters that may vary state by
state, as these matters are within the province 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 his or her practice, deeming it to be fraught with too many constraints and finding other outlets for the physician’s time
and staff’s 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 XTRAC system, 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 insurance reimbursement, 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
therapies or 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 a material adverse effect on our business, financial condition and results of operations.
In addition, while this introduction is specifically for those patients that might not be able to avail themselves of in-office treatments, it may be
viewed by our partner clinics as a channel conflict and cause a deterioration in our relationships with our current partners or negatively impact our ability to
grow the number of partner clinics.
The success of our products depends on third-party reimbursement of patients’ costs, which could result in potentially reduced prices or reduced
demand and 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
are willing 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 new standards for reimbursement determined by these third parties or because of the programs and policies enacted under the ACA.
Third-party payers are systematically challenging the prices charged for medical products and services. They may deny reimbursement if they
determine that a prescribed device is not used in accordance with cost-effective treatment methods as determined by the payer, or is experimental,
unnecessary or inappropriate. Further, although third parties may approve reimbursement, such approvals may be under terms and conditions that
discourage use of the XTRAC system. Accordingly, if less costly drugs or other treatments are available, third-party payers may not authorize or may limit
reimbursement for the use of our products, even if our products are safer or more effective than the alternatives.
In addition, medical insurance policies and treatment coverage have been and may be affected by the parameters of the ACA or successor policies
enacted by the current or any new administration. While the ACA’s stated purpose is to expand access to coverage, it also mandates certain requirements
regarding the types and limitations of insurance coverage. There can be no guarantee that the changes in coverage under the ACA will not affect the type
and level of reimbursement for our products.
20
Table of Contents
Although we have received reimbursement approvals from a majority of private healthcare plans for the XTRAC system, we cannot give
assurance that these private plans will continue to adopt or maintain favorable reimbursement policies or accept the XTRAC system in its clinical role as a
second-line therapy in the treatment of psoriasis. Additionally, third-party payers may require further clinical studies or changes to our pricing structure and
revenue model before authorizing or continuing reimbursement.
As of December 31, 2021, we estimate, based on published coverage policies and on payment practices of private and Medicare insurance plans,
that more than 86% of the insured population in the U.S. is covered by insurance coverage or payment policies that reimburse physicians for using the
XTRAC system for treatment of psoriasis. We can give no assurance that health insurers will not adversely modify their reimbursement policies for the use
of the XTRAC system in the future.
Currently, there is little insurance reimbursement coverage for acne treatments, such as those provided by TheraClear. In order for TheraClear to
be successful, patients and decision makers will need to be able to pay for treatments without insurance reimbursement.
The continuing development of our products depends upon our developing and maintaining strong working relationships with physicians.
The research, development, marketing and sale of our current products and any potential new and improved products or future product indications
for which we receive regulatory clearance or approval depend upon our maintaining working relationships with physicians. We rely on these professionals
to provide us with considerable knowledge and experience regarding the development, marketing and sale of our products. Physicians assist us as
researchers, marketing and product consultants and public speakers. If we cannot maintain our strong working relationships with these professionals and
continue to receive their advice and input, the development and marketing of our products could suffer, which could have a material adverse effect on our
business, financial condition, and results of operations. At the same time, companies in the medical device industry are under increasing scrutiny by the
U.S. Department of Health and Human Services Office of Inspector General, or OIG, and the U.S. Department of Justice, or DOJ for improper
relationships with physicians. Our failure to comply with requirements governing the industry’s relationships with physicians, including the reporting of
certain payments to physicians under the National Physician Payment Transparency Program (Open Payments) or an investigation into our compliance by
the OIG or the DOJ, could have a material adverse effect on our business, financial condition, and results of operations.
Any failure in our customer education efforts could have a material adverse effect on our revenue and cash flow.
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 to spend 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 or lawsuits against us, any of which could have a material adverse effect on our reputation, revenues and profitability.
If revenue from significant distributors declines, we may have difficulty replacing the lost revenue, which would negatively affect our results and
operations.
We depend on several key distributors for a material portion of our sales, especially in our international business. While we no longer rely upon a
single master distributor for our international sales, we now rely upon several in-country distributors in connection with this business. If, for example, a
distributor finds that the financial incentives underlying the distributor relationship are no longer attractive, we may need to reduce our margins in order to
continue the relationship or identify a new distributor, which could take a significant amount of time. This could have a significant negative effect on our
results and our operations.
21
Table of Contents
If we fail to manage our sales and marketing force or to market and distribute our products effectively, we may experience diminished revenues and
profits.
There are significant risks involved in 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 our
products;
to adequately train our sales and marketing force in the use and benefits of all our products and services, thereby making them more effective
promoters;
to manage our sales and marketing force and our ancillary channels (e.g., telesales) such that variable and semi-fixed expenses grow at a lesser
rate 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 treatments will be
accepted as attractive skin health and appropriate alternatives to conventional modalities and treatments
•
•
•
•
To increase acceptance and utilization of our products, we may expand our sales and marketing programs in the U.S. While we may be able to
draw on currently available personnel within our organization to meet this need, we also expect that we will have to increase the number of representatives
devoted to the sales and marketing programs and to broaden, through such representatives, the talents we have at our disposal. In some cases, we may look
outside our organization for assistance in marketing our 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,
in the 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
could have a material adverse effect on our delivery schedules, business, operating results and financial condition. Moreover, in the event we can no longer
utilize this supplier or acquire this resource and must identify a new supplier or substitute a different resource, such change may trigger an obligation for us
to comply with additional FDA regulatory requirements including, but not limited to, premarketing authorization and Quality System Requirements
(“QSR”).
Our indebtedness could materially adversely affect our financial condition and our ability to operate our business, react to changes in the economy or
industry or pay our debts and meet our obligations under our debt and could divert our cash flow from operations for debt payments.
In September 2021, we entered into an $8.0 million secured borrowing facility (the “Senior Credit Facility”) with MidCap. The Senior Credit
Facility bears interest at LIBOR plus 7.50%, with a LIBOR floor of 0.50%, and matures on September 1, 2026. In September 2022, we amended the Senior
Credit Facility to transition, upon the cessation of LIBOR, to one-month Secured Overnight Financing Rate (“SOFR”), or such other applicable period, plus
0.10%, with a floor of 0.50%. We are obligated to make interest-only payments through September 2024. From October 2024 to Maturity, we will make
principal payments in 24 equal installments. The loan is senior to all other indebtedness and is secured by substantially all of our assets. We are subject to
customary affirmative and negative covenants including a financial covenant based on minimum revenue thresholds. Upon an event of default, including a
covenant violation, all principal and interest are due on demand. See “Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources” for discussion included in Item 7 of this Annual Report on Form 10-K. In addition, subject to restrictions in
the agreements governing our credit facilities, we may incur additional debt.
22
Table of Contents
Our indebtedness could have negative consequences, including the following:
•
•
•
•
•
•
it may be difficult for us to satisfy our obligations, including debt service requirements under our outstanding debt, resulting in possible
defaults on and acceleration of such indebtedness;
our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions or other general
corporate purposes may be impaired;
a substantial portion of cash flow from operations may be dedicated to the payment of principal and interest on our debt, therefore reducing
our ability to use our cash flow to fund our operations, capital expenditures, future business opportunities, acquisitions and other purposes;
we are more vulnerable to economic downturns and adverse industry conditions and our flexibility to plan for, or react to, changes in our
business or industry is more limited;
our ability to capitalize on business opportunities and to react to competitive pressures, as compared to our competitors, may be compromised
due to our high level of debt; and
our ability to borrow additional funds or to refinance debt may be limited.
Furthermore, all of our debt under the Senior Credit Facility bears interest at variable rates. As these rates increase as they did in 2022, our debt
service obligations increase even though the amount borrowed remains the same, and our net income and cash flows, including cash available for servicing
our indebtedness, correspondingly decrease. If interest rates continue to increase, we will see a corresponding increase in these obligations. Accordingly,
our ability to borrow additional funds may be reduced and risks related to our indebtedness would intensify. Each quarter-point increase in the variable
interest rates would increase interest expense on our current variable rate debt by approximately $20 thousand during 2023.
The Financial Conduct Authority (the authority that regulates the London Interbank Offer Rate (“LIBOR”) announced it intended to stop
compelling banks to submit rates for the calculation of LIBOR after June 30, 2022. As discussed above, we amended the Senior Credit Facility to transition
to SOFR upon such occurrence. SOFR is a daily index of the interest rate banks and hedge funds pay to borrow money overnight, secured by U.S. Treasury
securities. We also anticipate that we may use SOFR as the interest rate index in future agreements. SOFR differs fundamentally from LIBOR. For
example, SOFR is a secured overnight rate, while LIBOR is an unsecured rate that represents interbank funding over different maturities. In addition,
because SOFR is a transaction-based rate, it is backward-looking, whereas LIBOR is forward-looking. Because of these and other differences, there can be
no assurance that SOFR will perform in the same way as LIBOR would have done at any time, and there is no guarantee that it is a comparable substitute
for LIBOR.
If our actual liability for state sales and use taxes is higher than our accrued liability, it could have a material impact on our financial condition.
Included in accrued state sales and use taxes are certain known and estimated sales and use taxes and related penalties and interest to taxing
authorities. In our recurring revenue model, we place the XTRAC system in the physician’s office under an arrangement for no upfront charge and generate
our revenue on a per-use basis.
In the ordinary course of business, we are, from time to time, subject to audits performed by state taxing authorities. These actions and
proceedings are generally based on the state’s position that the arrangements entered into by the Company are subject to state sales and use tax rather than
exempt from applicable law. We are currently under audit by two taxing jurisdictions as it pertains to state sales and/or use tax. The State of New York has
assessed us, in two assessments, an aggregate amount of $1.5 million for the period from March 2014 through February 2020 including penalties and
interest. In January 2021, we received notification that the administrative judge in this jurisdiction had issued an opinion finding in favor of us that the sale
of XTRAC treatment codes were not taxable as sales tax with respect to the first assessment. The relevant taxing authority filed an appeal of the
administrative law judge’s finding and, following the submission of legal briefs by both sides and an oral argument held in January 2022 and, on May 6,
2022, we received a written decision from the State of New York Tax Appeals Tribunal (the “Tribunal”) overturning the favorable sales tax determination
of the administrative law judge. We filed an appeal of the Tribunal’s decision, and posted the required appellate bond, with the New York State Appellate
Division. We are waiting for the appellate court to set a briefing and oral argument schedule. The second jurisdiction has made an assessment of $0.7
million from June 2015 through March 2018 plus interest of $0.2 million through April 2020. We are in the administrative appeal process in this
jurisdiction as well and the timing has been impacted by the COVID-19 pandemic. In the event there is a determination that the true object of the delivery
of phototherapy under the recurring revenue model is a sale or lease of property and it is not a prescription medication, or we do not have other defenses
where we prevail, we may be subject to state sales taxes in those particular states for previous years and in the future, plus interest and penalties for failure
to pay such taxes. If it was determined that our recurring revenue model was not exempt from sales taxes in all states where we do business, and taxes and
penalties were imposed in each of those states for the entire period through the expiration of each state’s statute of limitations, state sales and use tax,
penalties and interest for such period would have a material negative impact on our financial condition and cash flow.
23
Table of Contents
As of December 31, 2022 and 2021, we have estimated our sales and use tax liability to be approximately $4.0 million and $3.7 million,
respectively. We believe our sales and use tax accruals have properly recognized that if our arrangements with customers are deemed more likely than not
that we would not be exempt from sales tax in a particular state are the basis for measurement of the state sales and use tax is calculated in accordance with
ASC 405, Liabilities, as a transaction tax. While we believe we have strong positions that our recurring revenue is exempt from sales tax, if it is found that
we are subject to sales tax in those particular states where we believe it is more likely than not that we would be exempt from sales tax, then potential tax
liabilities including interest and penalties would be higher than accrued amounts. If and when we are successful in defending ourselves or in settling the
sales tax obligation for a lesser amount, the reversal of this liability is to be recorded in the period the settlement is reached. However, the precise scope,
timing and time period at issue, as well as the final outcome of any audit and actual settlements remain uncertain.
Our failure to respond to rapid changes in technology and other applications in the medical devices industry or the development of a cure for skin
conditions treated 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
respond to new developments in technology, new applications of existing technology and new treatment methods. Our financial condition and operating
results could 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 these diseases 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 and their components. The obsolete products and related components may have little to no resale value, leading to an increase in the reserves we
have against our inventory. Likewise, there is a risk that the new products or improved existing products may not achieve market acceptance and therefore
may also lead to an increase in the reserves against our inventory.
Our customers, or physicians and technicians, as the case may be, may misuse certain of our products, and product liability lawsuits and other
damages imposed on us may exceed our insurance coverage, or we may be subject to claims that are not covered by insurance.
We face an inherent risk of product liability as a result of the marketing and sale of our products. For example, we may be sued if our products
cause or are perceived to cause injury or are found to be otherwise unsuitable during manufacturing, marketing or sale. Any such product liability claim
may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or
breach of warranty. Our products are highly complex, and some are used to treat delicate skin conditions on and 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 to product 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 be involved in costly litigation. In addition,
the fact that we train technicians whom we do not supervise in the use of our XTRAC system during patient treatment may expose us to third-party claims
if we are accused of providing inadequate training. We may also be subject to claims against us even if the apparent injury is due to the actions of others or
the pre-existing health of the patient. For example, we rely on physicians in connection with the use of our products on patients. If these physicians are not
properly trained or are negligent, the capabilities and safety features of our products may be diminished or the patient may suffer critical injury. We may
also be subject to claims that are caused by the actions of our suppliers, such as those who provide us with components and sub-assemblies.
24
Table of Contents
We presently maintain liability insurance with coverage limits of at least $5.0 million per occurrence and overall aggregate, which we believe is an
adequate level of product liability insurance, but product liability insurance is expensive and we might not be able to obtain product liability insurance in
the future on acceptable terms or in sufficient amounts to protect us, if at all. Our insurance policy contains various exclusions, and we may be subject to a
product liability claim for which we have no coverage. A successful claim brought against us in excess of our insurance coverage could have a material
adverse effect on our business, results of operations and financial condition. Even successful defense would require significant financial and management
resources. In addition, continuing insurance coverage may also not be available at an acceptable cost, if at all. 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 eventual outcome, product liability claims may result in
decreased demand for a product, harm to our reputation, withdrawal of clinical trial volunteers, initiation of investigations by regulators, costs to defend the
related litigation, diversion of management’s time and our resources, monetary awards to trial participants or patients, product recalls, withdrawals or
labeling, marketing or promotional restrictions, exhaustion of any available insurance and our capital resources, a resulting decline in the price of our
common stock and loss of revenues. As a result, regardless 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 enforcement action against us and/or our products including recall, and could have a material adverse
effect upon our business, financial condition and results of operations.
We must comply with complex statutes prohibiting fraud and abuse, and both we and physicians utilizing our products could be subject to significant
penalties for noncompliance.
There are extensive federal and state laws and regulations prohibiting fraud and abuse in the healthcare industry that can result in significant
criminal and 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 the
referral 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 to use
items or services covered by either program; the Civil False Claims Act, which prohibits any person from knowingly presenting or causing to 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 for
violating these federal laws include criminal and civil penalties that range from punitive sanctions, damage assessments, monetary penalties, and
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 efforts to root out waste and to control fraud and abuse in governmental healthcare programs. Private enforcement of healthcare fraud has also
increased, due in large part 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 of any of these federal and state fraud and abuse laws and regulations could have a material adverse effect on our liquidity and
financial condition. An investigation into the use of our products by physicians may dissuade physicians from either purchasing or using our products and
could have a material adverse effect on our revenues.
25
Table of Contents
We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws and regulations and could face substantial penalties if we
are 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 payers, many healthcare laws
and regulations apply to our business. For example, we could be subject to healthcare fraud and abuse and patient privacy regulation and enforcement by
both the 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 laws, as modified by the ACA, which prohibits, among other things, persons or entities from
soliciting, 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 the
Medicare 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 payers that are false or fraudulent, or are for items or services not provided as claimed
and which may apply to entities like us to the extent that our interactions with customers may affect their billing or coding practices;
HIPAA, which established new federal crimes for knowingly and willfully executing a scheme to defraud any healthcare benefit program or
making false statements in connection with the delivery of or payment 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 services
reimbursed by any third-party payer, including commercial insurers, and state laws governing the privacy of health information in certain
circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance
efforts.
The medical device industry has been under heightened scrutiny as the subject of government investigations and regulatory or legal enforcement
actions 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
other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from the
Medicare and Medicaid programs and the curtailment or restructuring of its operations. Any penalties, damages, fines, exclusions, curtailment or
restructuring of 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 is increased 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 of these laws, even if we successfully defend against that action and the underlying alleged violations, could cause us to incur significant legal
expenses and divert 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 to be non-compliant with applicable laws, they may be subject to sanctions, which could also have a negative impact on our business.
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 not
increase 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 received
clearance 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 data
presented to the FDA for the XTRAC system was based on studies on these patients. For the treatment of vitiligo, atopic dermatitis and leukoderma, we
have received clearance from the FDA for the use of the XTRAC system based primarily on a showing of substantial equivalence to other previously
cleared predicate devices. However, we may discover that physicians will expect clinical data on such treatments with the XTRAC system. We also may
find that data from longer-term psoriasis patient follow-up studies may be inconsistent with those indicated by our relatively short-term data. If longer-term
patient studies or clinical experience indicate that treatment with the XTRAC system does not provide patients with sustained benefits or that treatment
with our product is less effective or less safe than our current data suggests, our revenues could decline. In addition, the FDA could then bring legal or
regulatory enforcement actions against us and/or our products including, but not limited to, recalls or requirements for premarket 510(k) authorizations. We
can give no assurance that our data will be substantiated in studies involving more patients. In such a case, we may never achieve significant revenues or
profitability.
26
Table of Contents
Our failure to obtain or maintain necessary FDA clearances and approvals, or to maintain continued clearances, or equivalents thereof in the U.S. and
relevant foreign markets, could hurt our ability to distribute and market our products.
In both our U.S. and foreign markets, we are affected by extensive laws, governmental regulations, administrative determinations, court decisions
and similar constraints. Such laws, regulations and other constraints may exist at the federal, state or local levels 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, the FDA 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 countries in which our products are manufactured,
distributed or sold. If we or our manufacturers fail to comply with those regulations, we could become subject to significant penalties or claims, which
could harm our results of operations or our ability to conduct our business. In addition, the adoption of new regulations or changes in the interpretations of
existing regulations may result in significant compliance costs or discontinuation of product sales and may impair the marketing of our products, resulting
in significant loss of net sales. Our failure to comply with federal or state regulations, or with regulations in foreign markets that cover our product claims
and advertising, including direct claims and advertising by us, may result in enforcement actions and imposition of penalties or otherwise harm the
distribution and sale of its products. Further, our businesses are subject to laws governing our accounting, tax and import and export activities. Failure to
comply with these requirements could result in legal and/or financial consequences that might adversely affect our sales and profitability. 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 exemption applies. Either process can
be lengthy and expensive. The FDA’s 510(k) clearance process may take from three to 12 months, or longer, and may or may not require human clinical
data. The PMA process is much more costly and lengthy. It may take from 11 months to three years, or even longer, and will likely require significant
supporting human clinical data. Delays in obtaining regulatory clearance or approval could adversely affect our revenues and profitability. Although we
have obtained 510(k) clearances for our XTRAC system for use in treating psoriasis, vitiligo, atopic dermatitis and leukoderma, these approvals and
clearances may be subject to revocation if post-marketing data demonstrates safety issues or lack of effectiveness.
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 requirements
include, 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 complying
with radiological performance standards.
The medical device industry is now experiencing greater scrutiny and regulation by federal, state and foreign governmental authorities. Companies
in our industry are subject to more frequent and more intensive reviews and investigations, often involving the marketing, business practices, and product
quality management. Such reviews and investigations may result in civil and criminal proceedings; the imposition of substantial fines and penalties; the
receipt of warning letters, untitled letters, demands for recalls or the seizure of our products; the requirement to enter into corporate integrity agreements,
stipulated judgments or other administrative remedies, and result in our incurring substantial unanticipated costs and the diversion of key personnel and
management’s attention from their regular duties, any of which may have an adverse effect on our financial condition, results of operations and liquidity,
and may result in greater and continuing governmental scrutiny of our business in the future.
27
Table of Contents
Additionally, federal, state and foreign governments and entities have enacted laws and issued regulations and other standards requiring increased
visibility and transparency of our interactions with healthcare providers. For example, the U.S. Physician Payment Sunshine Act, now known as Open
Payments, requires us to report to the Centers for Medicare & Medicaid Services, or CMS, payments and other transfers of value to all U.S. physicians and
U.S. teaching hospitals, with the reported information made publicly available on a searchable website. Effective January 2022 we are also required to
collect and report information on payments or transfers of value to physician assistants, nurse practitioners, clinical nurse specialists, certified registered
nurse anesthetists and certified nurse-midwives. Failure to comply with these legal and regulatory requirements could impact our business, and we have
had and will continue to spend substantial time and financial resources to develop and implement enhanced structures, policies, systems and processes to
comply with these legal and regulatory requirements, which may also impact our business and which could have a material adverse effect on our business,
financial condition, and results of operations.
International regulatory approval processes may take more or less time than the FDA clearance or approval process. If we fail to comply with
applicable FDA and comparable non-U.S. regulatory requirements, we may not receive regulatory clearances or approvals or may be subject to FDA or
comparable non-U.S. enforcement actions. We may be unable to obtain future regulatory clearance or approval in a timely manner, or at all, especially if
existing regulations are changed or new regulations are adopted. For example, the FDA clearance or approval process can take longer than anticipated due
to requests for additional clinical data and changes in regulatory requirements. A failure or delay in obtaining necessary regulatory clearances or approvals
would materially adversely affect our business, financial condition, and results of operations.
Further, more stringent regulatory requirements or safety and quality standards may be issued in the future with an adverse effect on our business.
We have ceased manufacturing and marketing MelaFind 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, for new or modified products, will be expensive and will require the
enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Delays or failures in our clinical trials will
prevent us from commercializing any modified 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 the
outcome uncertain. Moreover, the results of early clinical trials are not necessarily predictive of future results, and any product we advance into clinical
trials may 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
and recruit. Patient enrollment in clinical trials and completion of patient participation and follow-up depend on many factors, including the size of the
patient population, the nature of the trial protocol, the attractiveness of, or the discomforts and risks associated with, the treatments received by patients
enrolled as subjects, the availability of appropriate clinical trial investigators, support staff, and proximity of patients to clinical sites and ability to comply
with the eligibility and exclusion criteria for participation in the clinical trial and patient compliance. For example, patients may be discouraged from
enrolling in our clinical trials if the trial protocol requires them to undergo extensive post-treatment procedures or follow-up to assess the safety and
effectiveness of our products or if they determine that the treatments received under the trial protocols are not attractive or involve unacceptable risks or
discomforts. Patients may also not participate in our clinical trials if they choose to participate in contemporaneous clinical trials of competitive products.
In addition, patients participating 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 such protocols to support clearance and approval. Further, the FDA may require us to submit data on a greater number of patients than we
originally anticipated and/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 failure of patients to continue to participate in a clinical trial may cause an increase in costs and delays in the approval and attempted
commercialization of our products or result in the failure of the clinical trial. The FDA may not consider our data adequate to demonstrate safety and
efficacy. Such increased costs and delays or failures could adversely affect our business, operating results and prospects.
28
Table of Contents
Our medical device operations are subject to FDA regulatory requirements.
Medical devices regulated by the FDA are subject to “general controls” which include: registration with the FDA; listing commercially distributed
products with the FDA; complying with good manufacturing practices under the quality system regulations; filing reports with the FDA and keeping
records relative to certain types of adverse events associated with devices under the medical device reporting regulation; assuring that device labeling
complies with device labeling requirements; reporting certain device field removals and corrections to the FDA; and obtaining premarket notification
510(k) clearance for devices prior to marketing. Some devices known as “510(k)-exempt” can be marketed without prior marketing clearance or approval
from the FDA. In addition to the “general controls,” some Class II medical devices are also subject to “special controls,” including adherence to a particular
guidance document and compliance with the performance standard. Instead of obtaining 510(k) clearance, some Class III devices are subject to PMA. In
general, obtaining PMA to 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 requirements
include, 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 complying
with radiological performance standards.
The medical device industry is now experiencing greater scrutiny and regulation by federal, state and foreign governmental authorities. Companies
in our industry are subject to more frequent and more intensive reviews and investigations, often involving the marketing, business practices, and product
quality management including standards for device recalls and product labeling. Such reviews and investigations may result in civil and criminal
proceedings; the imposition of substantial fines and penalties; the receipt of warning letters, untitled letters, demands for recalls or the seizure of our
products; the requirement to enter into corporate integrity agreements, stipulated judgments or other administrative remedies, and result in our incurring
substantial unanticipated costs and the diversion of key personnel and management’s attention from their regular duties, any of which may have an adverse
effect on our financial condition, results of operations and liquidity, and may result in greater and continuing governmental scrutiny of our business in the
future.
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 take action 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 increased
visibility and transparency of our interactions with healthcare providers. For example, the U.S. Physician Payment Sunshine Act requires us to disclose
payments 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
and regulatory requirements could impact our business, and we have had and will continue to spend substantial time and financial resources to develop and
implement 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
foreign governments and regulators as well as third-party insurance providers to limit the growth of these costs. Among these proposals are regulations that
could impose limitations on the prices we will be able to charge for our products, the amounts of reimbursement available for our products from
governmental agencies or third-party payers, requirements regarding the usage of comparative studies, technology assessments and healthcare delivery
structure reforms to determine the effectiveness and select the products and therapies used for treatment of patients. While we believe our products provide
favorable clinical outcomes, value and cost efficiency, the resources necessary to demonstrate this value to our customers, patients, payers, and regulators is
significant and may require longer periods of time and effort in which to obtain acceptance of our products. There is no assurance that our efforts will be
successful, and these limitations could have a material adverse effect on our financial position and results of operations.
29
Table of Contents
These changes and additional proposed changes in the future could adversely affect the demand for our products as well as the way in which we
conduct our business. For example, the ACA was enacted into law in the U.S. in March 2010. They imposed on medical device manufacturers, a
requirement to research into the effectiveness of treatment modalities and institute changes to the reimbursement and payment systems for patient
treatments. In addition, governments and regulatory 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.
The FDA 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
more difficult to obtain 510(k) clearance as data requirements have increased. It is impossible to predict whether legislative changes will be enacted or
FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be. However, any changes could make it more
difficult for us 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
at the federal or state level, or the effect any future legislation or regulation will have on us. Furthermore, an expansion in government’s role in the U.S.
healthcare industry may lower reimbursements for our products, reduce medical procedure volumes and adversely affect our business, possibly materially.
In addition, if the excise taxes contained in the House or Senate health reform bills are enacted into law, our loss from continuing operations resulting from
such an excise tax and results 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 of participants’ cost.
We have introduced our XTRAC and VTRAC products into markets in more than 30 countries in Europe, the Middle East, Asia, Australia, South
Africa and parts of Central and South America through distributors. We cannot be certain that our salesforce and distributor network will be successful in
marketing our products in these or other countries or that our distributors will purchase XTRAC or VTRAC systems beyond their current contractual
obligations or in accordance with our expectations. Our TheraClear device has historically been sold in several foreign countries and is subject to similar
international regulatory approval requirements.
Even if we obtain and maintain the necessary foreign regulatory registrations or approvals, market acceptance of our products in international
markets may be dependent, in part, upon the availability of reimbursement within applicable healthcare payment systems. Reimbursement and healthcare
payment systems in international markets vary significantly by country, and include both government-sponsored healthcare and private insurance. We may
seek international 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 our
products in that market or others.
We face substantial competition, which may result in others discovering, developing or commercializing products more successfully than us.
The medical device industry is intensely competitive and subject to rapid and significant technological change. Many of our competitors have
significantly greater financial, technical and human resources. Smaller and early-stage companies may also prove to be significant competitors, particularly
through collaborative arrangements with large and established companies.
30
Table of Contents
Our competitors in medical device or pharmaceutical industries may also develop products that are more effective, more convenient, more widely
used, less costly, or have a better safety profile than our products and these competitors may also be more successful than us in manufacturing and
marketing their products.
Our competitors also compete with us in recruiting and retaining qualified scientific, management and commercial personnel, as well as in
acquiring technologies complementary to, or necessary for, our programs. Competition for these people in the medical device industry is intense and we
may face challenges in retaining and recruiting such individuals if, for example, other companies may provide more generous compensation and benefits,
more diverse opportunities, and better chances for career advancement than we do. Some of these advantages may be more appealing to high-quality
candidates and employees than those we have to offer. In addition, the decline in our stock price has created additional challenges by reducing the retention
value of our equity awards. Because of the complex and technical nature of our systems and the dynamic market in which we compete, any failure to attract
and retain a sufficient number of qualified employees could materially harm our ability to develop and commercialize our technology, which would have a
material adverse effect on our business, financial condition, and results of operations.
Consolidation in the medical device industry could have an adverse effect on our revenue and results of operations.
Many medical device industry companies are consolidating to create new companies with greater market power. As the medical device industry
consolidates, competition to provide goods and services to industry participants will become more intense. These industry participants may try to use their
market power to bundle the sale of more products to our customers in return for lower prices. If we reduce our prices because of consolidation in the
healthcare industry, our revenue would decrease and our earnings, financial condition, or cash flows would suffer, which would have a material adverse
effect on our business, financial condition, and results of operations.
We actively employ social media as part of our marketing strategy, which could give rise to regulatory violations, liability, breaches of data security or
reputational damage.
Despite our efforts to monitor evolving social media communication guidelines and comply with applicable rules, there is risk that the use of
social media by us, our employees or our customers to communicate about our products or business may cause us to be found in violation of applicable
requirements, including requirements of regulatory bodies such as the FDA and Federal Trade Commission. For example, promotional communications and
endorsements on social media that, among other things, promote our products for uses or in patient populations that are not described in the product’s
approved labeling (known as “off-label uses”), do not contain a fair balance of information about risks associated with using our products, make
comparative or other claims about our products that are not supported by sufficient evidence, and/or do not contain required disclosures could result in
enforcement actions against us. In addition, adverse events, product complaints, off-label usage by physicians, unapproved marketing or other unintended
messages posted on social media could require an active response from us, which may not be completed in a timely manner and could result in regulatory
action by a governing body. Further, our employees may knowingly or inadvertently make use of social media in ways that may not comply with our
corporate policies or other legal or contractual requirements, which may give rise to liability, lead to the loss of trade secrets or other intellectual property,
or result in public exposure of personal information of our employees, clinical trial patients, customers and others. Furthermore, negative posts or
comments about us or our products in social media could seriously damage our reputation, brand image and goodwill, which would have a material adverse
effect on our business, financial condition, and results of operations.
Social media companies on which we rely for advertising may change their policies limiting our ability to reach our target markets.
We rely on social media companies, such as Facebook and Twitter, to reach our target markets. Facebook has announced that beginning in January
2022 it will limit the ability of advertisers to target certain markets. Any restrictions by Facebook or any other social media platform on which we depend
to reach our target market could have a significant impact on our ability to develop customer awareness and generate new users for our physician partners.
31
Table of Contents
We may become subject to claims of infringement or misappropriation of the intellectual property rights of others, which could prohibit us from
shipping affected products, require us to obtain licenses from third parties or to develop non-infringing alternatives, and subject us to substantial
monetary damages 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
a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain. Therefore, we cannot be certain that
we have not infringed the intellectual property rights of such third parties. Our potential competitors may assert that some aspect of our products infringes
their patents. There also may be existing patents of which we are unaware that one or more components of our products may inadvertently infringe.
Any infringement or misappropriation claim could cause us to incur significant costs, could place significant strain on our financial resources,
divert management’s attention from our business and harm our reputation. If the relevant patents were upheld as valid and enforceable and we were found
to infringe, 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
design around 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 avoid infringement.
A court could order us to pay compensatory damages for such infringement, plus prejudgment interest and could, in addition, treble the
compensatory damages and award attorney fees. These damages could be substantial and could harm our reputation, business, financial condition and
operating results. A court also could enter orders that temporarily, preliminarily or permanently enjoin us and our customers from making, using, selling,
offering to sell or importing our products, and/or could enter an order mandating that we undertake certain remedial activities. Depending on the nature of
the relief ordered by the 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, or
whether a patent application should be granted, is a complex matter of science and law. Therefore, we cannot be certain that, if challenged, our patents,
patent applications and/or other intellectual property rights would be upheld. If one or more of those patents, patent applications and other intellectual
property rights are invalidated, rejected or found unenforceable, those outcomes could reduce or eliminate any competitive advantage we might otherwise
have had.
If we or our third-party manufacturers or suppliers fail to comply with the FDA’s Quality System Regulation or any applicable state equivalent, our
manufacturing 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 Good Manufacturing Practices
or its 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 the
production of our medical devices. We and our manufacturers and suppliers are also subject to the regulations of foreign jurisdictions regarding the
manufacturing process if we market its products overseas. The FDA enforces the QSR through periodic and announced or unannounced inspections of
manufacturing 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
in non-compliance or fail to take satisfactory corrective action in response to adverse QSR inspectional findings, FDA could take legal or regulatory
enforcement actions against us and/or our products, including but not limited to the cessation of sales or the recall of distributed products, which could
impair 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 bear
other costs or take other actions that may have a negative impact on our future sales and our ability to generate profits.
32
Table of Contents
Current regulations depend heavily on administrative interpretation. If the FDA does not believe that we are in substantial compliance with
applicable FDA regulations, the agency could take legal or regulatory enforcement actions against us and/or our products. We are also subject to periodic
inspections by the FDA, other governmental regulatory agencies, as well as certain third-party regulatory groups. Future interpretations made by the FDA
or other regulatory bodies made during the course of these inspections may vary from current interpretations and may adversely affect our business and
prospects. The FDA’s and foreign regulatory agencies’ statutes, regulations, or policies may change, and additional government regulation or statutes may
be enacted, which could increase post-approval regulatory requirements, or delay, suspend, prevent marketing of any cleared/approved products or
necessitate the recall of distributed products. We cannot predict the likelihood, nature or extent of adverse governmental regulation that might arise from
future legislative or administrative 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 our
operations 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 or restructuring of our operations or activities could adversely affect our ability to operate our business and our financial results. The risk of us
being found in violation 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 action against us for violation of these laws, even if we successfully defend ourselves against that action and its underlying allegations, could cause us
to incur significant legal expenses and divert management’s attention from the operation of our business. Where there is a dispute with a federal or state
governmental agency 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 by the commercial returns to us from maintaining the dispute or the product.
Various claims, design features or performance characteristics of our medical devices, that we regarded as permitted by the FDA without
marketing clearance or approval, may be challenged by the FDA or state regulators. The FDA or state regulatory authorities may find that certain claims,
design features or performance characteristics, in order to be made or included in the products, may have to be supported by further studies and marketing
clearances or approvals, 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 to
restrictions 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
other regulatory bodies, discovery of previously unknown problems with our products (including unanticipated adverse events or adverse events of
unanticipated severity or frequency), manufacturing problems, or failure to comply with regulatory requirements, or failure to adequately respond to any
FDA observations concerning 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.
33
Table of Contents
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 or manufacture. 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 device would cause serious injury or death. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is
found. A government-mandated or voluntary recall by us or one of our distributors could occur as a result of component failures, manufacturing errors,
design or labeling defects or other deficiencies and issues. Recalls of any of our products would divert managerial and financial resources and have an
adverse effect on our financial condition and results of operations. The FDA requires that certain classifications of recalls be reported to the FDA within ten
working days after the recall is initiated. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA. We may
initiate voluntary recalls involving our products in the future that we determine do not require notification of the FDA. If the FDA disagrees with our
determinations, they could require us to report those actions as recalls. A future recall announcement could harm our reputation with customers and
negatively affect sales. In addition, 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 device
reporting 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 or may 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 if the 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
timeframes, or at all, the FDA could take enforcement action against us. Any such adverse event involving our products also could result in future
voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection or enforcement action. Any corrective action,
whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require our time and capital, distract management from operating our
business, and may harm our reputation and financial results.
We may have a need for additional funds in the future and there is no guarantee that we will be able to generate those funds from our business.
Our existing cash position and ability to borrow funds and future revenue may not be sufficient to support the expenses of our operations in the
near term, although based upon our cash and cash equivalents, current budgeting and projected cash flow models, we believe that we will be able to support
our operations for at least the next 12 months following the filing of this Report. We plan to fund operations by the recurring revenue generated by the use
of the XTRAC lasers and the TheraClear Acne Therapy System in the U.S. and international markets, as well as domestic and international sales 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 additional financing. 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 will be able to
raise additional capital under terms that are favorable to us. Further, we cannot assure that an acquisition will in any way negate or mitigate our need for
future capital. Any additional financing may dilute the ownership interest of our existing stockholders and could adversely affect the market price of our
common stock.
34
Table of Contents
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
take measures 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 stronger financial
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
price of 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 the above-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
financial markets and the resulting limitations on available financing to us and to potential licensees, buyers and investors. Additionally, these options may
not be available to us as all of our assets have been pledged as security for the various financings.
We may be subject to disruptions or failures in our information technology systems and network infrastructures, including through cyber-attacks or
other third-party breaches that could have a material adverse effect on our business.
We rely on 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 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, natural disasters or accidents could cause breaches of data security, loss
of intellectual property and critical data and the release and misappropriation of sensitive competitive information.
While we have implemented a number of protective measures, including firewalls, antivirus, patches, data encryption, log monitors, routine back-
ups with offsite retention of storage media, system audits, data partitioning, routine password modifications and disaster recovery procedures, such
measures may not 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 to successfully expand the capacity of these systems, or we are unable to integrate new technologies into our existing systems, our operations and
financial results could suffer.
We have also outsourced significant elements of our information technology infrastructure and as a result we depend on third parties who are
responsible for maintaining significant elements of our information technology systems and infrastructure and who may or could have access to our
confidential information. The size and complexity of our information technology systems, and those of our third-party vendors, make such systems
potentially vulnerable to service interruptions and security breaches from inadvertent or intentional actions by its employees, partners or vendors. These
systems are also vulnerable to attacks by malicious third parties, and may be susceptible to intentional or accidental physical damage to the infrastructure
maintained 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
or other forms of deception, or for any other cause, could enable others to produce competing products, use our proprietary technology or information,
and/or adversely 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.
35
Table of Contents
Environmental and health safety laws may result in liabilities, expenses and restrictions on our operations.
Federal, state, local and foreign laws regarding environmental protection, hazardous substances and human health and safety may adversely affect
our business. Using hazardous substances in our operations exposes us to the risk of accidental injury, contamination or other liability from the use, storage,
importation, handling, or disposal of hazardous materials. If our or our suppliers’ operations result in the contamination of the environment or expose
individuals to hazardous substances, we could be liable for damages and fines, and any liability could significantly exceed our insurance coverage and have
a material adverse effect on our business, financial condition, and results of operations. Future changes to environmental and health and safety laws could
cause us to incur additional expenses or restrict our operations, which could have a material adverse effect on our business, financial condition, and results
of operations.
Risks Relating to Our Common Stock
Our shares of common stock could be delisted from the Nasdaq Capital Market which could result in, among other things, a decline in the price of our
common stock and less liquidity for holders of shares of our common stock.
Our common stock is listed on the Nasdaq Capital Market (“Nasdaq CM”), which imposes, among other requirements, a minimum $1.00 per share
bid price requirement for continued inclusion on the Nasdaq CM pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Requirement”). The closing
bid price for our common stock must remain at or above $1.00 per share to comply with the Bid Price Requirement for continued listing. On October 26,
2022, we received a deficiency letter (the “Notice”) from the Listing Qualifications Department of the Nasdaq Stock Market, LLC (“Nasdaq”) notifying us
that, for the preceding 30 consecutive trading days, the closing bid price of our common stock was below the Bid Price Requirement. On February 27,
2023, we announced that we had regained compliance with the Bid Price Requirement. Given market volatility and business conditions, we cannot assure
you that we will continue to maintain compliance under the current economic climate.
Your percentage ownership will be further diluted in the future.
Your percentage ownership in our common stock will be diluted in the future because of equity awards that we expect will be granted to our
directors, officers and employees. Our Equity Incentive Plan provides for the grant of equity-based awards, including restricted stock, restricted stock
units, stock options, stock appreciation rights and other equity-based awards to our directors, officers and other employees, advisors and consultants. In
September 2021, we issued a warrant to MidCap Financial Trust to purchase 373,626 shares of our common stock, with an exercise price of $1.82 per
share. We also maintain a shelf-registration statement that provides us with the ability, from time to time, to offer and sell up to $25.0 million in securities,
including selling up to $11.0 million of our common stock in registered “at-the-market” offerings pursuant to an equity distribution agreement entered into
with Ladenburg Thalmann & Co. Inc. in October 2021. As a result of shares sold or issued under the circumstances described above, your percentage
ownership in our common stock will be diluted in the future.
In the event of certain contingencies, the investors in the May 2018 Equity Financing may receive additional shares issued pursuant to the Retained
Risk Provisions as defined in the purchase agreements.
In the event of certain contingencies, the investors in the May 2018 equity financing may receive additional shares issued pursuant to the Retained
Risk Provisions as defined in the Stock Purchase Agreements. At the closing, the Company determined certain contingencies had been met and, in July
2018, the Company issued 153,004 shares associated with those contingencies. There were additional contingencies included in the SPAs that expired in
May 2020 and did not result in the issuance of shares.
36
Table of Contents
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 in
particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. The following factors, in
addition to other risk factors described in this section and general market and economic conditions, may have a significant impact on the market price of
our common 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;
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 and any perceived need to raise additional funds;
variations in our financial results from expected 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
stock and may adversely impact our ability to attract and retain employees and raise capital. In addition, stockholders have, and may in the future, initiate
securities class action lawsuits if the market price of our stock drops significantly. Whether or not meritorious, litigation brought against us could result in
substantial costs and could divert the time and attention of our management. Our insurance to cover claims of this sort may not be adequate.
37
Table of Contents
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 a third 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 at
stockholder meetings;
do not permit cumulative voting in the election of our directors, which would otherwise permit less than a majority of stockholders to elect
directors;
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 certain
persons 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. In connection with the financing in May 2018, our board of directors exempted AGP SPVI, L.P. from the
application of this provision in connection with its investment.
These provisions may have the effect of entrenching our management team and may deprive you of the opportunity to sell your shares to potential
acquirers at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price of our common stock.
38
Table of Contents
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
PROPERTIES
We lease an 8,513 sq. ft. facility in Horsham, Pennsylvania that houses our executive offices and marketing. The lease was set to expire in January
2023. In August 2022, we exercised the lease renewal option and extended the term of the lease to expire in August 2026.
We lease a 17,000 sq. ft. facility consisting of office, manufacturing and warehousing space in Carlsbad, California. The lease was set to expire on
September 30, 2019. On May 1, 2019, we entered into the Fifth Amendment to the lease. The term of the lease commenced on October 1, 2019 and expires
on September 30, 2024. Our Carlsbad facility houses the manufacturing and development operations for our excimer laser business, as well as the patient
call center and reimbursement center.
ITEM 3.
LEGAL PROCEEDINGS
From time to time in the ordinary course of our business, we may be a party to certain legal proceedings, incidental to the normal course of our
business. These may include controversies relating to contract claims and employment related matters, some of which claims may be material, in which
case, we will make separate disclosure as required.
On April 1, 2022, a proposed representative class action under California’s Private Attorneys General Act (“PAGA”) was filed in Superior Court
of California, County of San Diego against the Company and an employment agency (“Co-Defendant”) which provided the Company with temporary
employees. The complaint alleges various violations of the California Labor Code, including California’s wage and hour laws, relating to current and
former non-exempt employees of the Company. The complaint seeks class status and payments for allegedly unpaid compensation and attorney’s fees. In a
related matter, the attorneys in this matter and the proposed class representative, in a letter dated March 12, 2022, to the California Labor & Workforce
Development Agency made nearly identical claims seeking the right to pursue a PAGA action against the Company and the employment agency. On or
about May 16, 2022, the plaintiff filed a First Amended Complaint adding a PAGA claim to the action. On or about June 2, 2022, the plaintiff filed an
Application to Dismiss Class and Individual Claim without prejudice, in an attempt to pursue a PAGA only complaint. On or about June 30, 2022, the
parties entered into a stipulation to allow the plaintiff to file a Second Amended Complaint to clarify the PAGA claim and to stay the pending action to
allow an attempt at through mediation. The mediation was held on February 23, 2023, and the matter was settled on terms agreeable to the Company. The
settlement, which would require us to pay $0.1 million, is tentative and subject to court approval and the right of individual class members to reject the
settlement and proceed on their own.
We are currently under audit by two taxing jurisdictions, pertaining to sales and/or use tax. One jurisdiction has assessed us an amount of $1.5
million including penalties and interest, in two assessments, for the period from March 2014 through February 2020. We have declined an informal offer to
settle the first assessment at a substantially lower amount and are currently in that jurisdiction’s administrative process of appeal.
In January 2021, we received notification that the administrative law judge had issued an opinion finding in favor of us that the sale of XTRAC
treatment codes is not taxable as sales tax with respect to the first assessment. The relevant taxing authority filed an appeal of the administrative law judge’s
finding and, following the submission of legal briefs by both sides and oral argument held in January 2022, on May 6, 2022, we received a written decision
from the Taxing Authority’s Appeals Tribunal (“Tribunal”) overturning the favorable sales tax determination of the administrative law judge. We filed an
appeal of the Tribunal’s decision, and posted the required appellate bond requiring posting cash collateral, with the appellate court, and are awaiting for the
appellate court to set a briefing and oral argument schedule.
A second jurisdiction has made an assessment of $0.7 million from June 2015 through March 2018 plus interest of $0.2 million through April
2020. We are in this jurisdiction’s administrative process of appeal as well and the timing of the process has been impacted by the COVID-19 pandemic. If
it is found we are not exempt from sales tax in these or other states then potential tax liabilities including interest and penalties would be higher than
accrued amounts.
39
Table of Contents
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
As of March 15, 2023, we had 34,881,453 shares of common stock issued and outstanding, which are listed on the Nasdaq Capital Markets under
the symbol “SSKN.” This did not include (i) options to purchase 4,464,714 shares of common stock, of which 2,368,841 were vested as of March 15, 2023,
(ii) unissued restricted stock units of 119,597, or (iii) 373,626 shares of common stock reserved for issuance pursuant to a warrant.
DIVIDEND POLICY
We have not declared or paid any dividend on our common stock, since our inception. We do not anticipate that any dividends on our common
stock will be declared or paid in the future. Any future determination relating to our dividend policy will be made at the discretion of our board of directors
and will depend on then existing conditions, including our earnings, financial condition, results of operations, level of indebtedness, contractual restrictions,
capital requirements, business prospects 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 by Delaware law and our credit facility.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Equity Compensation Plan Information
The following is a summary of all of our equity compensation plans, including plans that were assumed through acquisitions and individual
arrangements that provide for the issuance of equity securities as compensation, as of December 31, 2022. See Notes 1 and 14 to the consolidated financial
statements for additional discussion.
Number of
securities
to be issued upon
exercise of
outstanding
securities
(#)
(a)
4,474,714 $
—
4,474,714 $
Weighted
average
exercise price of
outstanding
options ($)
(b)
1.72
—
1.72
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities reflected
in column(a)) (#)
(c)
3,193,706
—
3,193,706
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
40
Table of Contents
RECENT SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS FROM REGISTERED SECURITIES
None.
ISSUER PURCHASES OF EQUITY SECURITIES
None.
ITEM 6.
[RESERVED]
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our consolidated financial condition and results of operations together with our
consolidated financial statements and the related notes and other financial information included in this Annual Report. Some of the information contained
in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business,
includes forward-looking statements that involve risks and uncertainties as described under the heading “Cautionary Note Regarding Forward-Looking
Statements” elsewhere in this Annual Report. You should review the disclosure under the heading “Risk Factors” in this Annual Report for a discussion of
important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in
the following discussion and analysis.
Overview
STRATA Skin Sciences, Inc. is a medical technology company in dermatology dedicated to developing, commercializing and marketing
innovative products for the treatment of dermatologic conditions. Its products include the XTRAC® and now Pharos® excimer lasers and VTRAC® lamp
systems utilized in the treatment of psoriasis, vitiligo and various other skin conditions, as well as the TheraClear® X Acne Therapy System utilized in the
treatment of acne-related skin conditions.
The XTRAC ultraviolet light excimer laser system is utilized to treat psoriasis, vitiligo and other skin diseases. The XTRAC excimer laser system
received clearance from the United States Food and Drug Administration in 2000 and has since become a widely recognized treatment among
dermatologists. The system delivers targeted 308nm ultraviolet light to affected areas of skin, leading to psoriasis clearing and vitiligo repigmentation,
following a series of treatments. As of December 31, 2022, there were 909 XTRAC systems placed in dermatologists’ offices in the United States under
our dermatology recurring procedures model, an increase from 890 at the end of December 31, 2021. Under the dermatology recurring procedures model,
the XTRAC system is placed in a physician’s office and fees are charged on a per procedure basis or a fee is charged on a periodic basis not to exceed an
agreed upon number of procedures. The XTRAC system’s use for psoriasis is covered by nearly all major insurance companies, including Medicare. The
VTRAC Excimer Lamp system, offered internationally in addition to the XTRAC, provides targeted therapeutic efficacy demonstrated by excimer
technology with the simplicity of design and reliability of a lamp system. We believe there are approximately 8 million people in the United States and up
to 125 million people worldwide suffering from psoriasis, and 1% to 2% of the world’s population suffers from vitiligo.
Our non-U.S. business focuses on a direct distribution model for equipment sales and recurring revenue, and we have distribution agreements in
place in the Mid-East, Asia, and Mexico.
The Pharos excimer laser system holds FDA clearance to treat chronic skin diseases, including psoriasis, vitiligo, atopic dermatitis and
leukoderma.
The TheraClear® X Acne Therapy System combines intense pulse light with vacuum (suction) for the treatment of mild to moderate inflammatory
acne (including acne vulgaris), comedonal acne and pustular acne.
41
Table of Contents
COVID-19 Pandemic
In late 2019, there was an outbreak of a new strain of coronavirus (“COVID-19”) which became a global pandemic. While many of COVID-19’s
initial disruptions and damage to the global economy have been mitigated, the COVID-19 pandemic has continued to negatively impact the economy,
disrupted global supply chains, constrained workforce participation and created significant volatility and disruption of financial markets. The pandemic led
to the suspension of elective procedures in the U.S. and to the temporary closure of many physician practices, which are our primary customers. While
most offices have reopened, some physician practices closed and never reopened, and the impact of the ongoing COVID-19 pandemic and its variants on
our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frames, will depend
on future developments, including, but not limited to, the ongoing mutations and spread of the COVID-19 virus, impact on business operations, supply
chains and transport, and governmental and societal responses thereto, all of which are uncertain and cannot be predicted.
The ongoing COVID-19 pandemic has had a negative impact on our results of operations and financial performance through fiscal 2022, and we
expect it will continue to have a negative impact on revenues, earnings and cash flows until such time as its customers adjust to the pandemic’s
ramifications. Some physician offices continue to experience staffing issues, and we believe these shortages of trained personnel have negatively impacted
our business. Accordingly, current results and financial conditions discussed herein may not be indicative of future operating results and trends.
Russia-Ukraine War
Prior to the outbreak of the Russia-Ukraine War, Ukraine was the largest exporter of noble gases including neon, krypton, and xenon. Historically,
Ukraine has been the source of a significant amount of gas supplied to the Company by our contract suppliers. Neon gas is essential to the proper
functioning of our lasers. Our supporters have been resourceful in continuing to supply gases to us but cannot assure us that the supply will not remain
uninterrupted. The reduced supply and war have raised the price of gas significantly worldwide. Additionally, the Creating Helpful Incentives to Produce
Semiconductors and Science Act of 2022 has led to a further tightening of rare gas supplies as chip manufacturers reconfigure their supply chains to
address the need to secure their own supplies of rare gases for use in the manufacture of computer chips, while struggling with the disruptions caused by
this war.
42
Table of Contents
Key Technologies
•
•
•
•
•
XTRAC® Excimer Laser. XTRAC received FDA clearance in 2000 and has since become a widely recognized treatment among dermatologists for
psoriasis and other skin diseases. The XTRAC System delivers ultra-narrowband ultraviolet B (“UVB”) light to affected areas of skin. Following a
series of treatments typically performed twice weekly, psoriasis remission can be achieved, and vitiligo patches can be re-pigmented. XTRAC is
endorsed by the National Psoriasis Foundation, and its use for psoriasis is covered by nearly all major insurance companies, including Medicare.
We estimate that more than half of all major insurance companies now offer reimbursement for vitiligo as well, a figure that is increasing.
In the third quarter of 2018, we announced the FDA granted clearance for our Multi Micro Dose (MMD) tip for our XTRAC excimer laser. The
MMD Tip accessory is indicated for use in conjunction with the XTRAC laser system to filter the Narrow Band UVB (“NB-UVB”) light at
delivery in order to calculate and individualize the maximum non-blistering dose for a particular patient.
In January 2020, we announced the FDA granted clearance of our XTRAC Momentum Excimer Laser Platform. In February 2022, we announced
the commercial launch, with the first installation in the U.S. market, of our next generation excimer laser system, XTRAC MomentumTM 1.0.
VTRAC® Lamp. VTRAC received FDA clearance in 2005 and provides targeted therapeutic efficacy demonstrated by excimer technology with
the simplicity of design and reliability of a lamp system.
TheraClear® X Acne Treatment Device. The TheraClear® Acne Therapy System combines intense pulse light with vacuum (suction) for the
treatment of mild to moderate inflammatory acne (including acne vulgaris), comedonal acne and pustular acne.
Recent Developments
Asset Acquisitions
Pharos Laser Acquisition. In August 2021 we acquired certain assets and certain liabilities related to the Pharos U.S. dermatology business of Ra
Medical Systems, Inc. (“Ra Medical”). The Pharos asset acquisition provides us with the opportunity to market our full business solutions to Ra Medical’s
existing customer base of 400 dermatology practices and increase our recurring revenue base. The Pharos transaction also provides a highly synergistic
path to gain additional placements for our XTRAC excimer laser system.
We made upfront cash payments of $3.7 million in connection with the Pharos asset acquisition.
TheraClear Acquisition. In January 2022, the Company acquired certain assets related to the TheraClear devices from Theravant Corporation. The
TheraClear asset acquisition will allow the Company to futher develop, commercialize and market the TheraClear devices that are used for acne treatment,
as well as advance the TheraClear technology into multiple other devices that can be used to treat a range of additional indications.
The Company made an upfront cash payment of $0.5 million and issued to Theravant Corporation 358,367 shares of common stock with an
aggregate value of $0.5 million in connection with the TheraClear asset acquisition. During the fourth quarter of 2022, the Company also made a $0.5
million milestone payment upon the launch of the TheraClear Acne Therapy System, one of development related targets. Theravant Corporation is eligible
to receive up to $3.0 million in future earnout payments upon achievement of certain annual net revenue milestones, up to $20.0 million in future royalty
payments based upon a percentage of gross profit from future domestic sales ranging from 10-20%, 25% of gross profit from international sales over the
subsequent four-year period, and up to $0.5 million in future milestone payments upon the achievement of certain commercialization related targets.
43
Table of Contents
MidCap Financing
In September 2021, we entered into an $8.0 million secured borrowing facility with MidCap Financial Trust, or MidCap. The facility bears interest
at LIBOR plus 7.50%, with a LIBOR floor of 0.50%, and matures on September 1, 2026. In September 2022, we amended the facility to transition, upon
the cessation of LIBOR, to one-month SOFR, or such other applicable period, plus 0.10%, with a floor or 0.50%. We are obligated to make interest-only
payments through September 2024. From October 2024 to maturity, we will make payments of principal and interest in 24 equal installments. The loan is
senior to all other indebtedness and is secured by substantially all of our assets. We are subject to customary affirmative and negative covenants including a
financial covenant based on minimum revenue thresholds. Upon an event of default, including a covenant violation, all principal and interest are due on
demand.
Proceeds from our MidCap facility were used to repay, in their entirety, the outstanding principal and interest associated with our Economic Injury
Disaster Loan. In September 2021, we also repaid our note payable with the proceeds from the pledged time deposit held by the lender.
Equity Distribution Agreement
In October 2021, we entered into an equity distribution agreement under which we may sell up to $11.0 million of our shares of common stock in
registered “at-the-market” offerings. The shares will be offered at prevailing market prices, and we will pay commissions of up to 3.0% of the gross
proceeds from the sale of shares sold through our agent, which may act as an agent and/or principal. We have no obligation to sell any shares under this
agreement and may, at any time, suspend solicitations under this agreement. No shares of our common stock have been sold under this distribution
agreement during fiscal 2022 or 2021.
Components of Results of Operations
Revenues
To date, we have generated revenues primarily from the placement of our lasers in physicians’ offices and the related sales and rentals and the
recurring revenues from our sale of treatment sessions.
Dermatology Recurring Procedures Segment: we have primarily two types of arrangements for our phototherapy treatment equipment as follows:
(i) we place our lasers in a physician’s office at no charge to the physician, and generally charge the physician a fee for an agreed upon number of
treatments; or (ii) we place our lasers in a physician’s office and charge the physician a fixed fee for a specified period of time not to exceed an agreed
upon number of treatments; if that number is exceeded additional fees will have to be paid.
Dermatology Procedures Equipment Segment: we sell our products internationally through distributors and domestically, directly to a physician.
We also derive revenues from service and repair extended warranty contracts with our existing customers.
We refer you to the section titled “—Critical Accounting Policies and Use of Estimates—Revenue Recognition” appearing elsewhere in this
Annual Report on Form 10-K for additional information regarding how we account for revenues.
Sales in the United States represented 66% and 77% of our total revenues for the years ended December 31, 2022 and 2021, respectively, and have
been generated by our direct sales force. Outside the United States, our sales are made through third-party distributors. International revenues were 34%
and 23% for the years ended December 31, 2022 and 2021, respectively. We expect that both our United States and international revenues will increase in
the near term as we continue to expand our product offerings and increase the related patient utilization in the United States, as well as grow our presence
in Asia.
44
Table of Contents
Cost of Revenues and Gross Margin
Cost of revenues primarily consists of the costs of components and the manufacture of our XTRAC and VTRAC systems. Cost of revenues also
includes costs related to personnel, depreciation, amortization, warranty, shipping, and our operations and field service departments.
Our gross profit is calculated by subtracting our cost of revenues from our revenues. We calculate our gross margin as our gross profit divided by
our revenues. Our gross margin has been and will continue to be affected by a variety of factors, primarily product sales mix and pricing manufacturing
costs. Our gross margins on revenues from sales of dermatology procedures equipment are lower than our gross margins on revenues from sales of
dermatology recurring procedures and, as a result, the sales mix between dermatology recurring procedures and dermatology procedures equipment can
affect the gross margin in any reporting period.
Engineering and Product Development
Engineering and product development expenses consist primarily of personnel expenses, including salaries and related benefits for employees in
engineering, product development, regulatory and quality assurance functions. We typically use our employee, consultant and infrastructure resources
across our engineering and product development programs.
We plan to incur engineering and product development expenses for the near future as we expect to continue our development that focuses on the
application of our XTRAC system for the treatment of inflammatory skin disorders. As a result, we expect our engineering and product development
expenses to remain similar to our fiscal year 2022 expenses.
Selling and Marketing
Selling and marketing expenses consist of market research and commercial activities related to the sale of our dermatology recurring procedures
and dermatology procedures equipment sales, and salaries and related benefits and sales commissions for employees focused on these efforts. Other
significant sales and marketing costs include conferences and trade shows, promotional and marketing activities, including direct and online marketing to
the consumer and dermatologists, practice support programs, travel and training expenses.
We anticipate that our selling and marketing expenses will increase as we continue to execute on our growth initiatives and expand our business in
both the United States and internationally.
General and Administrative
General and administrative expenses consist primarily of personnel expenses, including salaries and related benefits, share-based compensation
and travel expenses, for employees in executive, finance, information technology, legal and human resource functions. General and administrative expenses
also include the cost of insurance, outside legal fees, accounting and other consulting services, audit fees from our independent registered public accounting
firm, board of directors’ fees and other administrative costs, such as corporate facility costs, including rent, utilities, depreciation and maintenance not
otherwise included in cost of revenues.
We anticipate that our general and administrative expenses will remain similar to our fiscal year 2022 expenses.
Gain of Forgiveness of Debt
In fiscal 2021, we recognized a gain on forgiveness of debt associated with our Paycheck Protection Program (“PPP”) loan.
Interest Expense
Interest expense consists of cash interest payable under our debt facilities and non-cash interest attributable to the amortization of deferred
financing costs related to our indebtedness.
45
Table of Contents
Interest Income
Interest income is earned on our cash and cash equivalent account balances.
Income Taxes
As of December 31, 2022, we had federal and state NOL carryforwards of $198.1 million and $60.8 million, respectively. The net operating loss
carryforwards generated prior to 2018 began to expire for federal income tax purposes and begin expiring in 2030 for state income tax purposes. Federal
and many state net operating losses generated in 2018 and into the future now have an indefinite life.
In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership
change” is subject to limitations on its ability to utilize its NOLs to offset future taxable income. We have not completed a study to assess whether an
ownership change has occurred in the past. Our existing NOLs may be subject to limitations arising from previous ownership changes, and if we undergo
an ownership change, our ability to utilize NOLs could be further limited by Section 382 of the Code. Future changes in our stock ownership, some of
which are outside of our control, could result in an ownership change under Section 382 of the Code. Our NOLs are also subject to international
regulations, which could restrict our ability to utilize our NOLs. Furthermore, our ability to utilize NOLs of companies that we may acquire in the future
may be subject to limitations. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our
existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities.
Results of Operations
Comparison of the Years ended December 31, 2022 and 2021
(in thousands)
Revenues, net
Cost of revenues
Gross profit
Operating expenses:
Engineering and product development
Selling and marketing
General and administrative
Loss from operations
Other (expense) income:
Interest expense
Interest income
Gain on forgiveness of debt
Loss before income tax expense
Year Ended
December 31,
Change
2022
2021
Dollar
Percentage
36,161 $
14,393
21,768
1,029
15,301
10,087
26,417
(4,649)
(926)
89
—
(837)
(5,486) $
29,977 $
10,127
19,850
1,434
13,106
9,712
24,252
(4,402)
(314)
15
2,029
1,730
(2,672) $
6,184
4,266
1,918
(405)
2,195
375
2,165
(247)
(612)
74
(2,029)
(2,567)
(2,814)
21%
42
10
(28)
17
4
9
6
(195)
493
(100)
(148)
105%
$
$
46
Table of Contents
Revenues
Revenues by Geography
The following tables present revenues by geography for the periods presented below:
(in thousands)
Domestic
International
Total Revenues
Revenues by Product Type
Year Ended
December 31,
Change
2022
2021
Dollar
Percentage
$
$
23,981 $
12,180
36,161 $
23,197 $
6,780
29,977 $
784
5,400
6,184
3%
80
21%
The following tables present revenues by segment for the periods presented below:
(in thousands)
Dermatology recurring
Dermatology equipment
Total Revenues
Dermatology Recurring Procedures
Year Ended
December 31,
Change
2022
2021
Dollar
Percentage
$
$
23,025 $
13,136
36,161 $
22,528 $
7,449
29,977 $
497
5,687
6,184
2%
76
21%
The ongoing COVID-19 pandemic has had a negative impact on our results for 2022 and 2021, and we expect it will continue to have a negative
impact on revenue given the change in the behavior of our customers and the ultimate consumer of our products and services as a result of the pandemic.
Recognized treatment revenue for the year ended December 31, 2022 was $23.0 million, which we estimate is approximately 329,000 treatments with
prices between $65 and $95 per treatment, compared to recognized treatment revenue for the year ended December 31, 2021 of $22.5 million, which is
approximately 321,000 treatments with prices between $65 and $95 per treatment.
Increases in procedures are dependent upon building market acceptance through marketing programs with our physician partners and their patients
to show that the XTRAC procedures will be of clinical benefit and will be generally reimbursed by insurers. We believe that several factors have an impact
on the prescribed use of XTRAC treatments for psoriasis and vitiligo patients. Specifically, we believe that there is a lack of awareness of the positive
effects of XTRAC treatments among both sufferers and providers; and the treatment regimen, which can sometimes require up to 12 or more treatments,
has limited XTRAC use to certain patient populations. Therefore, our strategy is to continue to execute a direct-to-patient program for XTRAC advertising
in the United States, targeting psoriasis and vitiligo patients through a variety of media and through our use of social media such as Facebook and Twitter.
We monitor the results of our advertising expenditures in this area to reach the more than 10 million patients in the United States we believe are afflicted
with these diseases. Furthermore, we increased our presence at trade shows throughout the United States during 2022, and we held our national sales
meeting for the first time since the onset of the COVID-19 pandemic during the second quarter of 2022.
Revenues from dermatology recurring procedures are recognized as revenue over the estimated usage period of the agreed upon number of
treatments, as the treatments are being used. As of December 31, 2022 and 2021, we deferred domestic net revenues of $2.2 million and $1.9 million,
respectively, which will be recognized as revenue over the remaining usage period for the related placements.
47
Table of Contents
Dermatology Procedures Equipment
The ongoing COVID-19 pandemic has had a negative impact on our results for 2022 and 2021, and we expect it will continue to have a negative
impact on revenue given the change in the behavior of our customers and the ultimate consumer of our products and services as a result of the pandemic.
For the year ended December 31, 2022, dermatology procedures equipment revenues were $13.1 million. Internationally, we sold 100 systems (88 XTRAC
and 12 VTRAC). Domestically, we sold 7 XTRAC systems for the year ended December 31, 2022.
For the year ended December 31, 2021, dermatology procedures equipment revenues were $7.5 million. Internationally, we sold 38 systems (30
XTRAC and 8 VTRAC).
Cost of Revenues and Gross Profit
The following tables present changes in our gross margin, by segment, for the periods presented below:
Dermatology Recurring Procedures
(in thousands)
Revenues
Cost of revenues
Gross profit
Gross profit percentage
Year Ended
December 31,
Change
2022
2021
Dollar
Percentage
$
$
23,025
8,371
14,654
$
$
63.6%
22,528
6,418
16,110
$
$
71.5%
497
1,953
(1,456)
2%
30
(9)%
The primary reasons for the decrease in gross profit for the year ended December 31, 2022 were higher amortization of intangible assets due to the
Pharos and TheraClear asset acquisitions and higher depreciation expenses and labor costs in 2022 compared to 2021, partially offset by higher recurring
procedures sales.
Dermatology Procedures Equipment
(in thousands)
Revenues
Cost of revenues
Gross profit
Gross profit percentage
Year Ended
December 31,
Change
2022
2021
Dollar
Percentage
$
$
13,136
6,022
7,114
$
$
54.2%
7,449
3,709
3,740
$
$
50.2%
5,687
2,313
3,374
76%
62
90%
The primary reasons for the increase in gross profit for the year ended December 31, 2022 were a change in product mix resulting in greater sales
of equipment with higher sales margins and recognition of deferred service revenue associated with assumed service contracts from Ra Medical, partially
offset by higher amortization of intangible assets due to the Pharos and TheraClear asset acquisitions.
Engineering and Product Development
For the year ended December 31, 2022, engineering and product development expenses were $1.0 million as compared to $1.4 million for the year
ended December 31, 2021. Engineering and product development costs during the year ended December 31, 2022 were lower primarily as a result of
reduction of costs incurred in connection with developing XTRAC MomentumTM 1.0, our next generation excimer laser system that was commercially
launched in February 2022.
Selling and Marketing
As of December 31, 2022, our sales and marketing personnel consisted of 63 full-time positions, inclusive of a vice president of sales, a vice
president of marketing and a vice president of relations, direct sales organization as well as an in-house call center staffed with patient advocates and a
reimbursement group that provides necessary insurance information to our physician partners and their patients.
48
Table of Contents
For the year ended December 31, 2022, sales and marketing expenses were $15.3 million as compared to $13.1 million for the year ended
December 31, 2021. Sales and marketing expenses for the year ended December 31, 2022 were higher, as compared to the same period in 2021, primarily
due to investments we made in sales and marketing and direct-to-consumer and dermatologists advertising, as well as increased head count and employee-
related expenses. Additionally, increased spending consisted of our national sales meeting and increased attendance at trade shows.
General and Administrative
For the year ended December 31, 2022, general and administrative expenses increased to $10.1 million from $9.7 million for the year ended
December 31, 2021. General and administrative expenses were higher for the year ended December 31, 2022, as compared to the same period in 2021. The
increase is primarily due to higher consulting services, including legal and professional services, offset by higher compensation, severance and recruiting
expenses incurred during the first quarter of 2021 as a result of the CEO transition.
Gain on Forgiveness of Debt
During the year ended December 31, 2021, we received notification our PPP loan had been forgiven and we recorded a gain on forgiveness of debt
of $2.0 million.
Interest Expense
Interest expense is primarily attributable to our debt obligations. For the year ended December 31, 2022, interest expense increased to $1.0 million
from $0.3 million for the year ended December 31, 2021. The increase is primarily the result of a higher interest rate on the Senior Term Facility entered
into in September 2021.
Interest Income
Interest income relates to the interest we receive on our cash, cash equivalents and restricted cash held with financial institutions.
Income Tax Expense
We recognized an income tax expense of $0.1 million for the year ended December 31, 2022 as compared to $34 thousand for the year ended
December 31, 2021, which is comprised primarily of changes in deferred tax liability related to goodwill.
Non-GAAP Financial Measures
We have determined to supplement our consolidated financial statements, prepared in accordance with accounting principles generally accepted in
the United States of America (“U.S. GAAP”), presented elsewhere within this report, with certain non-GAAP measures of financial performance. These
non-GAAP measures include non-GAAP gross profit, which excludes the non-cash expense of amortization of acquired intangible assets classified as cost
of revenues, and non-GAAP adjusted EBITDA, “Earnings Before Interest, Taxes, Depreciation, and Amortization.”
These non-GAAP disclosures have limitations as an analytical tool, should not be viewed as a substitute for Gross Profit or Net Earnings (Loss)
determined in accordance with U.S. GAAP, should not be considered in isolation or as a substitute for analysis of our results as reported under U.S. GAAP,
nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. We consider these non-GAAP
measures in addition to our results prepared under current accounting standards, but they are not a substitute for, nor superior to, U.S. GAAP measures.
These non-GAAP measures are provided to enhance readers’ overall understanding of our current financial performance and to provide further information
for comparative purposes. This supplemental presentation should not be construed as an inference that the Company’s future results will be unaffected by
similar adjustments to Gross Profit or Net Earnings (Loss) determined in accordance with U.S. GAAP. Specifically, we believe the non-GAAP measures
provide useful information to management and investors by isolating certain expenses, gains and losses that may not be indicative of our core operating
results and business outlook. In addition, we believe non-GAAP measures enhance the comparability of results against prior periods.
49
Table of Contents
Reconciliation to the most directly comparable U.S. GAAP measure of all non-GAAP measures included in this report is as follows:
(in thousands)
Gross Profit
Amortization of acquired intangible assets
Non-GAAP gross profit
Gross profit percentage
Non-GAAP gross profit percentage
(in thousands)
Net loss
Adjustments:
Depreciation and amortization
Amortization of operating lease right-of-use asset
Loss on disposal of property and equipment
Income taxes
Gain on forgiveness of debt
Interest income
Interest expense
Non-GAAP EBITDA
Stock-based compensation
Non-GAAP adjusted EBITDA
Liquidity and Capital Resources
Year Ended
December 31,
2022
2021
$
$
21,768
2,031
23,799
$
$
60.2%
65.8%
19,850
570
20,420
66.2%
68.1%
Year Ended December 31,
2022
2021
$
(5,549) $
(2,706)
5,293
395
52
63
—
(89)
926
1,091
1,466
2,557 $
3,736
350
140
34
(2,029)
(15)
314
(176)
1,643
1,467
$
As of December 31, 2022, we had cash and cash equivalents and restricted cash of $6.8 million and an accumulated deficit of $227.2 million. We
used $1.1 million in cash flows from operating activities and received cash flows from operating activities of $1.5 million during the years ended December
31, 2022 and 2021, respectively. We have historically incurred operating losses, and we anticipate that our operating losses will continue in the near term as
we seek to expand our sales and marketing initiatives to support our growth in existing and new markets, invest funds in additional engineering and product
development activities and utilize cash for other corporate purposes. Our primary sources of capital have been from borrowings under our debt facilities
and sales of our products. As of December 31, 2022, we had $8.0 million of borrowings outstanding under our debt facility with MidCap Financial Trust,
or MidCap, which has a final maturity in September 2026.
In September 2021, we entered into an $8.0 million secured borrowing facility with MidCap. The facility bears interest at LIBOR plus 7.50%,
with a LIBOR floor of 0.50%, and matures on September 1, 2026. In September 2022, we amended the facility to transition, upon the cessation of LIBOR,
to one-month SOFR, or such other applicable period, plus 0.10%, with a floor or 0.50%. We are obligated to make interest-only payments through
September 2024. From October 2024 to Maturity, we will make principal payments in 24 equal installments. The loan is senior to all other indebtedness
and is secured by substantially all of our assets. We are subject to customary affirmative and negative covenants including a financial covenant based on
minimum revenue thresholds. Upon an event of default, including a covenant violation, all principal and interest are due on demand.
50
Table of Contents
In October 2021, we entered into an equity distribution agreement under which we may sell up to $11.0 million of our shares of common stock in
registered “at-the-market” offerings. The shares will be offered at prevailing market prices, and we will pay commissions of up to 3.0% of the gross
proceeds from the sale of shares sold through our agent, which may act as an agent and/or principal. We have no obligation to sell any shares under this
agreement and may, at any time, suspend solicitations under this agreement. No shares of our common stock have been sold under this distribution
agreement during fiscal 2022 or 2021.
We cannot predict our revenues and expenses in the short term as a result of the COVID-19 pandemic and related responses by our customers and
our ultimate consumers as a result thereof. Based on our current business plan, we believe that our cash and cash equivalents as of December 31, 2022 and
anticipated revenues from sales of our products and operating expense management will be sufficient to meet our cash requirements for at least 12 months
from the date of issuance of the Annual Report. However, if these sources are insufficient to satisfy our liquidity requirements, we may seek to sell
additional debt or equity securities or enter into a new credit facility or another form of third-party funding or seek other debt financing. If we raise
additional funds by issuing equity or equity-linked securities, our stockholders would experience dilution and any new equity securities could have rights,
preferences and privileges superior to those of holders of our common stock. Debt financing, if available, may involve covenants restricting our operations
or our ability to incur additional debt. We cannot be assured that additional equity, equity-linked or debt financing will be available on terms favorable to us
or our stockholders, or at all. It is also possible that we may allocate significant amounts of capital towards products or technologies for which market
demand is lower than expected and, as a result, abandon such efforts. If we are unable to maintain our current financing or obtain adequate additional
financing when we require it, or if we obtain financing on terms which are not favorable to us, or if we expend capital on products or technologies that are
unsuccessful, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, or we may be
required to delay the development, commercialization and marketing of our products.
The following table summarizes our sources and uses of cash for each of the periods presented:
(in thousands)
Cash (used in) provided by
Operating activities
Investing activities
Financing activities
Net decrease in cash, cash equivalents and restricted cash
Operating Activities
Year Ended
December 31,
2022
2021
$
$
(1,108) $
(4,183)
(500)
(5,791) $
1,508
(7,126)
92
(5,526)
Net cash, cash equivalents and restricted cash used in operating activities was $1.1 million for the year ended December 31, 2022, compared to
cash, cash equivalents and restricted cash provided by operating activities of $1.5 million for the year ended December 31, 2021. The decrease in cash
flows from operating activities for the year ended December 31, 2022 was primarily driven by an increase in inventories to avoid supply chain disruptions,
an increase in accounts receivable, and a decrease in accrued compensation.
Investing Activities
Net cash, cash equivalents and restricted cash used in investing activities was $4.2 million for the year ended December 31, 2022, compared to
cash, cash equivalents and restricted cash used in investing activities of $7.1 million for the year ended December 31, 2021. The decrease is primarily the
result of the Pharos asset purchase in 2021, offset by the TheraClear asset purchase in 2022.
Financing Activities
During the year ended December 31, 2022, we received no proceeds and used $0.5 million in cash from financing activities for the payment of
contingent consideration resulting from the TheraClear asset purchase. During the year ended December 31, 2021, we received net proceeds of $7.9 million
from our senior term facility with MidCap, offset by debt repayments of $7.8 million associated with our note payable and EIDL Loan.
51
Table of Contents
Contractual Obligations and Commitments
Debt Obligations
In September 2021, we entered into an $8.0 million secured borrowing facility with MidCap. The facility bears interest at LIBOR plus 7.50%,
with a LIBOR floor of 0.50%, and matures on September 1, 2026. In September 2022, we amended the facility to transition, upon the cessation of LIBOR,
to one-month SOFR, or such other applicable period, plus 0.10%, with a floor or 0.50%. We are obligated to make interest-only payments through
September 2024. From October 2024 to Maturity, we will make principal payments in 24 equal installments. The loan is senior to all other indebtedness
and is secured by substantially all of our assets. We are subject to customary affirmative and negative covenants including a financial covenant based on
minimum revenue thresholds. Upon an event of default, including a covenant violation, all principal and interest are due on demand.
Operating Lease Obligations
We lease our facilities and certain IT and office equipment under non-cancellable operating leases with remaining lease terms of up to four years.
Remaining lease obligations are $1.1 million as of December 31, 2022, with payments of $0.4 million due within the next year.
Contingent Consideration
Theravant, the seller of the TheraClear devices, is eligible to receive up to $3.0 million in future earnout payments upon the achievement of certain
annual net revenue milestones, up to $20.0 million in future royalty payments based upon a percentage of gross profit from future domestic sales ranging
from 10-20%, 25% of gross profit from international sales over the subsequent four-year period, and up to $0.5 million in future milestone payments upon
the achievement of certain commercialization related targets. As of December 31, 2022, we have estimated the future earnout payments at $8.6 million, of
which $0.3 million is expected to be paid within the next year. Due to uncertainties associated with the development of a new product line and the use of
estimates and assumptions to determine the fair value of the contingent consideration, the amount ultimately paid in connection with the earnout may differ
from the estimated fair value.
Milestone Payments
In January 2022, we entered into a Development Agreement (the “Development Agreement”) with Theravant. Under the Development
Agreement, we will reimburse Theravant for costs incurred in further developing certain TheraClear technology and other healthcare products and methods
for the medical aesthetic marketplace. In connection with the development of three devices, Theravant is eligible to receive $0.5 million upon FDA
clearance for each device and $0.5 million upon achievement of certain net revenue targets for each device, aggregating to $3.0 million of potential future
milestone payments under the Development Agreement. The Development Agreement has a three-year term, unless terminated sooner by either party.
Impact of Inflation
We 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. If
we enter an inflationary period, it could have a material impact on our expenses.
Critical Accounting Policies and Estimates
The preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America, or
GAAP, and the rules and regulations of the SEC requires us to make estimates and assumptions, based on judgments considered reasonable, which affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. We base our estimates and assumptions on historical experience, known trends and events
and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the
carrying value of assets and liabilities that are not readily apparent from other sources. Although we believe our estimates and assumptions are reasonable
when made, they are based upon information available to us at the time they are made. We evaluate our estimates and assumptions on an ongoing basis and,
if necessary, make adjustments. Due to the risks and uncertainties involved in our business and evolving market conditions and given the subjective
element of the estimates and assumptions made, actual results may differ from estimated results.
We define our critical accounting policies as those accounting policies that are most important to the portrayal of our financial condition and
results of operations and require our most difficult and subjective judgments. While our significant accounting policies are more fully described in “Note 2.
Summary of Significant Accounting Policies” in our audited financial statements and related notes thereto appearing elsewhere in this Annual Report on
Form 10-K, we believe the following discussion addresses our most critical accounting policies.
52
Table of Contents
Revenue Recognition
We have primarily two types of arrangements for our phototherapy treatment equipment from which we earn revenues from dermatology recurring
procedures: (i) we place our lasers in a physician’s office at no charge to the physician, and generally charge the physician a fee for an agreed upon number
of treatments; or (ii) we place our lasers in a physician’s office and charge the physician a fixed fee for a specified period of time not to exceed an agreed
upon number of treatments; if that number is exceeded additional fees will have to be paid. Revenues attributable to these types of arrangements are
accounted for under the guidance applicable to leases. These arrangements are similar to operating leases since we provide the customers limited
arrangement rights to use the treatment equipment, the treatment equipment resides in the physician’s office and we may exercise the right to remove the
equipment upon notice, under certain circumstances, while the physician controls the utility and output of such equipment during the term of the
arrangement as it pertains to the use of access codes to treat the patients. For the first type of arrangement, sales of access codes are considered variable
treatment code payments and are recognized as revenue over the estimated usage period of the agreed upon number of treatments. For the second type of
arrangement, customers purchase access codes and revenue is recognized on a straight-line basis as the lasers are being used over the term specified in the
agreement. Variable treatment code payments that will be paid only if the customer exceeds the agreed upon number of treatments are recognized only
when such treatments are being exceeded and used.
We recognize revenue from dermatology procedures equipment sales when control of the promised good or service is transferred to our customers
in an amount that reflects the consideration to which we expect to be entitled in exchange for those good or services. Accordingly, we determine revenue
recognition by applying the following steps:
•
•
•
•
•
identification of the contract, or contracts, with a customer;
identification of the performance obligations in the contract;
determination of the transaction price;
allocation of the transaction price to the performance obligations in the contract; and
recognition of revenues when, or as, we satisfy a performance obligation.
A contract’s transaction price is allocated to each performance obligation and recognized as revenue when, or as, the performance obligation is
satisfied, which is generally the point in time when the product is shipped or control is transferred for our dermatology procedures equipment sales. We sell
to physicians in the United States and to third-party distributors outside the United States and do not provide return rights. Sales to distributors outside the
United States are made in U.S. dollars. In addition, we provide a one to two-year warranty for systems sold in the United States. Terms of the of the product
warranty differ amongst our third-party distributors outside the United States but are generally two years. These assurance-type warranties are not
considered a separate performance obligation. We provide for the estimated cost to repair or replace products under any warranty at the time of sale. We
also earn revenue from customers from services outside of their warranty term or annual service contracts. Revenue from these service-type warranties is
recognized as the services are provided.
Asset Acquisitions
Accounting for transactions as asset acquisitions is significantly different than business combinations. Goodwill is only recognized in business
combination transactions. The fair value of contingent consideration is recognized in business combination transactions and may be recognized in asset
acquisitions if payment is probable and the amount can be estimated. As a result, it is important to determine whether a business or an asset or a group of
assets is acquired. A business is defined in ASC 805, Business Combinations, as an integrated set of inputs and processes that are capable of generating
outputs that have the ability to provide a return to its investors or owners. Typical inputs include long-lived assets (including intangible assets or rights to
use long-lived assets), intellectual property and the ability to obtain access to required resources. Typical processes include strategic, operational and
resource management processes that are typically documented or evident through an organized workforce.
When substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable
assets, the acquired set is not a business. We considered all of the above factors when determining whether a business was acquired. In evaluating our
acquisition of TheraClear in 2022, we concluded that the fair value of consideration given to Theravant was concentrated in the acquired technology
intangible. In evaluating our acquisition of Pharos in 2021, we concluded that the fair value of consideration given to Ra Medical was concentrated in the
acquired customer list intangible. As such, we accounted for the transactions as asset acquisitions. The fair value was allocated to the acquired intangibles
and is being amortized over their estimated useful lives.
53
Table of Contents
Contingent Consideration
The purchase price for certain assets acquired related to TheraClear devices during January 2022 includes earnout payments, or contingent
consideration. Estimates that involve a significant level of estimation uncertainty include the valuation of contingent consideration, which was determined
using forecasted financial information available at the acquisition date, a discount rate and various other assumptions as described in more detail in Note 3
to our consolidated financial statements. Due to uncertainties associated with the development of a new product line and the use of estimates and
assumptions to determine the fair value of the contingent consideration, the amount ultimately paid in connection with the earnout may differ from the
estimated fair value at the acquisition date. A revaluation of the contingent consideration would only be required if there is a significant change to the
underlying valuation assumptions. The contingent consideration will be adjusted when the contingency is resolved and the consideration is paid or becomes
payable. Any difference between the cash payment and the amount accrued for contingent consideration will result in an adjustment to the technology
intangible asset.
Goodwill and Intangible Impairments
As of December 31, 2022, we had $8.8 million of goodwill related to the acquisitions of XTRAC and VTRAC businesses in fiscal 2015. We
evaluate the carrying value of goodwill during the fourth quarter of each year and whenever circumstances indicate the carrying value of goodwill may not
be recoverable. The determination of the fair value of the reporting units to which the goodwill relates requires management to make estimates and
assumptions. We organized our business into two operating segments, which also serve as our goodwill reporting units and are defined as Dermatology
Recurring Procedures and Dermatology Procedures Equipment Sales. Our analysis employed the use of both a market and income approach, with the
market approach given a 25% weighting and the income approach given a 75% weighting. Significant assumptions used in the income approach include
growth and discount rates, profit margins and our weighted average cost of capital. We used historical performance and management estimates of future
performance to determine profit margins and growth rates. Discount rates selected for each reporting unit varied. Our weighted average cost of capital
included a review and assessment of market and capital structure assumptions. For both reporting units the fair value was in excess of the carrying value.
Considerable management judgment is necessary to evaluate the impact of operating changes 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 a different conclusion.
All of our intangibles are definite lived assets, with amortization recorded over the estimated useful life on a straight-line basis. As of December
31, 2022 we had $17.4 million of intangible assets. The definite lived assets are tested for impairment when events or changes in circumstances indicate
that the carrying value of the asset group may not be recoverable. Our intangible assets are grouped into five categories: core technology, product
technology, customer relationships, trade names and Pharos customer lists. Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset group to the undiscounted cash flows attributable to the asset group. If the carrying amount of an asset group exceeds its
undiscounted cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset group exceeds its fair value of the
asset group.
Considerable management judgment is necessary to assess recoverable amounts of intangible assets and measure fair value of the intangible assets
that were impaired as such measurements involve estimation of future revenues, royalty rates, profit margins and other cash flows. Changes in our actual
results and/or estimates or any of our other assumptions used in our analysis could result in a different conclusion.
Sales and Use Taxes
The Company records state sales tax collected and remitted for its customers on dermatology procedures equipment sales on a net basis, excluded
from revenue. The Company’s sales tax expense that is not presently being collected and remitted for the recurring revenue business is recorded in general
and administrative expenses within the consolidated statements of operations.
The Company believes its state sales and use tax accruals have been properly recognized such that, if the Company’s arrangements with customers
are deemed more likely than not that the Company would not be exempt from sales tax in a particular state, the basis for measurement of the state sales and
use tax is calculated in accordance with ASC 405, Liabilities, as a transaction tax. If and when the Company is successful in defending itself or in settling
the sales tax obligation for a lesser amount, the reversal of this liability is to be recorded in the period the settlement is reached. However, the precise scope,
timing and time period at issue, as well as the final outcome of any audit and actual settlement, remains uncertain.
54
Table of Contents
In the ordinary course of business, the Company is, from time to time, subject to audits performed by state taxing authorities. These actions and
proceedings are generally based on the position that the arrangements entered into by the Company are subject to sales and use tax rather than exempt from
tax under applicable law. Several states have assessed the Company an aggregate of $2.4 million including penalties and interest for the period from March
2014 through April 2020. The Company received notification that an administrative state judge issued an opinion finding in favor of the Company that the
sale of XTRAC treatment codes was not taxable as sales tax with respect to that state’s first assessment. This ruling covers $1.5 million of the total $2.4
million of assessments. The relevant taxing authority filed an appeal of the administrative law judge’s finding and, following the submission of legal briefs
by both sides and oral argument held in January 2022, on May 6, 2022, the Company received a written decision from the State of New York Appeals
Tribunal (“Tribunal”) overturning the favorable sales tax determination of the administrative law judge. The Company filed an appeal of the Tribunal’s
decision, and posted the required appellate bond requiring posting cash collateral, with the New York State Appellate Division, and is awaiting for the
appellate court to set a briefing and oral argument schedule.
The Company is also in another jurisdiction’s administrative process of appeal with respect to the remaining $0.9 million of assessments, and the
timing of the process has been impacted by the COVID-19 pandemic. If there is a determination that the true object of the Company’s recurring revenue
model is not exempt from sales taxes and is not a prescription medicine, or the Company does not have other defenses where the Company prevails, the
Company may be subject to sales taxes in those particular states for previous years and in the future, plus potential interest and penalties.
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is
disclosed in Note 2 to our audited financial statements appearing elsewhere in this Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under
this item.
55
Table of Contents
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The 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 DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Limitations of Internal Control System
Because of the inherent limitations in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute
assurance 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 been
detected. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation
and presentation. Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or
detect all errors and all fraud.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design
and operation of our disclosure controls and procedures, (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934 (the “Exchange Act”), as of December 31, 2022. Based on that evaluation, management has concluded that, as of such date, our disclosure controls
and procedures were effective at the reasonable assurance level.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in reports that we file or
submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such
information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure.
In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how
well 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-benefit
relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all
potential future conditions.
Management’s Report on Internal Control over Financial Reporting
Our Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act. Our management conducted an assessment of the effectiveness of our internal control over financial reporting based
on the framework established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on this assessment, our management has determined that our internal control over financial reporting was effective as of
December 31, 2022.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting in our most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
56
Table of Contents
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference to our Proxy Statement for the 2023 Annual Meeting of Stockholders to be filed
with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2022.
Our Board has adopted a written Code of Conduct applicable to all officers, directors and employees, which is available on our website
(www.strataskinsciences.com) under “Corporate Governance” within the “Investors” section. We intend to satisfy the disclosure requirement under Item
5.05 of Form 8-K regarding amendment to, or waiver from, a provision of this Code of Conduct by posting such information on the website address and
location specified above.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to our Proxy Statement for the 2023 Annual Meeting of Stockholders to be filed
with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2022.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information required by this item is incorporated by reference to our Proxy Statement for the 2023 Annual Meeting of Stockholders to be filed
with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2022.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to our Proxy Statement for the 2023 Annual Meeting of Stockholders to be filed
with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2022.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated by reference to our Proxy Statement for the 2023 Annual Meeting of Stockholders to be filed
with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2022.
57
Table of Contents
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
PART IV
Consolidated balance sheets of STRATA Skin Sciences, Inc. and subsidiary as of December 31, 2022 and 2021, and the related consolidated statements
of operations, changes in stockholders’ equity and cash flows for each of the years ended December 31, 2022 and 2021.
(a)(2) Financial Statement Schedules
None, as all information required in these schedules is included in the Notes to the Consolidated Financial Statements.
(a)(3) Exhibits
The exhibits listed under subsection (b) of this Item 15 are hereby incorporated by reference.
(b) Exhibits
3.1 Fifth Amended and Restated Certificate of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 contained in our
Registration Statement on Form S-3 (File No. 333-258814), as filed on August 13, 2021).
3.2 Fourth Amended and Restated Bylaws of the Company (Incorporated by reference to Exhibit 3.2 contained in our Form 8-K current report
as filed on January 8, 2016).
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 Description of Common Stock
10.1* Form of Indemnification Agreement for directors and executive officers. (Incorporated by reference to our Annual Report on Form 10-K for
10.2*
the year ended December 31, 2013 filed on March 17, 2014).
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 Incentive Stock Option Agreement. (Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31,
2015 filed on March 15, 2016)
10.4* Form of Nonqualified Stock Option Agreement. (Incorporated by reference to our Annual Report on Form 10-K for the year ended December
31, 2015 filed on March 15, 2016)
10.5* STRATA Skin Sciences 2016 Omnibus Option Plan. (Incorporated by reference to our Form 10-Q quarterly report for the quarter ended
September 30, 2015 filed on November 14, 2016).
10.6 Securities Purchase Agreement dated as of March 30, 2018, between the Company and Accelmed (Incorporated by reference to Exhibit 10.1
contained in our Current Report on Form 8-K, as filed on April 2, 2018)
10.7 Securities Purchase Agreement dated as of March 30, 2018, between the Company and Broadfin (Incorporated by reference to Exhibit 10.2
contained in our Current Report on Form 8-K, as filed on April 2, 2018).
10.8 Securities Purchase Agreement dated as of March 30, 2018, between the Company and Sabby (Incorporated by reference to Exhibit 10.3
contained in our Current Report on Form 8-K, as filed on April 2, 2018).
10.9 Form of Registration Rights Agreement (Incorporated by reference to Exhibit 10.4 contained in our Current Report on Form 8-K, as filed on
April 2, 2018).
10.10 Form of Leak-Out Agreement (Incorporated by reference to Exhibit 10.5 contained in our Current Report on Form 8-K, as filed on April 2,
2018).
10.11 Form of Subscription Agreement (Incorporated by reference to Exhibit 10.7 contained in our Current Report on Form 8-K, as filed on April 2,
2018).
10.12* Amended and Restated Strata Skin Sciences, Inc. 2016 Omnibus Incentive Plan (Incorporated by reference to Appendix A to our Definitive
Proxy Statement on Schedule 14A, as filed on June 2, 2021).
10.13 Sublease Agreement between Luigi Bormioli Corporation and the Company for office space at 5 Walnut Grove Drive, Horsham, PA 19044
(Incorporated by reference to Exhibit 10.1 contained in our Current Report on Form 8-K, as filed on October 3, 2018).
10.14 Settlement Agreement and Release, dated as of August 10, 2020, between STRATA Skin Sciences, Inc. and Ra Medical Systems, Inc.
(incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on August 11, 2020)
10.15* Employment Agreement, dated as of March 1, 2021, between Robert Moccia and STRATA Skin Sciences, Inc. (incorporated by reference to
Exhibit 10.3 to our Current Report on Form 8-K filed on March 1, 2021)
58
Table of Contents
10.16* Form of Stock Option Agreement, dated as of March 1, 2021, between Robert Moccia and STRATA Skin Sciences, Inc. (incorporated by
reference to Exhibit 10.4 to our Current Report on Form 8-K filed on March 1, 2021)
10.17* Employment Agreement, dated as of October 4, 2021, between Christopher Lesovitz and STRATA Skin Sciences, Inc. (incorporated by
reference to Exhibit 10.5 to our Current Report on Form 8-K filed on October 4, 2021)
10.18 Form of Equity Distribution Agreement, dated October 15, 2021, between STRATA Skin Sciences, Inc. and Ladenburg Thalmann & Co. Inc.
(incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on October 18, 2021)
10.19* Form of management change of control severance agreement (incorporated by reference to Exhibit 10.79 to our Annual Report on Form 10-K
for the year ended December 31, 2021).
10.20 Credit and Security Agreement, dated as of September 30, 2021, among STRATA Skin Sciences, Inc., MidCap Financial Trust, as
administrative agent, and the lenders identified therein. (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on
October 4, 2021)
Intellectual Property Security Agreement, dated as of September 30, 2021, between STRATA Skin Sciences, Inc. and MidCap Financial Trust.
(incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on October 4, 2021)
10.21
10.22 Warrant Agreement to Purchase Shares of the Common Stock of STRATA Skin Sciences, Inc., dated as of September 30, 2021, between
STRATA Skin Sciences, Inc. and MidCap Funding XXVII Trust. (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-
K filed on October 4, 2021)
10.23 Registration Rights Agreement, dated as of September 30, 2021, between STRATA Skin Sciences, Inc. and MidCap Funding XXVII Trust
(incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K filed on October 4, 2021)
10.24 Limited Consent and Amendment No. 1 to Credit and Security Agreement, between STRATA Skin Sciences, Inc. and MidCap Financial Trust
as Agent for Lenders (incorporated by reference to Exhibit 10.84 to our Annual Report on Form 10-K for the year ended December 31, 2021).
10.25 Amendment No. 2 to Credit and Security Agreement, dated as of September 6, 2022, between STRATA Skin Sciences, Inc. and MidCap
Financial Trust as Agent for Lenders (attached hereto).
10.26 Asset Purchase Agreement, dated as of January 10, 2022, between STRATA Skin Sciences, Inc., Theravant Corporation and certain other
parties thereto (incorporated by reference as Exhibit 10.1 to our Current Report on Form 8-K dated January 10, 2022)
10.27 Form of Development Agreement by and between Theravant Corporation and STRATA Skin Sciences, Inc. (incorporation by reference to
Exhibit 10.2 to our Quarterly Report on Form 10-Q for the period ended March 31, 2022)
10.28 Asset Purchase Agreement, dated as of August 16, 2021, between STRATA Skin Sciences, Inc. and Ra Medical Systems, Inc. (incorporated by
reference to Exhibit 10.1 to our Current Report on Form 8-K filed on August 17, 2021)
10.29* Form of Performance Stock Option Agreement (Non-Qualified Stock Option) (incorporated by reference to Exhibit 10.3 to our Quarterly
Report on Form 10-Q for the period ended March 31, 2022)
10.30* Form of VWAP Performance Stock Option Agreement (Non-Qualified Stock Option) (incorporated by referenced to Exhibit 10.4 to our
Quarterly Report on Form 10-Q for the period ended March 31, 2022)
23.1 Consent of Marcum, LLP
31.1 Rule 13a-14(a) Certificate of Chief Executive Officer
31.2 Rule 13a-14(a) Certificate of Chief Financial Officer
32.1** Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
*
**
Indicates management contract or compensatory plan
The certifications attached as Exhibit 32.1 accompany this Annual Report on Form 10-K pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended.
ITEM 16.
FORM 10-K SUMMARY
None.
59
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: March 31, 2023
STRATA SKIN SCIENCES, INC.
By: /s/ Robert J. Moccia
Robert J. Moccia
Chief Executive Officer and Director
(principal executive officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature
Title
/s/ Robert J. Moccia
Robert J. Moccia
/s/ Christopher Lesovitz
Christopher Lesovitz
/s/ William D. Humphries
William D. Humphries
/s/ Uri Geiger
Uri Geiger
/s/ Samuel Rubinstein
Samuel Rubinstein
/s/ Nachum Shamir
Nachum Shamir
/s/ Douglas Strang
Douglas Strang
/s/ Patricia Walker
Patricia Walker
President, Chief Executive Officer,
and Director (Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer and Financial Officer)
Date
March 31, 2023
March 31, 2023
Director and Chairperson of the Board of Directors
March 31, 2023
Director
Director
Director
Director
Director
60
March 31, 2023
March 31, 2023
March 31, 2023
March 31, 2023
March 31, 2023
Table of Contents
STRATA SKIN SCIENCES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (PCAOB ID #688)
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
F-1
Page
F-2
F-4
F-5
F-6
F-7
F-8
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
STRATA Skin Sciences, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of STRATA Skin Sciences, Inc. and Subsidiary (the “Company”) as of December 31, 2022
and 2021, the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the two years in the period ended
December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in
all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial
statements 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 of the 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 audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor
were 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 of
internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over
financial reporting. 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, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or
required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion
on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical
audit matters or on the accounts or disclosures to which they relate.
Sales and Use Tax Liabilities:
As discussed in Note 12 to the consolidated financial statements, the Company recognizes sales tax liabilities, including interest and penalties, for its
domestic recurring revenue in those states which management determines are more-likely-than-not (“MLTN”) non-exempt from sales tax. Such amounts
are accounted for as transaction tax liabilities that are extinguished upon payment or settlement. The Company recognizes use tax liabilities, including
interest and penalties, for those states that management determines are MLTN to be exempt from sales tax obligations. The Company’s sales tax expense
that is not presently being collected and remitted for its domestic recurring revenue are recorded as general and administrative expenses. The Company is
currently undergoing sales tax audits in two state jurisdictions which are each in the process of appeal.
We identified the accounting for sales and use tax liabilities as a critical audit matter due to the audit effort relating to the following:
•
•
•
The Company utilized specialists in prior years to assist in determining MLTN conclusions, and such analysis has been updated in the current year
by management and counsel.
Complexity in the interpretation of relevant tax laws in various states requires significant management and auditor judgment.
The extent of specialized skill and knowledge and consultation outside of the engagement team required to assess the appropriateness of
management’s determinations.
F-2
Table of Contents
Our principal audit procedures related to the Company's accounting for sales and use tax liabilities included the following:
• We evaluated management's significant accounting policies related to accounting for sales and use tax liabilities for reasonableness.
• We involved our firm’s tax professionals and subject-matter-experts, with specialized skills and knowledge, who assisted in assessing the
Company’s interpretation of the relevant tax laws.
• We inspected correspondence and determinations from relevant state taxing authorities for those states undergoing sales tax audits.
• We tested the underlying data of management’s calculations and analyzed the expiration of statutes of limitations and tax rates.
Goodwill:
As discussed in Note 2 to the consolidated financial statements, goodwill represents the excess of the purchase price over the fair value of the net tangible
and identifiable intangible assets acquired and liabilities assumed in a business combination. Goodwill is tested for impairment at least annually at the
reporting unit level. Management bypassed the qualitative impairment assessment (step zero) and performed a quantitative impairment assessment. The
Company used a combination of the market and income approaches to determine the estimated fair value of its reporting units as of December 31, 2022.
We identified the annual goodwill impairment test as a critical audit matter due to the audit effort relating to the following:
•
•
The determination of the fair value of the reporting unit requires management to make significant estimates and assumptions related to forecasted
revenue growth rates, estimated expenses and discount rates. Such estimates and assumptions were challenging to test as they required forward
looking assumptions with a high degree of subjectivity.
The extent of specialized skill and knowledge and consultation outside of the engagement team required to assess the appropriateness of
management’s valuation assumptions.
Our principal audit procedures related to the Company's goodwill impairment test included the following:
• We evaluated management's significant accounting policies related to goodwill impairment for reasonableness.
• We obtained an understanding and evaluated the reasonableness of management’s forecasts of future revenue and estimated expenses by
comparing these forecasts to historical operating results of the Company by applying procedures to test the financial inputs used in the income
approach, including sensitizing management’s cash flow forecasts.
• We involved our firm’s valuation professionals, with specialized skills and knowledge, who assisted in assessing assumptions utilized under the
income and market approaches. Such assumptions that were evaluated included the discount rate, selected comparable companies, market
multiples, control premium and market capitalization reconciliation.
Intangible asset acquisition:
As discussed in Note 3 to the consolidated financial statements, in January 2022, the Company acquired certain assets related to the Theraclear devices
from Theravant Corporation (“Theravant”). The purchase price included an initial cash payment, issuance of common stock and contingent consideration.
The Company determined this transaction represented an asset acquisition as substantially all of the value was being ascribed to one intangible asset as
defined by ASC 805, Business Combinations (“ASC 805”). The contingent consideration is accounted for as a contingent liability under ASC 450,
Contingencies.
We identified the valuation of the acquired intangible asset and contingent consideration as a critical audit matter due to the audit effort relating to the
following:
•
•
The determination of the fair value of the intangible asset and estimate of the contingent consideration liability requires management to make
significant estimates and assumptions related to forecasted revenue growth rates, estimated expenses, royalty rate and discount rates. Such
estimates and assumptions were challenging to test as they required forward looking assumptions with a high degree of subjectivity.
The extent of specialized skill and knowledge and consultation outside of the engagement team required to assess the appropriateness of
management’s valuation assumptions.
Our principal audit procedures related to the Company's valuation of the acquired intangible asset and contingent consideration included the following:
• We evaluated management’s determinations of the assets acquired, liabilities assumed and the consideration paid under the asset purchase
agreement for reasonableness.
• We evaluated management's significant accounting policies related to accounting for asset acquisitions, intangible assets and contingent
consideration for reasonableness.
• We obtained an understanding and evaluated the reasonableness of management’s forecasts of future revenue and estimated expenses by applying
procedures to test the financial inputs used in the income approach, including sensitizing management’s cash flow forecasts.
• We involved our firm’s valuation professionals, with specialized skills and knowledge, who assisted in assessing assumptions utilized under the
income approach. Such assumptions that were evaluated included the appropriateness of valuation model used, discount rate, selected comparable
companies, revenue volatility, cost of equity and royalty rate.
• We tested the existence, completeness and valuation of the tangible assets acquired and liabilities assumed, to assess the consideration paid
reconciliation.
/s/ Marcum LLP
Marcum LLP
We have served as the Company’s auditor since 2019.
Philadelphia, Pennsylvania
March 31, 2023
F-3
Table of Contents
Assets
Current assets:
STRATA Skin Sciences, Inc. and Subsidiary
Consolidated Balance Sheets
(in thousands except share and per share data)
December 31,
2022
2021
Cash and cash equivalents
Restricted cash
Accounts receivable, net of allowance for doubtful accounts of $382 and $275 at December 31, 2022 and 2021,
$
$
5,434
1,361
respectively
Inventories
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Operating lease right-of-use assets
Intangible assets, net
Goodwill
Other assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Deferred revenues
Current portion of operating lease liabilities
Current portion of contingent consideration
Total current liabilities
Long-term debt, net
Deferred revenues and other liabilities
Deferred tax liability
Operating lease liabilities, net of current portion
Contingent consideration, net of current portion
Total liabilities
Commitments and contingencies (Note 12)
Stockholders’ equity:
$
$
$
$
4,471
5,547
691
17,504
7,498
975
17,394
8,803
98
52,272
3,425
6,555
2,778
355
313
13,426
7,476
314
306
610
8,309
30,441
12,586
—
3,433
3,489
462
19,970
6,883
638
10,083
8,803
216
46,593
2,822
6,377
3,285
318
—
12,802
7,319
400
266
392
—
21,179
Series C convertible preferred stock, $0.10 par value; 10,000,000 shares authorized, no shares issued and
outstanding
Common stock, $0.001 par value; 150,000,000 shares authorized; 34,723,046 and 34,364,679 shares issued and
outstanding at December 31, 2022 and 2021, respectively
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
—
—
35
249,024
(227,228)
21,831
52,272
$
34
247,059
(221,679)
25,414
46,593
$
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
STRATA Skin Sciences, Inc. and Subsidiary
Consolidated Statements of Operations
(in thousands except share and per share data)
Revenues, net
Cost of revenues
Gross profit
Operating expenses:
Engineering and product development
Selling and marketing
General and administrative
Loss from operations
Other (expense) income:
Interest expense
Interest income
Gain on forgiveness of debt
Loss before income tax expense
Income tax expense
Net loss
Net loss per share of common stock, basic and diluted
Year Ended December 31,
2022
2021
$
36,161
14,393
21,768
1,029
15,301
10,087
26,417
(4,649)
(926)
89
—
(837)
(5,486)
(63)
(5,549) $
(0.16) $
29,977
10,127
19,850
1,434
13,106
9,712
24,252
(4,402)
(314)
15
2,029
1,730
(2,672)
(34)
(2,706)
(0.08)
$
$
$
Weighted average shares of common stock outstanding, basic and diluted
34,712,246
34,050,274
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
STRATA Skin Sciences, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders’ Equity
(in thousands except share data)
Balance at January 1, 2021
Stock-based compensation expense
Exercise of stock options
Issuance of restricted stock
Issuance of common stock warrants in connection with Senior Term Facility
Net loss
Balance at December 31, 2021
Stock-based compensation expense
Issuance of common stock for acquisition
Net loss
Balance at December 31, 2022
Common Stock
Shares
33,801,045
—
329,076
234,558
—
—
34,364,679
—
358,367
—
34,723,046
Amount
$
$
Additional Paid-
in Capital
Accumulated
Deficit
Total
Stockholders’
Equity
34
—
—
—
—
—
34
—
1
—
35
$
$
244,831
1,643
—
—
585
—
247,059
1,466
499
—
249,024
$
(218,973) $
—
—
—
—
(2,706)
(221,679)
—
—
(5,549)
(227,228) $
$
25,892
1,643
—
—
585
(2,706)
25,414
1,466
500
(5,549)
21,831
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
STRATA Skin Sciences, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization
Amortization of operating lease right-of-use assets
Amortization of deferred financing costs and debt discount
Provision for doubtful accounts
Stock-based compensation
Loss on disposal of property and equipment
Gain on forgiveness of debt
Deferred taxes
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable
Accrued expenses and other liabilities
Deferred revenues
Operating lease liabilities
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Purchase of property and equipment
Cash paid in connection with TheraClear asset acquisition
Cash paid in connection with Ra Medical asset acquisition
Net cash used in investing activities
Cash flows from financing activities:
Payment of contingent consideration
Proceeds from long-term debt
Payment of deferred financing costs
Repayment of note payable
Repayment of long-term debt
Net cash (used in) provided by financing activities
Net decrease in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of year
Cash, cash equivalents and restricted cash at end of year
Supplemental disclosure of cash flow information:
Cash paid during the year for interest
Cash paid during the year for income taxes
Supplemental schedule of non-cash investing and financing activities:
Change in operating lease right-of-use assets and liabilities due to new and amended leases
Inventories acquired in connection with TheraClear asset acquisition
Intangible assets acquired in connection with TheraClear asset acquisition
Contingent consideration issued in connection with TheraClear asset acquisition
Common stock issued in connection with TheraClear asset acquisition
Transfer of property and equipment to inventories
Issuance of common stock warrants in connection with Senior Term Facility
Assumed deferred revenues in connection with asset acquisition
Year Ended
December 31,
2022
2021
$
(5,549) $
(2,706)
5,293
395
157
107
1,466
52
—
40
(1,145)
(1,524)
(111)
603
229
(644)
(477)
(1,108)
(3,552)
(631)
—
(4,183)
(500)
—
—
—
—
(500)
(5,791)
12,586
6,795
$
744
19
732
71
10,182
9,122
500
463
—
—
$
$
$
$
$
$
$
$
$
$
3,736
350
37
1
1,643
140
(2,029)
12
(490)
(45)
(65)
58
1,679
(444)
(369)
1,508
(3,653)
—
(3,473)
(7,126)
—
8,000
(133)
(7,275)
(500)
92
(5,526)
18,112
12,586
222
—
—
—
—
—
—
—
585
1,841
$
$
$
$
$
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Table of Contents
1. Organization and Nature of Business
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Consolidated Financial Statements
STRATA Skin Sciences, Inc. (the “Company”) is a medical technology company in dermatology dedicated to developing, commercializing and
marketing innovative products for the treatment of dermatologic conditions. Its products include the XTRAC® and Pharos® excimer lasers and VTRAC®
lamp systems utilized in the treatment of psoriasis, vitiligo and various other skin conditions. In January 2022, the Company acquired the TheraClear Acne
Therapy System to broaden its opportunities with expansion potential in the acne care market. The Company markets the device under the brand name
TheraClear® X.
COVID-19 Pandemic
In late 2019, there was an outbreak of a new strain of coronavirus (“COVID-19”) which became a global pandemic. While many of COVID-19’s
initial disruptions and damage to the global economy have been mitigated, the COVID-19 pandemic has continued to negatively impact the economy,
disrupted global supply chains, constrained workforce participation and created significant volatility and disruption of financial markets. The pandemic led
to the suspension of elective procedures in the U.S. and to the temporary closure of many physician practices, which are the Company’s primary customers.
While most offices have reopened, some physician practices closed and never reopened, and the impact of the ongoing COVID-19 pandemic and its
variants on the Company’s operational and financial performance, including its ability to execute its business strategies and initiatives in the expected time
frames, will depend on future developments, including, but not limited to, the ongoing mutations and spread of the COVID-19 virus, impact on business
operations, supply chains and transport, and governmental and societal responses thereto, all of which are uncertain and cannot be predicted.
The ongoing COVID-19 pandemic has had a negative impact on the Company’s results of operations and financial performance through fiscal
2022, and the Company expects it will continue to have a negative impact on revenues, earnings and cash flows until such time as its customers adjust to
the pandemic’s ramifications. Some physician offices continue to experience staffing issues, and the Company believes these shortages of trained personnel
have negatively impacted its business. Accordingly, current results and financial conditions discussed herein may not be indicative of future operating
results and trends.
Russia-Ukraine War
Prior to the outbreak of the Russia-Ukraine War, Ukraine was the largest exporter of noble gases including neon, krypton, and xenon. Historically,
Ukraine has been the source of a significant amount of gas supplied to the Company by its contract suppliers. Neon gas is essential to the proper
functioning of the Company’s lasers. The Company’s supporters have been resourceful in continuing to supply gases to the Company but cannot assure it
that the supply will not remain uninterrupted. The reduced supply and war have raised the price of gas significantly worldwide. Additionally, the Creating
Helpful Incentives to Produce Semiconductors and Science Act of 2022 has led to a further tightening of rare gas supplies as chip manufacturers
reconfigure their supply chains to address the need to secure their own supplies of rare gases for use in the manufacture of computer chips, while struggling
with the disruptions caused by this war.
Liquidity and Going Concern
The Company has been negatively impacted by the ongoing COVID-19 pandemic, has historically experienced recurring losses, has been
dependent on raising capital from the sale of securities in order to continue to operate, was required to restrict cash for potential sales tax liabilities (see
Notes 2 and 12) and refinanced its debt at a lower interest rate. In October 2021, the Company entered into an equity distribution agreement with an
investment bank under which the Company may sell up to $11.0 million of its common stock in registered “at-the-market” offerings. Management believes
that the Company’s cash and cash equivalents, combined with the anticipated revenues from the sale or use of its products and operating expense
management, will be sufficient to satisfy the Company’s working capital needs, capital asset purchases, outstanding commitments and other liquidity
requirements associated with its existing operations for at least the next 12 months following the date of the issuance of these consolidated financial
statements. However, market conditions, including the negative impact of the ongoing COVID-19 pandemic and the Russia-Ukraine War on the financial
markets, supply chain disruptions and rising interest rates, could interfere with the Company’s ability to access financing and on favorable terms.
F-8
Table of Contents
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Consolidated Financial Statements
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements are presented in U.S. dollars and have been prepared in conformity with accounting
principles generally accepted in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the
authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and as amended by Accounting Standards Updates (“ASUs”) of the
Financial Accounting Standards Board (“FASB”). The accompanying consolidated financial statements include the accounts of the Company and
Photomedex India Private Limited, its wholly-owned subsidiary in India. No operating activities have occurred within the Company’s subsidiary as of and
during the years ended December 31, 2022 and 2021.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and
reported amounts of revenue and expenses during the reporting period. The Company’s significant estimates and judgments involve revenue recognition
with respect to deferred revenues and the contract term and valuation allowances of accounts receivable, inputs used when evaluating goodwill for
impairment, inputs used in the valuation of acquired intangible assets and contingent consideration, state sales and use tax accruals, the estimated useful
lives of intangible assets, and the valuation allowance related to deferred tax assets. Actual results could differ from those estimates.
Concentrations of Credit Risk and Major Customers
The Company’s cash is held on deposit in demand accounts at a large financial institution in amounts in excess of the Federal Deposit Insurance
Corporation, or FDIC, insurance coverage limit of $0.3 million per depositor, per FDIC-insured bank, per ownership category. Management has reviewed
the financial statements of this institution and believes it has sufficient assets and liquidity to conduct its operations in the ordinary course of business with
little credit risk to the Company.
Financial instruments that potentially subject the Company to concentrations of credit risk principally consist of cash equivalents and accounts
receivable. The Company limits its credit risk associated with cash equivalents by placing investments in highly-rated money market funds. The Company
limits its credit risk with respect to accounts receivable by performing credit evaluations when deemed necessary, but it does not require collateral to secure
amounts owed by its customers.
The Company had two customers and one customer, international distributors, from which it earns dermatology recurring procedures and
dermatology procedures equipment revenues, that accounted for more than 10% of the Company’s revenues for the years ended December 31, 2022 and
2021, respectively. Revenues from these customers were $8.5 million and $3.4 million, or 23% and 11%, of total net revenues during the years ended
December 31, 2022 and 2021, respectively. Accounts receivable associated with these customers was $0.5 million and 11% of net accounts receivable as
of December 31, 2022, and less than 10% of total accounts receivable as of December 31, 2021. No other customer represented more than 10% of total
accounts receivable as of December 31, 2022 or 2021.
Cash and Cash Equivalents
The Company considers all highly-liquid investments purchased with an original maturity of three months or less to be cash equivalents. As of
December 31, 2022 and 2021, cash equivalents consisted of credit card transactions with settlement terms of less than five days.
F-9
Table of Contents
Restricted Cash
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Consolidated Financial Statements
As discussed more fully in Note 12, an administrative state judge in the State of New York issued an opinion in January 2021 finding in favor of
the Company that the sale of XTRAC treatment codes was not taxable as sales tax with respect to that state’s first assessment. The relevant taxing authority
filed an appeal of the administrative law judge’s finding and, following the submission of legal briefs by both sides and oral argument held in January 2022,
on May 6, 2022, the Company received a written decision from the State of New York Tax Appeals Tribunal (“Tribunal”) overturning the favorable sales
tax determination of the administrative law judge. The Company filed an appeal of the Tribunal’s decision, and posted the required appellate bond requiring
the posting of cash collateral, with the New York State Appellate Division, and is awaiting for the appellate court to set a briefing and oral argument
schedule. The cash collateral is recorded as restricted cash on the consolidated balance sheet as of December 31, 2022. The following table provides a
reconciliation of the components of cash, cash equivalents and restricted cash reported in the Company’s consolidated balance sheets to the total of the
amount presented in the consolidated statements of cash flows (in thousands):
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents and restricted cash presented in the consolidated statements of cash flows
Accounts Receivable and Allowance for Doubtful Accounts
December 31,
2022
2021
$
$
5,434 $
1,361
6,795 $
12,586
—
12,586
Accounts receivable primarily relates to amounts due from customers, which are typically due within 30 to 90 days from invoice date. The
Company provides credit to its customers in the normal course of business and maintains allowances for potential credit losses. The Company does not
require collateral or other security for accounts receivable. The Company maintains allowances for doubtful accounts for estimated losses resulting from
amounts deemed to be uncollectible from its customers. These allowances are for specific amounts on certain customer accounts based on facts and
circumstances determined on a case-by-case basis. The Company writes off accounts receivable when they are considered uncollectible, and payments
subsequently received on such receivables are credited to bad debt expense. The Company does not recognize interest accruing on accounts receivable past
due.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined based on purchased cost for raw materials and all production
cost related to the laser manufacturing process (labor and indirect manufacturing cost, including sub-contracted work components) for work-in-process and
finished goods is classified as inventory. For the Company’s products, cost is determined on the first-in, first-out method. 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 the Company (at which date such equipment is transferred to property and equipment) or (ii) be sold to distributors or physicians directly. The
cost to build a laser, 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 of these reserves periodically based on forecasted sales and market trends.
F-10
Table of Contents
Property and Equipment, net
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Property and equipment are recorded at cost less accumulated depreciation. Maintenance and repairs are charged to expense as incurred and costs
of improvements and renewals are capitalized. Upon retirement or disposition, the applicable property and equipment amounts are deducted from the
accounts and any gain or loss is recorded in the consolidated statements of operations. Depreciation and amortization are recognized using the straight-line
method based on the estimated useful lives of the related assets. The Company uses an estimated useful life of three years for computers, hardware and
software, five years for machinery and equipment and seven years for furniture and fixtures and the lesser of the useful life or lease term for leasehold
improvements.
Intangible Assets
Intangible assets consist of core technology, product technology, customer relationships, trademarks and distribution rights. Intangible assets are
amortized over the period of estimated benefit using the straight-line method and estimated useful lives ranging from three to 12 years.
Goodwill
Goodwill is the excess of the cost of an acquired entity over the net amounts assigned to tangible and intangible assets acquired and liabilities
assumed. Goodwill is not amortized, but is subject to an annual impairment test. The Company has two reporting units and goodwill is allocated to the
reporting units.
The Company performs its goodwill impairment test on an annual basis in the fourth quarter of each fiscal year or more frequently if changes in
circumstances or the occurrence of events suggest that an impairment exists. If the fair value of the reporting unit is less than its carrying value, an
impairment loss is recorded to the extent that the implied fair value of the reporting unit’s goodwill is less than the carrying value of the reporting unit’s
goodwill. The Company bypassed the qualitative assessment and did a quantitative assessment by comparing the fair value of a reporting unit with its
carrying amount. The Company’s annual goodwill impairment test resulted in no impairment charges during the years ended December 31, 2022 and 2021.
Impairment of Long-Lived Assets and Intangibles
The Company reviews its long-lived assets and intangible assets subject to amortization for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset group may not be recoverable. Recoverability of assets held and used is measured by comparison of
the carrying amount of an asset group to future net cash flows expected to be generated by the asset group. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying amount of the asset group exceeds the fair value of the asset group, less
costs to sell. The Company did not record any charges related to asset impairment during the years ended December 31, 2022 and 2021.
Fair Value Measurements
The Company measures financial assets and liabilities at fair value at each reporting period using a fair value hierarchy that requires the use of
observable inputs and minimizes the use of unobservable inputs. The Company defines fair value as the price that would be received from selling an asset
or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the
following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the
lowest level of input that is available and significant to the fair value measurement:
•
•
•
Level 1 – quoted market prices in active markets for identical assets or liabilities.
Level 2 – observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar
assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the
full term of the assets or liabilities.
Level 3 – inputs that are generally unobservable and typically reflect the Company’s estimate of assumptions that market participants would use in
pricing the asset or liability.
F-11
Table of Contents
Accrued Warranty Costs
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Consolidated Financial Statements
The Company offers a standard warranty on product sales generally for a one to two-year period, however, the Company has offered longer
warranty periods, ranging from three to four years, in order to meet competition or to meet customer demands. The Company provides for the estimated
cost of the future warranty claims on the date the product is sold.
The activity in the warranty accrual during the years ended December 31, 2022 and 2021 is summarized as follows (in thousands):
Balance, beginning of year
Additions
Expirations and claims satisfied
Total
Less current portion within accrued expenses and other current liabilities
Balance within deferred revenues and other liabilities
Debt Issuance Costs
December 31,
2022
2021
$
79
246
(118)
207
(136)
$
71
113
71
(105)
79
(59)
20
$
$
The Company capitalizes direct costs incurred to obtain debt financing and amortizes these costs to interest expense over the term of the debt
using the effective interest method. These costs are recorded as a debt discount and are netted against the related debt on the Company’s consolidated
balance sheets.
Revenue Recognition
Revenues from the Company’s dermatology recurring procedures customers are earned by providing physicians with its laser products and
charging the physicians a fee for a fixed number of treatment sessions or a fixed fee for a specified period of time not to exceed an agreed upon number of
treatments; if that number is exceeded additional fees will have to be paid. The placement of the laser products at physician locations represents embedded
leases which are accounted for as operating leases. For the lasers placed-in service under these arrangements, the terms of the domestic arrangements are
generally 36 months with automatic one-year renewals and include a termination clause that can be effected at any time by either party with 30 to 60 day
notice. Amounts paid are generally non-refundable. Sales of access codes for a fixed number of treatment sessions are considered variable treatment code
payments and are recognized as revenue over the estimated usage period of the agreed upon number of treatments. Sales of access codes for a specified
period of time are recognized as revenue on a straight-line basis as the lasers are being used over the term period specified in the agreement. Variable
treatment code payments that will be paid only if the customer exceeds the agreed upon number of treatments are recognized only when such treatments are
being exceeded and used. Internationally, the Company generally sells access codes for a fixed amount on a monthly basis to its distributors and the terms
are generally 48 months, with termination in the event of the customers’ failure to remit payments timely, and include a potential buy-out at the end of the
term of the contract. Currently, this is the only foreign recurring revenue. Prepaid amounts recorded in deferred revenue and customer deposits recorded in
accounts payable are recognized as revenue over the lease term in the patterns described above. Pricing is fixed with the customer. With respect to lease and
non-lease components, the Company adopted the practical expedient to account for the arrangement as a single lease component.
F-12
Table of Contents
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Revenues from the Company’s dermatology procedures equipment are recognized when control of the promised goods or services is transferred to
its customers or distributors, in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services.
Accordingly, the Company determines revenue recognition through the following steps:
•
•
•
•
•
identification of the contract, or contracts, with a customer;
identification of the performance obligations in the contract;
determination of the transaction price;
allocation of the transaction price to the performance obligations in the contract; and
recognition of revenue when, or as, performance obligations are satisfied.
Accounting for the Company’s contracts involves the use of significant judgments and estimates including determining the separate performance
obligations, allocating the transaction price to the different performance obligations and determining the method to measure the entity’s performance
toward satisfaction of performance obligations that most faithfully depicts when control is transferred to the customer. The Company allocates the
contract’s transaction price to each performance obligation using the Company’s best estimate of the standalone selling price for each distinct good or
service in the contract. The Company maximizes the use of observable inputs by beginning with average historical contractual selling prices and adjusting
as necessary and on a consistent and rational basis for other inputs such as pricing trends, customer types, volumes and changing cost and margins.
Revenues from dermatology procedures equipment are recognized when control of the promised products is transferred to either the Company’s
distributors or end-user customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those products (the
transaction price). Control transfers to the customer at a point in time. To indicate the transfer of control, the Company must have a present right to
payment and legal title must have passed to the customer. The Company ships most of its products FOB shipping point, and as such, the Company
primarily transfers control and records revenue upon shipment. From time to time the Company will grant certain customers, for example governmental
customers, FOB destination terms, and the transfer of control for revenue recognition occurs upon receipt. The Company has elected to recognize the cost
of freight and shipping activities as fulfillment costs. Amounts billed to customers for shipping and handling are included as part of the transaction price
and recognized as revenue when control of the underlying goods are transferred to the customer. The related shipping and freight charges incurred by the
Company are included in cost of revenues.
The following table presents the Company’s net revenues disaggregated by dermatology recurring procedures and dermatology procedures
equipment (in thousands):
Dermatology recurring procedures
Dermatology procedures equipment
Total net revenues
Year Ended
December 31,
2022
2021
$
$
23,025 $
13,136
36,161 $
22,528
7,449
29,977
The following table summarizes the Company’s expected future undiscounted fixed treatment code payments from dermatology recurring
procedures (in thousands):
Years ending December 31:
2023
2024
2025
2026
2027
$
$
1,207
975
384
166
4
2,736
Remaining performance obligations related to ASC 606 represent the aggregate transaction price allocated to performance obligations with an
original contract term greater than one year, which are fully or partially unsatisfied at the end of the period. Remaining performance obligations include the
potential obligation to perform under extended warranties and service contracts but exclude any dermatology procedures equipment accounted for as leases.
As of December 31, 2022 and 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was $0.6 million and
$1.3 million, respectively, and the Company expects to recognize $0.4 million and $0.9 million, respectively, of the remaining performance obligations
within one year and the remainder over one to three years. The decrease in remaining performance obligations from December 31, 2021 to December 31,
2022 is due to the recognition of deferred service revenue associated with assumed service contracts from Ra Medical (see Note 3). Contract assets
primarily relate to the Company’s rights to consideration for work completed in relation to its services performed but not billed at the reporting date. The
contract assets are transferred to receivables when the rights become unconditional. Currently, the Company does not have any contract assets which have
not transferred to a receivable.
F-13
Table of Contents
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Contract liabilities primarily relate to extended warranties and service contracts where the Company has received payments but has not yet
satisfied the related performance obligations. The allocations of the transaction price are based on the price of stand-alone warranty contracts sold in the
ordinary course of business. The advance consideration received from customers for the warranty services is a contract liability that is recognized ratably
over the warranty period. As of December 31, 2022 and 2021, the $0.4 million and $0.9 million of short-term contract liabilities, respectively, is presented
as deferred revenues and the $0.2 million and $0.4 million of long-term contract liabilities, respectively, is presented within deferred revenues and other
liabilities on the consolidated balance sheets, respectively. For the years ended December 31, 2022 and 2021, the Company recognized $0.9 million and
$0.1 million, respectively, as revenue from amounts classified as contract liabilities (i.e. deferred revenues) as of December 31, 2021 and 2020.
With respect to contract acquisition costs, the Company applied the practical expedient and expenses these costs immediately.
Engineering and Product Development
Engineering and product development costs associated with research, new product development and product redesign are expensed as incurred.
Advertising Costs
Advertising costs are expensed as incurred and included in selling and marketing expenses within the Company’s consolidated statement of
operations. The Company recognized advertising costs of $1.6 million during each of the years ended December 31, 2022 and 2021.
Stock-Based Compensation
The Company measures share-based awards at their grant-date fair value and records compensation expense on a straight-line basis over the
requisite service period of the awards.
Estimating the fair value of share-based awards requires the input of subjective assumptions, including the expected life of the options and stock
price volatility. The Company accounts for forfeitures of stock option awards as they occur. The estimated fair value of restricted stock awards is equal to
the Company’s common stock price at the grant date. The Company uses the Black-Scholes option pricing model to value its stock option awards. The
assumptions used in estimating the fair value of stock-option awards represent management’s estimate and involve inherent uncertainties and the
application of management’s judgment. As a result, if factors change and management uses different assumptions, share-based compensation expense could
be materially different for future awards.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax basis of assets and liabilities, as well as on net operating loss carryforwards, and are measured
using enacted tax rates and laws that are expected to be in effect when the differences reverse. Any resulting net deferred tax assets are evaluated for
recoverability and, 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 recognizes the tax effects of uncertain tax positions only if the position is “more-likely-than-not” to be sustained were it to be
challenged by a taxing authority. The assessment 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 upon ultimate settlement with the taxing authority is recorded. The Company has no uncertain tax positions as of
December 31, 2022. The Company includes interest and penalties related to income tax obligations within income tax expense. The Company’s tax years
are still under open status from 2019 to present.
F-14
Table of Contents
Net Loss Per Share
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Basic net loss per share of common stock is computed by dividing net loss attributable to common stockholders by the weighted-average number
of shares of common stock outstanding during each period. Diluted loss per share of common stock includes the effect, if any, from the potential exercise or
conversion of securities such as unvested restricted stock awards, stock options and warrants for common stock which would result in the issuance of
incremental shares of common stock. For diluted net loss per share, the weighted-average number of shares of common stock is the same as for basic net
loss per share due to the fact that when a net loss exists, dilutive securities are not included in the calculation as the impact is anti-dilutive.
The following potentially dilutive securities have been excluded from the computation of diluted weighted-average shares of common stock
outstanding, as they would be anti-dilutive:
Restricted stock units
Stock options
Common stock warrants
Accounting Pronouncements Recently Adopted
December 31,
2022
278,004
4,474,714
373,626
5,126,344
2021
90,540
3,938,613
373,626
4,402,779
In May 2021, the FASB issued ASU 2021-04, Earnings per Share (Topic 260), Debt – Modifications and Extinguishments (Subtopic 470-50),
Compensation – Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting
for Certain Modifications or Exchanges or Freestanding Equity-Classified Written Call Options. The pronouncement outlines how an entity should account
for modifications made to equity-classified written call options, including stock options and warrants to purchase the entity’s own common stock. The
guidance in the ASU requires an entity to treat a modification of an equity-classified written call option that does not cause the option to become liability-
classified as an exchange of the original option for a new option. This guidance applies whether the modification is structured as an amendment to the
terms and conditions of the equity-classified written call option or as termination of the original option and issuance of a new option. The guidance is
effective prospectively for fiscal years beginning after December 15, 2021 and early adoption is permitted. The adoption of this guidance on January 1,
2022 did not have a material effect on the consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments, as amended subsequently by ASUs 2018-19, 2019-04, 2019-05, 2019-10, 2019-11 and 2020-03. The guidance in the ASUs requires that credit
losses be reported using an expected losses model rather than the incurred losses model that is currently used. The standard also establishes additional
disclosures related to credit risks. This standard is effective for fiscal years beginning after December 15, 2022 and early adoption is permitted. The
Company does not believe this will have a material effect on its consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on
Financial Reporting and in January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope. These pronouncements provide
temporary optional expedients and exceptions for applying GAAP principles to contract modifications and hedging relationships to ease the financial
reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. In December 2022, the
FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which allows Topic 848 to be adopted and
applied prospectively to contract modifications made on or before December 31, 2024. The Company continues to evaluate the temporary expedients and
options available under this guidance and the effects of these pronouncements and, as the Company does not have any hedging activities, does not believe
this will have a material effect on its consolidated financial statements.
F-15
Table of Contents
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Consolidated Financial Statements
In August 2020, the FASB issued ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivative and Hedging –
Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s own Equity. The pronouncement
simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on
an entity’s own equity. Specifically, the ASU simplifies accounting for convertible instruments by removing major separation models required under
current GAAP. In addition, the ASU removes certain settlement conditions that are required for equity contracts to qualify for it and simplifies the diluted
earnings per share (EPS) calculations in certain areas. The guidance is effective for fiscal years beginning after December 15, 2023 and early adoption is
permitted. The Company does not currently engage in contracts covered by this guidance and does not believe it will have a material effect on the
Company’s consolidated financial statements, but it could in the future.
3. Acquisitions
TheraClear Asset Acquisition
In January 2022, the Company acquired certain assets related to the TheraClear devices from Theravant Corporation (“Theravant”). The
TheraClear asset acquisition will allow the Company to further develop, commercialize and market the TheraClear devices that are used for acne treatment,
as well as advance the TheraClear technology into multiple other devices that can be used to treat a range of additional indications.
The Company made an upfront cash payment of $0.5 million and issued to Theravant 358,367 shares of common stock with an aggregate value of
$0.5 million as of the closing date in connection with the TheraClear asset acquisition. During the fourth quarter of 2022, the Company also made a $0.5
million milestone payment upon the launch of the TheraClear Acne Therapy System, one of the development-related targets. Theravant is eligible to
receive up to $3.0 million in future earnout payments upon the achievement of certain annual net revenue milestones, up to $20.0 million in future royalty
payments based upon a percentage of gross profit from future domestic sales ranging from 10-20%, 25% of gross profit from international sales over the
subsequent four-year period, and up to $0.5 million in future milestone payments upon the achievement of certain commercialization related targets.
The Company determined this transaction represented an asset acquisition as substantially all of the value was in the TheraClear technology
intangible asset as defined by ASC 805, Business Combinations (“ASC 805”).
The purchase price was allocated, on a relative fair value basis, to the technology intangible asset and acquired inventories as follows (in
thousands):
Consideration:
Cash payment
Common stock issued
Transaction costs
Contingent consideration
Total consideration
Assets acquired:
Technology intangible asset
Inventories
Total assets acquired
$
$
$
$
500
500
131
9,122
10,253
10,182
71
10,253
The technology intangible asset is being amortized on a straight-line basis over a period of ten years, to be updated for subsequent changes in the
contingent consideration that is allocated to its carrying value. The intangible asset was valued using the relief from royalty method. Significant
assumptions used in the relief from royalty method include a 14.5% weighted average cost of capital and 15.0% of revenues for the royalty rate. The net
book value of acquired inventories approximated its fair value. To calculate the fair value of the earnout using Monte Carlo simulations, Company
projections were utilized to develop expected revenues and gross profits based on the risk inherent in the projections using the Geometric-Brownian motion
for the earnout periods and related earnout payments. Significant assumptions used in the Geometric-Brownian motion analysis include projected revenues,
projected gross profit, risk free rate of return of 1.6%, revenue volatility of 45.0%, and a cost of equity of 10.5%. Due to uncertainties associated with the
development of a new product line and the use of estimates and assumptions to determine the fair value of the contingent consideration, the amount
ultimately paid in connection with the earnout may differ from the estimated fair value at the acquisition date. A revaluation of the contingent consideration
would only be required if there is a significant change to the underlying valuation assumptions. The contingent consideration will be adjusted when the
contingency is resolved and the consideration is paid or becomes payable. Any difference between the cash payment and the amount accrued for contingent
consideration will result in an adjustment to the technology intangible asset. Contingent consideration expected to be paid within the next year, which
consists of $0.3 million as of December 31, 2022, is classified as current on the consolidated balance sheet.
F-16
Table of Contents
Pharos Asset Acquisition
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Consolidated Financial Statements
In August 2021, the Company acquired certain assets and liabilities related to the U.S. dermatology Pharos business from Ra Medical Systems,
Inc. (“Ra Medical”). Ra Medical’s Pharos excimer laser system holds FDA clearance to treat chronic skin diseases, including psoriasis, vitiligo, atopic
dermatitis and leukoderma. The acquisition of these assets and liabilities allows the Company to market its full business solutions to Ra Medical’s existing
customer base comprised of 400 dermatology practices offering opportunities to increase its recurring revenue base and a pathway to gain additional
placements for the Company’s XTRAC excimer laser system.
The purchase price of $3.7 million was paid in cash at the time of acquisition. In addition, the Company assumed certain extended warranty
service contracts associated with acquired laser system products. Concurrent with the purchase of the net assets, the Company and Ra Medical entered into
a services agreement whereby Ra Medical will provide certain transitional services for the Company as it integrates the acquired assets into the Company.
The Company determined this transaction represented an asset acquisition as substantially all of the value was in the acquired customer list intangible asset
as defined by ASC 805.
The purchase price was allocated, on a relative fair value basis, to the acquired inventories, customer lists intangible asset and deferred revenues as
follows (in thousands):
Consideration:
Cash payment
Transaction costs
Total consideration
Assets acquired:
Inventories
Customer lists intangible asset
Total assets acquired
Liabilities assumed:
Deferred revenues – service contracts
Total liabilities assumed
Net assets acquired
$
$
$
3,700
57
3,757
284
5,314
5,598
1,841
1,841
$
3,757
The customer lists intangible asset is being amortized on a straight-line basis over a period of 12 years. As the transaction was accounted for as an
asset acquisition, the Company allocated consideration paid to the inventories acquired and the deferred revenues assumed, with the remaining
consideration paid allocated to the customer lists intangible asset, which also equals its estimated fair value. The intangible asset was valued using an
excess earnings model. Significant assumptions used in the excess earnings model include estimated customer sales growth, customer attrition and
weighted average cost of capital of 3%, 5% and 17%, respectively.
F-17
Table of Contents
4. Fair Value Measurements
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Consolidated Financial Statements
The carrying values of cash equivalents, restricted cash, accounts receivable, prepaid expenses and other current assets, and accounts payable on
the Company’s consolidated balance sheets approximated their fair values as of December 31, 2022 and 2021 due to their short-term nature. The carrying
value of the Company’s current Senior Term Facility approximated its fair value as of December 31, 2022 and 2021 due to its variable interest rate.
5. Inventories
Inventories consist of the following (in thousands):
Raw materials and work-in-process
Finished goods
6. Property and Equipment, net
Property and equipment consist of the following (in thousands):
Lasers placed-in-service
Equipment, computer hardware and software
Furniture and fixtures
Leasehold improvements
Less: accumulated depreciation and amortization
December 31,
2022
2021
5, 418
129
5,547
$
$
3,201
288
3,489
December 31,
2022
2021
$
28,790
293
235
136
29,454
(21,956)
$
7,498
25,949
238
213
254
26,654
(19,771)
6,883
$
$
$
$
The Company recorded depreciation and amortization expense of $2.4 million and $2.1 million during the years ended December 31, 2022 and 2021,
respectively.
7. Leases
The Company recognizes right-of-use assets (“ROU assets”) and operating lease liabilities when it obtains the right to control an asset under a
leasing arrangement with an initial term greater than 12 months. The Company adopted the short-term accounting election for leases with a duration of less
than one year. The Company leases its facilities and certain IT and office equipment under non-cancellable operating leases. All of the Company’s leasing
arrangements are classified as operating leases with remaining lease terms ranging from one to four years, and one facility lease had a renewal option for
two years. The renewal option was initially excluded from the determination of the lease term as it was not reasonably certain of exercise. In August 2022,
the Company exercised the renewal option and amended the terms of the option, which has been accounted for as a lease modification. The ROU asset and
operating lease liability were remeasured at the modification date, resulting in an increase to both balances of $0.7 million during the year ended December
31, 2022. There were no lease modifications during the year ended December 31, 2021.
Operating lease costs were $0.4 million for each of the years ended December 31, 2022 and 2021. Cash paid for amounts included in the
measurement of operating lease liabilities was $0.4 million and $0.5 million for the years ended December 31, 2022 and 2021, respectively. As of
December 31, 2022 and 2021, the weighted average incremental borrowing rate was 8.76% and 9.76%, respectively, and the weighted average remaining
lease term was 2.8 years and 2.3 years, respectively.
F-18
Table of Contents
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Consolidated Financial Statements
The following table summarizes the Company’s operating lease maturities as of December 31, 2022 (in thousands):
Years ending December 31:
2023
2024
2025
2026
Total remaining lease payments
Less: imputed interest
Total lease liabilities
$
$
426
386
195
81
1,088
(123)
965
With respect to lease and non-lease components, the Company adopted the practical expedient to account for the lessee arrangement as a single
lease component.
F-19
Table of Contents
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Consolidated Financial Statements
8. Intangible Assets and Goodwill
Intangible assets consist of the following (in thousands):
December 31, 2022
Core technology
Product technology
Customer relationships
Tradenames
Pharos customer lists
December 31, 2021
Core technology
Product technology
Customer relationships
Tradenames
Pharos customer lists
Balance
5,700
12,182
6,900
1,500
5,314
31,596
Balance
5,700
2,000
6,900
1,500
5,314
21,414
$
$
$
$
Accumulated
Amortization
$
(4,275) $
(3,018)
(5,175)
(1,125)
(609)
(14,202) $
Accumulated
Amortization
$
(3,705) $
(2,000)
(4,485)
(975)
(166)
(11,331) $
$
$
Net Book
Value
1,425
9,164
1,725
375
4,705
17,394
Net Book
Value
1,995
—
2,415
525
5,148
10,083
The Company recorded amortization expense of $2.9 million and $1.6 million during the years ended December 31, 2022 and 2021, respectively.
The following table summarizes the estimated future amortization expense for the above intangible assets for the next five years (in thousands):
Years ending December 31:
2023
2024
2025
2026
2027
$
2,871
2,871
2,166
1,461
1,461
F-20
Table of Contents
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Goodwill consists of the following (in thousands):
Dermatology recurring procedures segment
Dermatology procedures equipment segment
9. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following (in thousands):
Warranty obligations
Compensation and related benefits
State sales, use and other taxes
Professional fees and other
10. Note Payable
December 31,
2022
2021
$
$
7,958 $
845
8,803 $
7,958
845
8,803
December 31,
2022
2021
136
1,997
3,986
436
6,555
$
$
59
2,052
3,697
569
6,377
$
$
In December 2020, the Company had renewed its $7.3 million loan with a commercial bank pursuant to a one-year Fixed Rate – Term Promissory
Note (the “Note”). The Company’s obligations under the Note were secured by an Assignment and Pledge of Time Deposit (“Time Deposit”), under which
the Company had pledged to the commercial bank the proceeds of a time deposit account in the amount of the loan and recorded the time deposit and
accrued interest as restricted cash on the balance sheet. The principal was due on December 30, 2021 with no penalties for prepayments. The interest rate
was fixed at 1.40%. The secured time deposit had a fixed interest rate of 0.40%. The Company repaid the Note with the proceeds from the Time Deposit in
September 2021.
11. Long-Term Debt
Senior Term Facility
On September 30, 2021, the Company entered into a credit and security agreement with MidCap Financial Trust, also acting as the administrative
agent, and the lenders identified therein (“Senior Term Facility”). The Senior Term Facility provides for an $8.0 million senior term loan that was drawn
upon by the Company upon executing the agreement. On September 30, 2021, the Company also repaid the outstanding principal and interest for its Note
(Note 10) and the Economic Injury Disaster Loan. Borrowings under the Senior Term Facility bear interest at LIBOR (with a LIBOR floor rate of 0.50%)
plus 7.50% per year and mature on September 1, 2026, unless terminated earlier. The interest rate was 11.72% and 8.00% as of December 31, 2022 and
2021, respectively. The Company is obligated to make monthly interest-only payments through September 30, 2024. From October 1, 2024 to the date of
maturity, the Company will make 24 equal monthly principal payments plus interest, and all borrowings are secured by substantially all of the Company’s
assets. The Senior Debt Facility was amended on January 10, 2022 to provide MidCap Financial Trust’s consent to the acquisition of TheraClear (Note 3).
In September 2022, the Company amended the facility to transition, upon the cessation of LIBOR, to one-month Secured Overnight Financing Rate
(“SOFR”), or such other applicable period, plus 0.10%, with a floor or 0.50%.
The Company may voluntarily prepay the outstanding term loan, with such prepayment of at least $5.0 million, at any time upon 30 days’ written
notice. Upon prepayment, the Company will be required to pay a prepayment fee equal to (i) 3.00% of the outstanding principal prepaid or required to be
prepaid (whichever is greater), if the prepayment is made between 12 months and 24 months after September 30, 2021, (ii) 2.00% of the outstanding
principal prepaid or required to be prepaid (whichever is greater), if the prepayment is made between 24 months and 36 months after September 30, 2021,
or (iii) 1.00% of the outstanding principal prepaid or required to be prepaid (whichever is greater), if the prepayment is made after 36 months after
September 30, 2021 and prior to the maturity date.
F-21
Table of Contents
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Consolidated Financial Statements
The Senior Term Facility contains certain customary representations and warranties, affirmative covenants and conditions. The Senior Term Facility
also contains a number of negative covenants that subject the Company to certain exceptions and waivers and restrictions, as defined in the agreement. In
addition, the Senior Term Facility contains a quarterly financial covenant that requires the Company to have a specified minimum amount of net revenue
for the trailing 12-month period, with compliance measured on the last day of each fiscal quarter beginning on September 30, 2021. At December 31, 2022,
the minimum net revenue threshold was $28.0 million. The minimum net revenue threshold will increase to $30.0 million by December 31, 2023. At
December 31, 2022, the Company was in compliance with all financial covenants within the Senior Term Facility.
The Senior Term Facility contains customary indemnification obligations and customary events of default, including, among other things, (i)
nonpayment, (ii) breach of warranty, (iii) nonperformance of covenants and obligations, (iv) default on other indebtedness, (v) judgments, (vi) change of
control, (vii) bankruptcy and insolvency, (viii) impairment of security, (ix) regulatory matters, (x) failure to remain a publicly traded company, and (xi)
material adverse event. Where an event of default arises from certain bankruptcy events, the commitments shall automatically and immediately terminate
and the principal of, and interest then outstanding on, all of the loans shall become immediately due and payable. Subject to certain notice requirements and
other conditions, upon the occurrence of other events of default, including the occurrence of a condition having or reasonably likely to have a material
adverse effect, commitments may be terminated and the principal of, and interest then outstanding on, all of the loans may become immediately due and
payable. At December 31, 2022, no event of default had occurred and the Company believed that events or conditions having a material adverse effect,
giving rise to an acceleration of any amounts outstanding under the Senior Term Facility, had not occurred and was remote.
In connection with entering into the Senior Term Facility, the Company issued an affiliate of the lender a warrant to purchase 373,626 shares of the
Company’s common stock at an initial exercise price of $1.82 per share. The warrant is equity classified and is exercisable at any time on or prior to the
tenth anniversary of its issue date. The estimated fair value of the warrants was $0.6 million and determined using the Black-Scholes option pricing model.
The key assumptions used in the Black-Scholes option pricing model were (i) an expected term of ten years, (ii) expected volatility of 88.6%, (iii) a risk-
free rate of 1.50% and (iv) no estimated dividend yield. In addition, the Company incurred third party costs and lender fees of $0.1 million. The proceeds
were allocated on a basis that approximates the relative fair value method. The fair value of the warrants and fees incurred were recorded as a debt discount
and are being recognized as interest expense over the life of the Senior Term Facility using the effective-interest method. The unamortized debt discount
was $0.5 million and $0.7 million as of December 31, 2022 and 2021, respectively. The Company recognized interest expense of $0.9 million during the
year ended December 31, 2022, of which $0.2 million was related to the amortization of the debt discount. The Company recognized interest expense of
$0.3 million during the year ended December 31, 2021, of which $37 thousand was related to the amortization of the debt discount.
Future minimum principal payments at December 31, 2022 are as follows (in thousands):
Years ending December 31:
2024
2025
2026
Paycheck Protection Program Loan
$
$
1,000
4,000
3,000
8,000
On April 22, 2020, the Company closed a loan of $2.0 million (the “PPP Loan”) from a commercial bank, pursuant to the Paycheck Protection
Program (“PPP”) administered by the Small Business Administration (the “SBA”) pursuant to the CARES Act. The PPP Loan would have matured on May
1, 2022 and bore an interest rate of 1% per year. Payments of principal and interest of any unforgiven balance were scheduled to commence December 1,
2020, but were deferred until the SBA approved of the forgiveness amount. In the second quarter of 2021, the Company received notification that the PPP
Loan had been forgiven. Accordingly, the Company recorded a gain on forgiveness of debt in the amount of the loan of $2.0 million.
F-22
Table of Contents
Economic Injury Disaster Loan
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Consolidated Financial Statements
On May 22, 2020, the Company secured the EIDL Loan from the SBA under its Economic Injury Disaster Loan (“EIDL”) assistance program in
light of the impact of the COVID-19 pandemic on the Company’s business. The principal amount of the EIDL Loan was up to $0.5 million, with proceeds
to be used for working capital purposes, and was collateralized by all the Company’s assets. On June 12, 2020, the Company received these funds from the
SBA. Interest accrued at the rate of 3.75% per year. Installment payments, including principal and interest, were originally due monthly beginning March
26, 2021 (12 months from the date of the promissory note) in the amount of $2 thousand. In March 2021, the SBA deferred payments on the EIDL loans by
an additional 12 months. The balance of principal and interest was payable over the next 30 years from the date of the promissory note. There were no
penalties for prepayment. Based upon guidance issued by the SBA on June 19, 2020, the EIDL Loan was not required to be refinanced by the PPP Loan.
On September 30, 2021, the Company repaid this loan in full.
12. Commitments and Contingencies
Legal Matters
In the ordinary course of business, the Company is routinely a defendant in or party to pending and threatened legal actions and proceedings,
including actions brought on behalf of various classes of claimants. These actions and proceedings are generally based on alleged violations of
employment, contract and other laws. In some of these actions and proceedings, claims for substantial monetary damages are asserted against the Company.
In the ordinary course of business, the Company is also subject to regulatory and governmental examinations, information gathering requests, inquiries,
investigations, and threatened legal actions and proceedings. In connection with formal and informal inquiries by federal, state, local and foreign agencies,
the Company receives numerous requests, subpoenas and orders for documents, testimony and information in connection with various aspects of its
activities.
On April 1, 2022, a proposed representative class action under California’s Private Attorneys General Act (“PAGA”) was filed in Superior Court of
California, County of San Diego against the Company and an employment agency (“Co-Defendant”) which provided the Company with temporary
employees. The complaint alleges various violations of the California Labor Code, including California’s wage and hour laws, relating to current and
former non-exempt employees of the Company. The complaint seeks class status and payments for allegedly unpaid compensation and attorney’s fees. In a
related matter, the attorneys in this matter and the proposed class representative, in a letter dated March 12, 2022, to the California Labor & Workforce
Development Agency made nearly identical claims seeking the right to pursue a PAGA action against the Company and the employment agency. On or
about May 16, 2022, the plaintiff filed a First Amended Complaint adding a PAGA claim to the action. On or about June 2, 2022, the plaintiff filed an
Application to Dismiss Class and Individual Claim without prejudice, in an attempt to pursue a PAGA only complaint. On or about June 30, 2022, the
parties entered into a stipulation to allow the plaintiff to file a Second Amended Complaint to clarify the PAGA claim and to stay the pending action to
allow an attempt at resolution through mediation. The mediation was held on February 23, 2023, and the matter was settled on terms agreeable to the
Company. The settlement, which would require the Company to pay $0.1 million, is tentative and subject to court approval and the right of individual class
members to reject the settlement and proceed on their own. As of December 31, 2022, $0.1 million has been accrued for this matter.
Sales and Use Tax Matters
The Company records state sales tax collected and remitted for its customers on dermatology procedures equipment sales on a net basis, excluded
from revenues. The Company’s sales tax expense that is not presently being collected and remitted for the recurring revenues business is recorded in
general and administrative expenses within the consolidated statements of operations.
F-23
Table of Contents
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Consolidated Financial Statements
The Company believes its state sales and use tax accruals have been properly recognized such that, if the Company’s arrangements with customers
are deemed more likely than not that the Company would not be exempt from sales tax in a particular state, the basis for measurement of the state sales and
use tax is calculated in accordance with ASC 405, Liabilities, as a transaction tax. If and when the Company is successful in defending itself or in settling
the sales tax obligation for a lesser amount, the reversal of this liability is to be recorded in the period the settlement is reached. However, the precise scope,
timing and time period at issue, as well as the final outcome of any audit and actual settlement, remains uncertain.
In the ordinary course of business, the Company is, from time to time, subject to audits performed by state taxing authorities. These actions and
proceedings are generally based on the position that the arrangements entered into by the Company are subject to sales and use tax rather than exempt from
tax under applicable law. Several states have assessed the Company an aggregate of $2.4 million including penalties and interest for the period from March
2014 through April 2020. The Company received notification that an administrative state judge issued an opinion finding in favor of the Company that the
sale of XTRAC treatment codes was not taxable as sales tax with respect to that state’s first assessment. This ruling covers $1.5 million of the total $2.4
million of assessments. The relevant taxing authority filed an appeal of the administrative law judge’s finding and, following the submission of legal briefs
by both sides and oral argument held in January 2022, on May 6, 2022, the Company received a written decision from the State of New York Tax Appeals
Tribunal (“Tribunal”) overturning the favorable sales tax determination of the administrative law judge. The Company filed an appeal of the Tribunal’s
decision, and posted the required appellate bond requiring posting cash collateral, with the New York State Appellate Division, and is awaiting for the
appellate court to set a briefing and oral argument schedule.
The Company is also in another jurisdiction’s administrative process of appeal with respect to the remaining $0.9 million of assessments, and the
timing of the process has been impacted by the COVID-19 pandemic. If there is a determination that the true object of the Company’s recurring revenue
model is not exempt from sales taxes and is not a prescription medicine, or the Company does not have other defenses where the Company prevails, the
Company may be subject to sales taxes in those particular states for previous years and in the future, plus potential interest and penalties.
The precise scope, timing and time periods at issue, as well as the final outcomes of the investigations and judicial proceedings, remain uncertain.
Accordingly, the Company’s estimate may change from time to time, and actual losses could vary.
Employee 401(k) Savings Plan
The Company sponsors a 401(k) defined contribution retirement savings plan that covers all eligible employees who have met the minimum age and
service requirements. Under the plan, eligible employees may contribute a portion of their annual compensation into the plan up to IRS annual limits. The
Company has elected to make matching contributions to the plan based on percentage of the employee’s contribution. For each of the years ended
December 31, 2022 and 2021, the Company’s contributions to the plan were $0.3 million.
Milestone Payments
In January 2022, the Company entered into a Development Agreement (the “Development Agreement”) with Theravant Corporation (“Theravant”).
Under the Development Agreement, the Company will reimburse Theravant for costs incurred in further developing certain TheraClear technology and
other healthcare products and methods for the medical aesthetic marketplace. In connection with the development of three devices, Theravant is eligible to
receive $0.5 million upon FDA clearance for each device and $0.5 million upon achievement of certain net revenue targets for each device, aggregating to
$3.0 million of potential future milestone payments under the Development Agreement. The Development Agreement has a three-year term, unless
terminated sooner by either party, and is being accounted for separately from the TheraClear asset acquisition discussed in Note 3.
F-24
Table of Contents
13. Stockholders’ Equity
Preferred Stock
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Consolidated Financial Statements
The Company is authorized to issue preferred stock with such designation, rights and preferences as may be determined from time to time by the
Company’s Board of Directors. Other than the limitations on conversions to keep each such holder’s beneficial ownership below 9.99%, the terms of the
Series C convertible preferred stock generally bestow the same rights to each holder as such holder would receive if they were common stock shareholders
and are not redeemable by the holders, except that the Series C convertible preferred stock shares do not have voting rights. Each share of Series C
convertible preferred stock has a stated value of $1,000 and is convertible into shares of common stock at a conversion price equal to $2.69. No preferred
shares were outstanding as of December 31, 2022 and 2021.
Common Stock
The Company issued 358,367 shares to Theravant as consideration for the TheraClear asset acquisition (Note 3) during the year ended December
31, 2022.
The Company issued 329,076 shares upon the exercise of options and 234,558 shares upon the vesting of restricted stock during the year ended
December 31, 2021.
In October 2021, the Company entered into an equity distribution agreement under which the Company may sell up to $11.0 million of its shares
of common stock in registered “at-the-market” offerings. The shares will be offered at prevailing market prices, and the Company will pay commissions of
up to 3.0% of the gross proceeds from the sale of shares sold through the Company’s agent, which may act as an agent and/or principal. The Company has
no obligation to sell any shares under this agreement and may, at any time, suspend solicitations under this agreement. No shares of the Company’s
common stock have been sold under this distribution agreement during fiscal 2022 or 2021.
Common Stock Warrants
In September 2021 and in connection with entering into the Company’s Senior Term Facility (Note 11), the Company issued a warrant to purchase
373,626 shares of the Company’s common stock at an initial exercise price of $1.82 per share. The warrant is equity classified and is exercisable at any
time on or prior to the tenth anniversary of its issue date. As of December 31, 2022, the warrant remains outstanding in its entirety.
14. Stock-Based Compensation
The Company’s 2016 Omnibus Incentive Stock Plan (“2016 Plan”), as amended, has reserved up to 7,832,651 shares of common stock for future
issuance. As of December 31, 2022, there were 3,193,706 shares of common stock remaining available for issuance for awards under the 2016 Plan.
The Company measures share‑based awards at their grant‑date fair value and records compensation expense on a straight‑line basis over the
requisite service period of the awards. The Company recorded share‑based compensation expense of $1.3 million and $1.6 million (for all awards and
modifications, if any) for the years ended December 31, 2022 and 2021, respectively, within general and administrative expenses in the accompanying
consolidated statements of operations. During the year ended December 31, 2022, the Company also recorded share-based compensation expense of $0.2
million within selling and marketing expenses in the accompanying consolidated statement of operations.
On March 30, 2022, the Company granted 160,000 stock-based options to the Chief Executive Officer. The vesting of these awards is contingent
upon meeting one or more financial goals (a performance condition) or a common stock share price (a market condition). The fair value of stock-based
awards is determined at the date of grant. Stock-based compensation expense is recorded ratably for market condition awards during the requisite service
period and is not reversed, except for forfeitures, at the vesting date regardless of whether the market condition is met. Stock-based compensation expense
for performance condition awards is re-evaluated at each reporting period based on the probability of the achievement of the goal. As of December 31,
2022, the market condition was not met and 60,000 of the stock-based options were forfeited.
F-25
Table of Contents
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Consolidated Financial Statements
In connection with the separation of the Company’s Chief Executive Officer in February 2021, the Company accelerated the vesting of all
unvested options to purchase shares of common stock and extended the period to exercise to August 22, 2021. This acceleration and the extension of the
period to vest met the modification criteria for accounting purposes. For these modifications, the Company calculated and recorded additional
compensation expense of $0.2 million.
Stock Options
The following table summarizes stock option activity for the years ended December 31, 2022 and 2021:
Outstanding at January 1, 2021
Granted
Exercised
Forfeited and expired
Outstanding at December 31, 2021
Granted
Exercised
Forfeited and expired
Outstanding at December 31, 2022
Exercisable at December 31, 2022
Weighted-
Average
Exercise
Price per
Option
Weighted-
Average
Remaining
Contractual
Life (in
years)
1.87
1.70
1.12
2.10
1.90
1.41
1.29
2.63
1.72
1.88
7.91
8.02
7.28
Number of
Shares under
Option Plan
5,292,888
2,463,714
(1,557,628)
(2,260,361)
3,938,613
1,000,000
(15,000)
(448,899)
4,474,714
2,202,792
$
$
$
$
The weighted‑average grant date fair value of options granted was $1.06 and $1.27 per share during the years ended December 31, 2022 and 2021,
respectively. As of December 31, 2022, the total unrecognized compensation expense related to unvested stock option awards was $2.3 million, which the
Company expects to recognize over a weighted‑average period of approximately 2.2 years. There was no aggregate intrinsic value of options outstanding
and options exercisable at December 31, 2022 or of options that were exercised during the year ended December 31, 2022. The aggregate intrinsic value of
options outstanding and options exercisable at December 31, 2021 was $26 thousand and $4 thousand, respectively, and the aggregate intrinsic value of
options that were exercised during the year ended December 31, 2021 was $0.5 million.
During the year ended December 31, 2021, there were 1,557,628 options that were exercised on a cashless basis at $1.12 per share resulting in the
net issuance of 329,076 shares of common stock.
The fair value of options is estimated using the Black Scholes option pricing model which takes into account inputs such as the exercise price, the
value of the underlying common stock at the grant date, expected term, expected volatility, risk free interest rate and dividend yield. The fair value of each
grant of options during the year ended December 31, 2022 and 2021 was determined using the methods and assumptions discussed below.
●
●
●
●
The expected term of employee options is based on the observed and expected time to full-vesting, forfeiture and exercise. Groups of
employees that have similar historical exercise behavior are considered separately for valuation purposes. Options expire up to a maximum of
ten years from the date of grant.
The expected volatility is based on historical volatility of the Company’s common stock.
The risk-free interest rate is based on the interest rate payable on U.S. Treasury securities in effect at the time of grant for a period that is
commensurate with the assumed expected term.
The expected dividend yield is none because the Company has not historically paid and does not expect for the foreseeable future to pay a
dividend on its ordinary shares.
F-26
Table of Contents
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Consolidated Financial Statements
For the years ended December 31, 2022 and 2021, the grant date fair value of all option grants was estimated at the time of grant using the Black-
Scholes option-pricing model using the following weighted average assumptions:
Expected term (in years)
Expected volatility
Risk-free rate
Dividend rate
Restricted Stock Units
Year Ended
December 31,
2022
2021
6.10
89.57%
2.51%
0.00%
5.96
90.03%
1.08%
0.00%
Restricted stock units have been issued to certain board members. Restricted stock units unvested are summarized in the following table:
Weighted-
Average
Grant
Date Fair
Value
Number
of
Units
Outstanding at January 1, 2021
Granted
Vested
Forfeited and expired
Unvested at December 31, 2021
Granted
Vested
Forfeited and expired
Unvested at December 31, 2022
$
—
290,861
(146,364)
(53,957)
90,540
$
187,464
(158,407)
—
$
119,597
—
1.44
1.42
1.45
1.45
0.96
1.26
—
0.93
As of December 31, 2022, the total unrecognized compensation expense related to unvested restricted stock units was less than $0.1 million,
which the Company expects to recognize over a weighted‑average period of approximately 0.5 years. During the first quarter of 2023, the Company issued
158,407 shares of common stock related to the restricted stock units that vested during 2022.
15. Income Taxes
Income tax expense consists of the following (in thousands):
Current:
Federal
State
Deferred:
Federal
State
Income tax expense
Year Ended
December 31,
2022
2021
$
$
—
23
23
23
17
40
63
$
$
—
22
22
23
(11)
12
34
F-27
Table of Contents
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Deferred tax assets and liabilities are determined based on the differences between the consolidated financial statement carrying amounts and tax
bases of assets and liabilities using enacted tax rates in effect for years in which differences are expected to reverse.
Significant components of the Company’s deferred tax liability for federal income taxes consisted of the following (in thousands):
Deferred tax assets (liabilities)
Net operating loss carryforwards
Intangible assets
Inventory
Reserves and accrued expenses
Property and equipment
Stock-based compensation
Operating lease right-of-use assets
Goodwill
Operating lease liabilities
481(a) adjustment
Interest expense limitation carryover
Less: valuation allowance
Net deferred tax liability
December 31,
2022
2021
$
45,077
1,697
57
1,431
1,111
548
(242)
(1,095)
240
(333)
208
(49,005)
(306) $
46,596
1,039
26
1,230
441
458
(159)
(950)
177
(667)
—
(48,457)
(266)
$
$
In assessing the need for a valuation allowance, management must determine that there will be sufficient taxable income to allow for the
realization of deferred tax assets. Based upon the historical and anticipated future losses, management has determined that the deferred tax assets do not
meet the more likely than not threshold for realizability. Accordingly, a nearly full valuation allowance has been recorded against the Company’s deferred
tax assets as of December 31, 2022 and 2021. The valuation allowance increased by $0.5 million and $0.1 million during the years ended December 31,
2022 and 2021, respectively. The Company does not have unrecognized tax benefits as of December 31, 2022 or 2021. The Company recognizes interest
and penalties accrued on any unrecognized tax benefits as a component of income tax expense.
The Company had net operating loss (“NOL”) carryforwards for federal and state income tax purposes as follows (in thousands):
Federal
State
December 31,
2022
2021
$
$
198,144
60,784
$
$
204,314
60,654
The NOL carryforwards generated prior to 2018 began to expire for federal income tax purposes and begin expiring in 2030 for state income tax
purposes. Federal and many state NOLs generated in 2018 and into the future now have an indefinite life.
The NOL carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL
carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders
over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code, respectively, as well as similar state
provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the
annual limitation is determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further
affect the limitation in future years. To date, the Company has not performed an analysis to determine whether or not ownership changes have occurred
since inception.
F-28
Table of Contents
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Consolidated Financial Statements
A reconciliation of income tax expense at the statutory federal income tax rate and income taxes as reflected in the consolidated financial
statements is as follows:
Federal tax expense at statutory rate
State tax, net of federal benefit
Permanent differences
Other difference and true ups
Change in valuation allowance
Tax provision
December 31,
2022
2021
21.00%
(0.58)%
(2.23)%
(11.20)%
(8.14)%
(1.15)%
21.00%
(0.33)%
8.90%
(25.27)%
(5.57)%
(1.27)%
On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022 (“IRA”). The IRA contains certain tax measures, including a corporate
alternative minimum tax of 15% on some large corporations and an excise tax of 1% on corporate stock repurchases. The Company is currently
evaluating the various provisions of the IRA and does not anticipate a material impact on its consolidated financial statements.
16. Business and Geographical Reporting Segments
The Company organized its business into two operating segments to better align its organization based upon the Company’s management
structure, products and services offered, markets served and types of customers, as follows. The Dermatology Recurring Procedures segment derives its
revenues from the usage of its equipment by dermatologists to perform XTRAC procedures. The Dermatology Procedures Equipment segment generates
revenues from the sale of equipment, such as lasers and lamp products. Management reviews financial information presented on an operating segment basis
for the purposes of making certain operating decisions and assessing financial performance.
Unallocated operating expenses include costs that are not specific to a particular segment but are general to the group; included are expenses
incurred for administrative and accounting staff, general liability and other insurance, professional fees and other similar corporate expenses. Interest and
other financing income (expense) is also not allocated to the operating segments.
The following tables reflect results of operations from our business segments for the periods indicated below (in thousands, except gross profit %):
Year Ended December 31, 2022
Revenues
Cost of revenues
Gross profit
Gross profit %
Allocated expenses:
Engineering and product development
Selling and marketing
Unallocated expenses
Income (loss) from operations
Interest expense
Interest income
Income (loss) before income tax expense
Dermatology
Recurring
Procedures
23,025
8,371
14,654
$
Dermatology
Procedures
Equipment
$
$
13,136
6,022
7,114
54.2%
357
1,798
—
2,155
4,959
—
—
4,959
$
Total
36,161
14,393
21,768
60.2%
1,029
15,301
10,087
26,417
(4,649)
(926)
89
(5,486)
63.6%
672
13,503
—
14,175
479
—
—
479
$
$
F-29
Table of Contents
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Year Ended December 31, 2021
Revenues
Cost of revenues
Gross profit
Gross profit %
Allocated expenses:
Engineering and product development
Selling and marketing
Unallocated expenses
Income (loss) from operations
Interest expense
Interest income
Gain on debt extinguishment
Income (loss) before income tax expense
Dermatology
Recurring
Procedures
22,528
6,418
16,110
$
Dermatology
Procedures
Equipment
$
$
7,449
3,709
3,740
Total
29,977
10,127
19,850
71.5%
50.2%
66.2%
1,251
12,257
—
13,508
2,602
—
—
—
2,602
$
183
849
—
1,032
2,708
—
—
—
2,708
$
1,434
13,106
9,712
24,252
(4,402)
(314)
15
2,029
(2,672)
$
For the years ended December 31, 2022 and 2021, depreciation and amortization by reportable segment were as follows (in thousands):
Dermatology recurring procedures
Dermatology procedures equipment
Unallocated expenses
Consolidated total
Year Ended
December 31,
2022
2021
$
$
4,421
857
15
5,293
$
$
3,334
384
18
3,736
The following tables present the Company’s revenue disaggregated by geographical region for the years ended December 31, 2022 and 2021 (in
thousands). Domestic refers to revenue from customers based in the United States, and foreign revenue is derived from the Company’s distributors
primarily in Asia.
Year Ended December 31, 2022
Domestic
China
Korea
Other foreign
Total
Year Ended December 31, 2021
Domestic
China
Korea
Other foreign
Total
Dermatology
Recurring
Procedures
Dermatology
Procedures
Equipment
$
$
21,585
195
888
357
23,025
$
$
2,396
4,556
2,828
3,356
13,136
Dermatology
Recurring
Procedures
Dermatology
Procedures
Equipment
$
$
21,215
—
941
372
22,528
$
$
1,982
931
2,412
2,124
7,449
$
$
$
$
Total
23,981
4,751
3,716
3,713
36,161
Total
23,197
931
3,353
2,496
29,977
As of December 31, 2022 and 2021, total assets by reportable segment were as follows (in thousands):
Dermatology recurring procedures
Dermatology procedures equipment
Other unallocated assets
Consolidated total
F-30
December 31,
2022
2021
$
$
37,230 $
7,890
7,152
52,272 $
30,897
2,662
13,034
46,593
Table of Contents
STRATA Skin Sciences, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Long-lived assets of $0.6 million and $1.0 million were located in international markets, primarily Korea and Japan, as of December 31, 2022 and
2021, respectively, with the remainder located in domestic markets.
17. Subsequent Events
On October 26, 2022, the Company had received written notification from the NASDAQ Stock Market (“Nasdaq”) that the closing bid price of its
common stock had been below the minimum $1.00 per share for the previous 30 consecutive business days and that the Company, therefore, was not in
compliance with the requirements for continued listing on the NASDAQ Capital Market. On February 27, 2023, the Company received written notice from
Nasdaq that it had regained compliance with the listing requirements with respect to its minimum bid price, and the Company will continue to trade on
Nasdaq.
F-31
Exhibit 10.25
Execution Version
AMENDMENT NO. 2 TO CREDIT AND SECURITY AGREEMENT
This AMENDMENT NO. 2 TO CREDIT AND SECURITY AGREEMENT (this “Agreement”) is made as of this 6th
day of September, 2022 (“Effective Date”), by and among STRATA SKIN SCIENCES, INC., a Delaware corporation (together
with each of its subsidiaries that hereafter becomes a party to this Agreement, the “Borrower”), MIDCAP FINANCIAL
TRUST, as Agent for Lenders (in such capacity and together with its permitted successors and assigns, the “Agent”) and the
other financial institutions or other entities from time to time parties to the Credit Agreement referenced below, each as a Lender.
RECITALS
A. Agent, Lenders and Borrower have entered into that certain Credit and Security Agreement, dated as of September
30, 2021 (as amended by that certain Limited Consent and Amendment No. 1 to Credit and Security Agreement, dated as of
January 10, 2022, and as further amended, restated, supplemented or otherwise modified from time to time prior to the date
hereof, the “Existing Credit Agreement” and the Existing Credit Agreement, as amended hereby, the “Credit Agreement”),
pursuant to which the Lenders have agreed to make certain advances of money and to extend certain financial accommodations to
Borrower in the amounts and manner set forth in the Credit Agreement.
B. Borrowers have requested, and Agent and Lenders have agreed, to amend certain provisions of the Existing Credit
Agreement, all in accordance with the terms and subject to the conditions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, the terms and conditions set forth in this Agreement, and other
good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Agent, Lenders, and the
Borrower hereby agree as follows:
1. Recitals; Construction. This Agreement shall constitute a Financing Document and the Recitals and each
reference to the Credit Agreement, unless otherwise expressly noted, will be deemed to reference the Credit Agreement as
modified hereby. Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Credit
Agreement (including those capitalized terms used in the Recitals hereto).
2. Amendments. Subject to the terms and conditions of this Agreement, including, without limitation, the conditions
to effectiveness set forth in Section 3 below, the Existing Credit Agreement is hereby amended as follows, which amendments to
the Existing Credit Agreement are effective as of the first day after the end of the Applicable Interest Period during which this
Agreement becomes effective in accordance with Section 3 below:
(a)
Section 2.6(a) of the Existing Credit Agreement is hereby amended by:
(i)
(ii)
renumbering the existing Section 2.6(a) as Section 2.6(a)(i); and
adding the following new clauses (ii) and (iii) thereto:
MidCap / Strata / Amendment No. 2
“(ii) In the event one or more of the following events occurs with respect to Term SOFR: (a) a public statement
or publication of information by or on behalf of the SOFR Administrator announcing that the SOFR Administrator
has ceased or will cease to provide Term SOFR for a 1-month period, permanently or indefinitely, provided that, at
the time of such statement or publication, there is no successor administrator that will continue to provide Term
SOFR for a 1-month period; (b) a public statement or publication of information by the regulatory supervisor for
the SOFR Administrator, the Federal Reserve Board, the Federal Reserve Bank of New York, an insolvency
official or resolution authority with jurisdiction over the SOFR Administrator, or a court or an entity with similar
insolvency or resolution authority, which states that the SOFR Administrator has ceased or will cease to provide
Term SOFR for a 1-month period permanently or indefinitely, provided that, at the time of such statement or
publication, there is no successor administrator that will continue to provide Term SOFR for a 1-month period; or
(c) a public statement or publication of information by the regulatory supervisor for the SOFR Administrator
announcing that Term SOFR for a 1-month period is no longer, or as of a specified future date will no longer be,
representative and Agent has provided Borrower with notice of the same, any outstanding affected SOFR Loans
will be deemed to have been converted to Credit Extensions that bear interest at a rate based on the Applicable
Prime Rate at the end of the Applicable Interest Period.
(iii) In connection with Term SOFR, Agent will have the right to make Conforming Changes from time to time
and, notwithstanding anything to the contrary herein or in any other Financing Document, any amendments
implementing such Conforming Changes will become effective without any further action or consent of any other
party to this Agreement or any other Financing Document. Agent will promptly notify Borrower and the Lenders
of the effectiveness of any Conforming Changes.”
(b)
Section 2.6(h) of the Existing Credit Agreement is hereby amended by:
(i) deleting the name of such subsection in its entirety and restating it as follows:
“(h) Taxes; Additional Costs; Increased Costs; Inability to Determine Rates; Illegality.”
(ii) adding the following new clause (x) in the appropriate numerical order therein:
“(x) If any Lender shall reasonably determine that the adoption or taking effect of, or any change in, any
applicable Law shall (i) impose, modify or deem applicable any reserve, special deposit, compulsory loan,
insurance charge or similar requirement against assets of, deposits with or for the account of, or credit
extended or participated in by, any Lender, (ii) subject any Lender to any tax of any kind whatsoever with
respect to this Agreement, or any SOFR Loan made by it, or change the basis of taxation of payments to
such Lender in respect thereof (except for Taxes covered by Section 2.6); or (iii) impose on any Lender any
other condition, cost or expense affecting this Agreement or SOFR Loans made by such Lender, and the
result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any
Credit Extension the interest on which is determined by reference to Term SOFR (or of maintaining its
obligation to make any such Credit Extension), or to reduce the amount of any sum received or receivable
by such Lender (whether of principal, interest or any other amount) then, upon request of such Lender, the
Borrower will pay to such Lender such additional amount or amounts as will compensate such Lender for
such additional costs incurred or reduction suffered.”
MidCap / Strata / Amendment No. 2
2
(iii)
renumbering the existing clause (x) as new clause (xi); and
(iv)
renumbering the existing clause (xi) as new clause (xii).
(c) Section 2.7 of the Existing Credit Agreement is hereby amended by renumbering such existing Section
2.7 as new Section 2.8.
(d) The Existing Credit Agreement is hereby amended by adding the following as a new Section 2.7:
“2.7 Benchmark Replacement Setting; Conforming Changes.
(a) Upon the occurrence of a Benchmark Transition Event, Agent and Borrowers may (and shall work
in good faith to) amend this Agreement to replace the then-current Benchmark with a Benchmark Replacement.
Any such amendment will become effective at 5:00 p.m. (New York City time) on the fifth (5th) Business Day
after Agent has posted such proposed amendment to all Lenders and Borrower so long as Agent has not received,
by such time, written notice of objection thereto from Lenders comprising the Required Lenders. No such
replacement will occur prior to the applicable Benchmark Transition Start Date. In connection with the
implementation of a Benchmark Replacement, Agent will have the right to make Conforming Changes from time
to time and, notwithstanding anything to the contrary herein or in any other Financing Document, any
amendments implementing such Conforming Changes will become effective without any further action or consent
of any other party to this Agreement or any other Financing Document. Agent will promptly notify Borrower and
the Lenders of the implementation of any Benchmark Replacement and the effectiveness of any Conforming
Changes.
(b) Any determination, decision or election that may be made by Agent or, if applicable, any Lender
(or group of Lenders) pursuant to this Section will be conclusive and binding absent manifest error and may be
made in its or their sole discretion and without consent from any other party to this Agreement or any other
Financing Document, except, in each case, as expressly required pursuant to this Section. Notwithstanding
anything to the contrary herein or in any other Financing Document, at any time, (a) if the then-current Benchmark
is a term rate (including Term SOFR) and either (i) any tenor for such Benchmark is not displayed on a screen or
other information service that publishes such rate from time to time as selected by Agent in its reasonable
discretion or (ii) the regulatory supervisor for the administrator of such Benchmark has provided a public
statement or publication of information announcing that any tenor for such Benchmark is or will be no longer
representative, then Agent may modify the definition of “Applicable Interest Period” (or any similar or analogous
definition) for any Benchmark settings at or after such time to remove such unavailable or non- representative
tenor, and (b) if a tenor that was removed pursuant to clause (a) above either (i) is subsequently displayed on a
screen or information service for a Benchmark or (ii) is not, or is no longer, subject to an announcement that it is
or will no longer be representative for a Benchmark, then Agent may modify the definition of “Applicable Interest
Period” (or any similar or analogous definition) for all Benchmark settings at or after such time to reinstate such
previously removed tenor. Agent will promptly notify Borrower of the removal or reinstatement of any tenor of a
Benchmark pursuant to this Section.
MidCap / Strata / Amendment No. 2
3
(c) Upon Borrower’s receipt of notice of the commencement of a Benchmark Unavailability Period, the
Applicable Index Rate for any outstanding affected Credit Extensions will be deemed to be the Applicable Prime
Rate at the end of the Applicable Interest Period.
(e) New Definitions. Section 15 of the Existing Credit Agreement is hereby amended by adding the
following definitions in the appropriate alphabetical order therein:
“Applicable SOFR Rate” means, with respect to each day during which interest accrues on a Credit Extension,
the rate per annum (expressed as a percentage) equal to (a) Term SOFR for the Applicable Interest Period for such
day; or (b) if the then-current Benchmark has been replaced with a Benchmark Replacement pursuant to Section
2.7, such Benchmark Replacement for such day. Notwithstanding the foregoing, the Applicable SOFR Rate shall
not at any time be less the Applicable Floor.
“Available Tenor” means, as of any date of determination with respect to the then- current Benchmark, (a) if such
Benchmark is a term rate, any tenor for such Benchmark (or component thereof) that is or may be used for
determining the length of an interest period pursuant to this Agreement or (b) otherwise, any payment period for
interest calculated with reference to such Benchmark (or component thereof) that is or may be used for
determining any frequency of making payments of interest calculated with reference to such Benchmark pursuant
to this Agreement, in each case, as of such date and not including, for the avoidance of doubt, any tenor for such
Benchmark that is then- removed from the definition of “Applicable Interest Period” or similar term pursuant to
Section 2.7.
“Benchmark” means, initially, Term SOFR; provided that if a Benchmark Transition Event and its related
Benchmark Replacement Date have occurred with respect to Term SOFR or the then-current Benchmark, then
“Benchmark” means the applicable Benchmark Replacement to the extent that such Benchmark Replacement has
replaced such prior benchmark rate pursuant to Section 2.7.
“Benchmark Replacement” means, with respect to any Benchmark Transition Event, the sum of: (a) the alternate
benchmark rate that has been selected by Agent giving due consideration to (i) any selection or recommendation
of a replacement benchmark rate or the mechanism for determining such a rate by the Relevant Governmental
Body or (ii) any evolving or then-prevailing market convention for determining a benchmark rate as a replacement
to the then-current Benchmark for Dollar-denominated syndicated credit facilities at such time and (b) the related
Benchmark Replacement Adjustment; provided that, if such Benchmark Replacement as so determined would be
less than the Applicable Floor, such Benchmark Replacement will be deemed to be the Applicable Floor for the
purposes of this Agreement and the other Financing Documents.
“Benchmark Replacement Adjustment” means, with respect to any replacement of the then-current Benchmark
with an Unadjusted Benchmark Replacement for any applicable Available Tenor, the spread adjustment, or method
for calculating or determining such spread adjustment (which may be a positive or negative value or zero) that has
been selected by Agent giving due consideration to any selection or recommendation by the Relevant
Governmental Body, or any evolving or then-prevailing market convention at such time, for determining a spread
adjustment, or method for calculating or determining such spread adjustment, for such type of replacement for
U.S. dollar-denominated syndicated credit facilities at such time.
MidCap / Strata / Amendment No. 2
4
“Benchmark Replacement Date” means the earlier to occur of the following events with respect to the then-
current Benchmark: (a) in the case of clause (a) or (b) of the definition of “Benchmark Transition Event”, the later
of (i) the date of the public statement or publication of information referenced therein and (ii) the date on which
the administrator of such Benchmark (or the published component used in the calculation thereof) permanently or
indefinitely ceases to provide all Available Tenors of such Benchmark (or such component thereof); or (b) in the
case of clause (c) of the definition of “Benchmark Transition Event”, the first date on which such Benchmark (or
the published component used in the calculation thereof) has been determined and announced by the regulatory
supervisor for the administrator of such Benchmark (or such component thereof) to be no longer representative;
provided, that such non-representativeness will be determined by reference to the most recent statement or
publication referenced in such clause (c) even if any Available Tenor of such Benchmark (or such component
thereof) continues to be provided on such date. For the avoidance of doubt, the “Benchmark Replacement Date”
will be deemed to have occurred in the case of clause (a) or (b) with respect to any Benchmark upon the
occurrence of the applicable event or events set forth therein with respect to all then-current Available Tenors of
such Benchmark (or the published component used in the calculation thereof).
“Benchmark Transition Event” means the occurrence of one or more of the following events with respect to the
then-current Benchmark: (a) a public statement or publication of information by or on behalf of the administrator
of such Benchmark (or the published component used in the calculation thereof) announcing that such
administrator has ceased or will cease to provide all Available Tenors of such Benchmark (or such component
thereof), permanently or indefinitely, provided that, at the time of such statement or publication, there is no
successor administrator that will continue to provide any Available Tenor of such Benchmark (or such component
thereof); (b) a public statement or publication of information by the regulatory supervisor for the administrator of
such Benchmark (or the published component used in the calculation thereof), the Federal Reserve Board, the
Federal Reserve Bank of New York, an insolvency official or resolution authority with jurisdiction over the
administrator for such Benchmark (or such component), or a court or an entity with similar insolvency or
resolution authority, which states that the administrator of such Benchmark (or such component) has ceased or will
cease to provide all Available Tenors of such Benchmark (or such component thereof) permanently or indefinitely,
provided that, at the time of such statement or publication, there is no successor administrator that will continue to
provide any Available Tenor of such Benchmark (or such component thereof); or (c) a public statement or
publication of information by the regulatory supervisor for the administrator of such Benchmark (or the published
component used in the calculation thereof) announcing that all Available Tenors of such Benchmark (or such
component thereof) are no longer, or as of a specified future date will no longer be, representative. For the
avoidance of doubt, a “Benchmark Transition Event” will be deemed to have occurred with respect to any
Benchmark if a public statement or publication of information set forth above has occurred with respect to each
then-current Available Tenor of such Benchmark (or the published component used in the calculation thereof).
“Benchmark Transition Start Date” means, in the case of a Benchmark Transition Event, the earlier of (a) the
applicable Benchmark Replacement Date and (b) if such Benchmark Transition Event is a public statement or
publication of information of a prospective event, the 90th day prior to the expected date of such event as of such
public statement or publication of information (or if the expected date of such prospective event is fewer than 90
days after such statement or publication, the date of such statement or publication).
MidCap / Strata / Amendment No. 2
5
“Benchmark Unavailability Period” means the period (if any) (a) beginning at the time that a Benchmark
Replacement Date pursuant to clauses (a) or (b) of that definition has occurred if, at such time, no Benchmark
Replacement has replaced the then-current Benchmark for all purposes hereunder and under any Financing
Document in accordance with Section 2.7 and (b) ending at the time that a Benchmark Replacement has replaced
the then-current Benchmark for all purposes hereunder and under any Financing Document in accordance with
Section 2.7.
“Conforming Changes” means, with respect to either the use or administration of Term SOFR or the use,
administration, adoption or implementation of any Benchmark Replacement, any technical, administrative or
operational changes (including (a) changes to the definition of “Applicable Interest Period”, “Base Rate Index”,
“Business Day”, “Reference Time” or other definitions, (b) the addition of concepts such as “interest period”, (c)
changes to timing and/or frequency of determining rates, making interest payments, giving borrowing requests,
prepayment, conversion or continuation notices, or length of lookback periods, (d) the applicability of Section
2.6(h), and (e) other technical, administrative or operational matters) that Agent decides may be appropriate to
reflect the adoption and implementation of Term SOFR or such Benchmark Replacement and to permit the
administration thereof by Agent in a manner substantially consistent with market practice (or, if Agent decides that
adoption of any portion of such market practice is not administratively feasible or determines that no such market
practice exists, in such other manner as Agent decides is reasonably necessary in connection with the
administration of this Agreement and the other Financing Documents).
“Reference Time” means approximately a time substantially consistent with market practice two (2) SOFR
Business Days prior to the first day of each calendar month. If by 5:00 pm (New York City time) on any interest
lookback day, Term SOFR in respect of such interest lookback day has not been published on the SOFR
Administrator’s Website, then Term SOFR for such interest lookback day will be Term SOFR as published in
respect of the first preceding SOFR Business Day for which Term SOFR was published on the SOFR
Administrator’s Website; provided that such first preceding SOFR Business Day is not more than three (3) SOFR
Business Days prior to such interest lookback day.
“Relevant Governmental Body” means the Federal Reserve Board and/or the Federal Reserve Bank of New
York, or a committee officially endorsed or convened by the Federal Reserve Board and/or the Federal Reserve
Bank of New York or any successor thereto.
“Second Amendment” means that certain Amendment No. 2 to Credit and Security Agreement, dated as of
September 6, 2022, by and among Borrowers, Agent and the Lenders party thereto.
“SOFR” means, with respect to any SOFR Business Day, a rate per annum equal to the secured overnight
financing rate for such SOFR Business Day.
“SOFR Administrator” means CME Group Benchmark Administration Limited (CBA) (or a successor
administrator of Term SOFR selected by Agent in its reasonable discretion).
MidCap / Strata / Amendment No. 2
6
“SOFR Administrator’s Website” means
the SOFR Administrator, currently at
https://www.cmegroup.com/market-data/cme-group-benchmark- administration/term-sofr.html, or any successor
source for Term SOFR identified by the SOFR Administrator from time to time.
the website of
“SOFR Business Day” means any day other than a Saturday or Sunday or a day on which the Securities Industry
and Financial Markets Association recommends that the fixed income departments of its members be closed for
the entire day for purposes of trading in United States government securities.
“SOFR Implementation Date” means the first day after the end of the Applicable Interest Period during which
the Second Amendment shall become effective in accordance with its terms.
“SOFR Loan” means a Credit Extension that bears interest at a rate based on Term SOFR.
“Term SOFR” means the greater of (a) the forward-looking term rate for a period comparable to such Applicable
Interest Period based on SOFR that is published by the SOFR Administrator and is displayed on the SOFR
Administrator’s Website at approximately the Reference Time for such Applicable Interest Period plus 0.10% and
(b) the Applicable Floor. Unless otherwise specified in any amendment to this Agreement entered into in
accordance with Section 2.7, in the event that a Benchmark Replacement with respect to Term SOFR is
implemented, then all references herein to Term SOFR shall be deemed references to such Benchmark
Replacement.
“Unadjusted Benchmark Replacement” means the applicable Benchmark Replacement excluding the related
Benchmark Replacement Adjustment.
(f) Restated Definitions. The definitions of “Applicable Index Rate”, “Applicable Interest Period”,
“Applicable Interest Rate Determination Date” and “Business Day”, set forth in Section 15 of the Existing Credit
Agreement are hereby deleted in their entirety and restated to read as follows:
“Applicable Index Rate” means, from and after the SOFR Implementation Date, for any Applicable Interest
Period, the rate per annum determined by Agent equal to the Applicable SOFR Rate; provided, however, that in
the event that any change in market conditions or any law, regulation, treaty, or directive, or any change therein or
in the interpretation of application thereof, shall at any time after the date hereof, in the reasonable opinion of
Agent or any Lender, make it unlawful or impractical for Agent or such Lender to fund or maintain Obligations
bearing interest based upon the Applicable SOFR Rate, Agent or such Lender shall give notice of such changed
circumstances to Agent and Borrower and the Applicable Index Rate for Obligations outstanding or thereafter
extended or made by Agent or such Lender shall thereafter be the Applicable Prime Rate until Agent or such
Lender determines (as to the portion of the Credit Extensions or Obligations owed to it) that it would no longer be
unlawful or impractical to fund or maintain such Obligations or Credit Extensions at the Applicable SOFR Rate.
In the event that Agent shall have determined (which determination shall be final and conclusive and binding upon
all parties hereto), as of any Applicable Interest Rate Determination Date, that adequate and fair means do not
exist for ascertaining the interest rate applicable to any Credit Facility on the basis provided for herein, then Agent
may select a comparable replacement index and corresponding margin.
MidCap / Strata / Amendment No. 2
7
“Applicable Interest Period” for each Credit Facility has the meaning specified for that Credit Facility in the
Credit Facility Schedule; provided, however, that, at any time that the Applicable Prime Rate is the Applicable
Index Rate, Applicable Interest Period shall mean the period commencing as of the most recent Applicable
Interest Rate Determination Date and continuing until the next Applicable Interest Rate Determination Date or
such earlier date as the Applicable Prime Rate shall no longer be the Applicable Index Rate; and provided, further,
that, at any time Term SOFR is adjusted as set forth in this Agreement, or re-implemented following invocation of
the Applicable Prime Rate as permitted herein, the Applicable Interest Period shall mean the period commencing
as of such adjustment or re-implementation and continuing until the next Applicable Interest Rate Determination
Date, if any.
“Applicable Interest Rate Determination Date” means the second (2nd) Business Day prior to the first (1st) day
of the related Applicable Interest Period; provided, however, that, at any time that the Applicable Prime Rate is the
Applicable Index Rate, Applicable Interest Rate Determination Date means the date of any change in the Base
Rate Index; and provided, further, that, at any time Term SOFR is adjusted as set forth in this Agreement, the
Applicable Interest Rate Determination Date shall mean the date of such adjustment or the second (2nd) Business
Day prior to the first (1st) day of the related Applicable Interest Period, as elected by Agent.
“Business Day” means any day except a Saturday, Sunday or other day on which either the New York Stock
Exchange is closed, or on which commercial banks in Washington, DC and New York City are authorized by law
to close; provided, however, that when used in the context of a SOFR Loan, the term “Business Day” shall also
exclude any day that is not also a SOFR Business Day.
(g) Deleted Definitions. Section 15 of the Existing Credit Agreement is hereby amended by deleting in their
entirety the definitions of “Applicable Libor Rate” and “Libor Rate Index” therein.
(h) The Credit Facility Schedule for Credit Facility #1 attached to the Existing Credit Agreement is hereby
amended by replacing the definition of “Applicable Floor” therein in its entirety with the following:
(i)
Applicable Floor: means one half percent (0.50%) per annum.
3. Conditions to Effectiveness. This Agreement shall become effective as of the date on which Agent shall have
received (including by way of facsimile or other electronic transmission) a duly authorized, executed and delivered counterpart of
the signature page to this Agreement from each Borrower, Agent and the Lenders.
4. No Waiver or Novation. The execution, delivery and effectiveness of this Agreement shall not operate as a
waiver of any right, power or remedy of Agent, nor constitute a waiver of any provision of the Credit Agreement, the Financing
Documents or any other documents, instruments and agreements executed or delivered in connection with any of the foregoing.
Nothing herein is intended or shall be construed as a waiver of any existing Defaults or Events of Default under the Credit
Agreement or other Financing Documents or any of Agent’s rights and remedies in respect of such Defaults or Events of Default.
This Agreement (together with any other document executed in connection herewith) is not intended to be, nor shall it be
construed as, a novation of the Credit Agreement.
MidCap / Strata / Amendment No. 2
8
5. Miscellaneous.
(a) Reference to the Effect on the Credit Agreement. The Credit Agreement, and all other Financing
Documents (and all covenants, terms, conditions and agreements therein), shall remain in full force and effect, and are hereby
ratified and confirmed in all respects by each Credit Party.
(b) THIS AGREEMENT AND THE RIGHTS, REMEDIES AND OBLIGATIONS OF THE PARTIES
HERETO, AND ANY CLAIM, CONTROVERSY OR DISPUTE ARISING UNDER OR RELATED TO THIS AGREEMENT,
THE RELATIONSHIP OF THE PARTIES, AND/OR THE INTERPRETATION AND ENFORCEMENT OF THE RIGHTS
AND DUTIES OF THE PARTIES AND ALL OTHER MATTERS RELATING HERETO OR ARISING THEREFROM
(WHETHER SOUNDING IN CONTRACT LAW, TORT LAW OR OTHERWISE), SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT
REFERENCE TO ITS CONFLICT OF LAW PROVISIONS (OTHER THAN SECTION 5-1401 OF THE GENERAL
OBLIGATIONS LAW). NOTWITHSTANDING THE FOREGOING, AGENT AND LENDERS SHALL HAVE THE RIGHT
TO BRING ANY ACTION OR PROCEEDING AGAINST EACH CREDIT PARTY OR ITS PROPERTY IN THE COURTS
OF ANY OTHER JURISDICTION WHICH AGENT AND LENDERS (IN ACCORDANCE WITH THE PROVISIONS OF
SECTION 12.1 OF THE CREDIT AGREEMENT) DEEM NECESSARY OR APPROPRIATE TO REALIZE ON THE
COLLATERAL OR TO OTHERWISE ENFORCE AGENT’S AND LENDERS’ RIGHTS AGAINST SUCH CREDIT PARTY
OR ITS PROPERTY. EACH CREDIT PARTY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH
JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND EACH CREDIT PARTY
HEREBY WAIVES ANY OBJECTION THAT IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION,
IMPROPER VENUE, OR FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH
LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. EACH CREDIT PARTY HEREBY
WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINTS, AND OTHER PROCESS ISSUED IN SUCH
ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINTS, AND OTHER PROCESS MAY
BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO THE APPLICABLE CREDIT PARTY AT THE
ADDRESS SET FORTH IN ARTICLE 11 OF THE CREDIT AGREEMENT AND THAT SERVICE SO MADE SHALL BE
DEEMED COMPLETED UPON THE EARLIER TO OCCUR OF SUCH CREDIT PARTY’S ACTUAL RECEIPT THEREOF
OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAIL, PROPER POSTAGE PREPAID.
(c) TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, EACH CREDIT PARTY,
AGENT AND LENDERS PARTY HERETO EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR
CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT OR ANY CONTEMPLATED
TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS
WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT. EACH
PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.
(d) Incorporation of Credit Agreement Provisions. The provisions contained in Section 12.2(b) (California
Waivers), Section 12.3 (California Waiver) and Section 13.2 (Indemnification) of the Credit Agreement are incorporated herein
by reference to the same extent as if reproduced herein in their entirety.
MidCap / Strata / Amendment No. 2
9
(e) Headings. Section headings in this Agreement are included for convenience of reference only and shall
not constitute a part of this Agreement for any other purpose.
(f) Counterparts. This Agreement may be executed in any number of counterparts and by different parties on
separate counterparts, each of which, when executed and delivered, is an original, and all taken together, constitute one
Agreement. Delivery of an executed signature page of this Agreement by facsimile transmission or electronic transmission shall
be as effective as delivery of a manually executed counterpart hereof. In furtherance of the foregoing, the words “execution”,
“signed”, “signature”, “delivery” and words of like import in or relating to any document to be signed in connection with this
Agreement and the transactions contemplated hereby or thereby shall be deemed to include Electronic Signatures, deliveries or
the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually
executed signature, physical delivery thereof or the use of a paper-based recordkeeping system, as the case may be, to the extent
and as provided for in any applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, the
New York State Electronic Signatures and Records Act, or any other similar state laws based on the Uniform Electronic
Transactions Act. As used herein, “Electronic Signature” means an electronic sound, symbol, or process attached to, or associated
with, a contract or other record and adopted by a Person with the intent to sign, authenticate or accept such contract or other
record.
(g) Entire Agreement. This Agreement constitutes the entire agreement and understanding among the parties
hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof.
(h) Severability. In case any provision of or obligation under this Agreement shall be invalid, illegal or
unenforceable in any applicable jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or
of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby.
(i) Successors/Assigns. This Agreement shall bind, and the rights hereunder shall inure to, the respective
successors and assigns of the parties hereto, subject to the provisions of the Credit Agreement and the other Financing
Documents.
[SIGNATURES APPEAR ON FOLLOWING PAGES]
MidCap / Strata / Amendment No. 2
10
IN WITNESS WHEREOF, intending to be legally bound, the undersigned have executed this Agreement as of the day and year
first hereinabove set forth.
AGENT:
MidCap / Strata / Amendment No. 2
MIDCAP FINANCIAL TRUST
By: Apollo Capital Management, L.P., its
investment manager
By: Apollo Capital Management GP, LLC, its
general partner
By: /s/ Maurice Amsellem
Name: Maurice Amsellem
Title: Authorized Signatory
Signature Page(s)
LENDERS:
ELM 2020-3 TRUST
By: MidCap Financial Services Capital
Management, LLC, as Servicer
By: /s/ John O’Dea
Name: John O’Dea
Title: Authorized Signatory
ELM 2020-4 TRUST
By: MidCap Financial Services Capital Management, LLC, as Servicer
By: /s/ John O’Dea
Name: John O’Dea
Title: Authorized Signatory
Signature Page(s)
MidCap / Strata / Amendment No. 2
BORROWER:
STRATA SKIN SCIENCES. INC.
By: Christopher Lesovitz
Name: Christopher Lesovitz
Title: CFO
MidCap / Strata / Amendment No. 2
Signature Page(s)
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S CONSENT
We consent to the incorporation by reference in the Registration Statement of STRATA Skin Sciences, Inc. and Subsidiary on Amendment No. 1 to Form
S-3 on Form S-1 (File No.’s 333-205797 and 333-226296), Form S-3 (File No.’s 333-262150, 333-261090 and 333-258814) and Form S-8 (File No.’s 333-
257867) of our report dated March 31, 2023, with respect to our audits of the consolidated financial statements of STRATA Skin Sciences, Inc. and
Subsidiary as of December 31, 2022 and 2021 and for the years ended December 31, 2022 and 2021, which report is included in this Annual Report on
Form 10-K of STRATA Skin Sciences, Inc. for the year ended December 31, 2022.
Exhibit 23.1
/s/ Marcum LLP
Marcum LLP
Philadelphia, Pennsylvania
March 31, 2023
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Robert Moccia, 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 to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered
by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
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 (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-
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 our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us
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 under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
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
the effectiveness 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’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably 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 financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
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's
internal control over financial reporting.
Dated: March 31, 2023
STRATA SKIN SCIENCES, INC.
By: /s/ Robert J. Moccia
Robert J. Moccia
President & Chief Executive Officer
E-31.1
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Christopher Lesovitz, 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 to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered
by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
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 (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-
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 our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us
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 under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
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
the effectiveness 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’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably 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 financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
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's
internal control over financial reporting.
Dated: March 31, 2023
STRATA SKIN SCIENCES, INC.
By: /s/ Christopher Lesovitz
Christopher Lesovitz
Chief Financial Officer
E-31.2
SECTION 906 CERTIFICATION
CERTIFICATION (1)
Exhibit 32.1
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350, as adopted), Robert Moccia, the President and Chief Executive
Officer of STRATA Skin Sciences, Inc. (the “Company”), and Christopher Lesovitz, the Chief Financial Officer of the Company, each hereby certifies that,
to the best of his knowledge:
1.
2.
The Company’s Annual Report on Form 10-K for the year ended December 31, 2022, to which this Certification is attached as Exhibit 32.1
(the “Periodic Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as
amended, and
The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of
the Company.
Dated: March 31, 2023
/s/ Robert J. Moccia
Robert Moccia
President & Chief Executive Officer
/s/ Christopher Lesovitz
Christopher Lesovitz
Chief Financial Officer
(1) This certification accompanies the Annual Report on Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission
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-K), irrespective of any general incorporation language contained in such filing. A
signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to STRATA Skin Sciences, Inc.
and will be retained by STRATA Skin Sciences, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
E-32.1