STRATA Skin Sciences, Inc. - Quarter Report: 2019 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10 - Q

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

OR

◻          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to ___________

Commission File Number 0-51481

(Exact name of registrant as specified in its charter)

(Address of principal executive offices, including zip code)

(Registrant's telephone number, including area code)

Securities registered under Section 12(b) of the Exchange Act:

 

Indicate by check mark whether the registrant: (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days.

Yes ◻  No [X]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ◻  No [X]

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

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

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

The number of shares outstanding of the issuer's common stock as of October 31, 2019 was 32,903,287 shares.

STRATA SKIN SCIENCES, INC.

TABLE OF CONTENTS

		March 31, 2019				December 31, 2018
ASSETS		(unaudited)
Current assets:
Cash and cash equivalents		$	16,389			$	16,487
Accounts receivable, net of allowance for doubtful accounts of $134 and $141, respectively			3,575				3,393
Inventories			3,121				2,794
Prepaid expenses and other current assets			430				536
Total current assets			23,515				23,210
Property and equipment, net			4,962				5,301
Operating lease right-of-use assets, net			755				-
Intangible assets, net			9,312				9,765
Goodwill			8,803				8,803
Other assets			392				428
Total assets		$	47,739			$	47,507
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt		$	1,010			$	252
Accounts payable			2,045				1,764
Other accrued liabilities			4,724				4,500
Current portion of operating lease liabilities			293				-
Deferred revenues			2,063				2,099
Total current liabilities			10,135				8,615
Long-term liabilities:
Long-term debt, net			6,421				7,145
Deferred tax liability			69				111
Long-term operating lease liabilities, net			479				-
Other liabilities			397				388
Total liabilities			17,501				16,259
Commitments and contingencies (see Note 15)
Stockholders' equity:
Series C Convertible Preferred Stock, $.10 par value, 10,000,000 shares authorized; 6,878 and 9,968 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively			1				1
Common Stock, $.001 par value, 150,000,000 shares authorized; 31,120,608 and 29,943,086 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively			31				30
Additional paid-in capital			242,310				241,988
Accumulated deficit			(212,104	)			(210,771	)
Total stockholders' equity			30,238				31,248
Total liabilities and stockholders’ equity		$	47,739			$	47,507

		For the Three Months Ended March 31,
		2019				2018
Revenues, net		$	7,483			$	6,738
Cost of revenues			2,874				3,345
Gross profit			4,609				3,393
Operating expenses:
Engineering and product development			304				338
Selling and marketing			3,066				2,871
General and administrative			2,480				1,884
			5,850				5,093
Loss from operations			(1,241	)			(1,700	)
Other (expense) income, net:
Interest expense, net			(135	)			(363	)
Change in fair value of warrant liability (see Note 1)			-				1
Other income, net			-				21
			(135	)			(341	)
Loss before income taxes			(1,376	)			(2,041	)
Income tax benefit (expense)			43				(40	)
Net loss		$	(1,333	)		$	(2,081	)
Loss attributable to common shares		$	(1,216	)		$	(512	)
Loss attributable to Preferred Series C shares		$	(117	)		$	(1,569	)
Loss per common share:
Basic		$	(0.04	)		$	(0.12	)
Diluted		$	(0.04	)		$	(0.12	)
Shares used in computing loss per common share:
Basic			30,703,501				4,371,369
Diluted			30,703,501				4,371,369
Loss per Preferred Series C share basic and diluted		$	(14.72	)		$	(43.57	)
Shares used in computing loss per basic and diluted Preferred Series C Shares			7,944				36,002

		Convertible Preferred Stock – Series C								Common Stock								Additional Paid-In				Accumulated
		Shares				Amount				Shares				Amount				Capital				Deficit				Total
BALANCE, January 1, 2018			36,182			$	4				4,304,425			$	4			$	223,829			$	(203,957	)		$	19,880
Cumulative accounting adjustment from adoption of new standard net of tax			-				-				-				-				-				(234	)			(234	)
Cumulative accounting adjustment from adoption of new standard net of tax (Note 1)																			2,614				(2,547	)			67
Stock-based compensation			-				-				-				-				19				-				19
Conversion of convertible preferred stock into common stock			(202	)			-				75,000				-				-				-				-
Net loss			-				-				-				-				-				(2,081	)			(2,081	)
BALANCE, March 31, 2018			35,980			$	4				4,379,425			$	4			$	226,462			$	(208,819	)		$	17,651
		Convertible Preferred Stock- Series C								Common Stock								Additional Paid-In				Accumulated
		Shares				Amount				Shares				Amount				Capital				Deficit				Total
BALANCE, January 1, 2019			9,968			$	1				29,943,086			$	30			$	241,988			$	(210,771	)		$	31,248
Stock-based compensation			-				-				-				-				323				-				323
Conversion of convertible preferred stock into common stock			(3,090	)			-				1,148,698				1				(1	)			-				-
Exercise of options			-				-				28,824				-				-				-				-
Net loss			-				-				-				-				-				(1,333	)			(1,333	)
BALANCE, March 31, 2019			6,878			$	1				31,120,608			$	31			$	242,310			$	(212,104	)		$	30,238

		For the Three Months Ended March 31,
		2019				2018
Cash Flows From Operating Activities:
Net loss		$	(1,333	)		$	(2,081	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			1,204				1,463
Amortization of right-of-use asset			93				-
Provision for doubtful accounts			(7	)			-
Loss on disposal of property and equipment and lasers placed in service			22				182
Loss on intangible assets from cancellation of distributor rights agreement			-				226
Stock-based compensation			323				19
Deferred taxes			(42	)			40
Amortization of debt discount			7				19
Amortization of deferred financing costs			27				20
Change in fair value of warrant liability			-				(1	)
Changes in operating assets and liabilities:
Accounts receivable			(175	)			650
Inventories			(327	)			(20	)
Prepaid expenses and other assets			142				(669	)
Accounts payable			281				381
Other accrued liabilities			224				(16	)
Other liabilities			9				227
Operating lease liabilities			(76	)			-
Deferred revenues			(36	)			(380	)
Net cash provided by operating activities			336				60
Cash Flows From Investing Activities:
Lasers placed-in-service			(434	)			(375	)
Purchases of property and equipment			-				(6	)
Payments on distributor rights liability			-				(24	)
Net cash used in investing activities			(434	)			(405	)
Cash Flows From Financing Activities:
Advance fees related to equity financing			-				(202	)
Payments on notes payable			-				(105	)
Net cash used in financing activities			-				(307	)
Net decrease in cash and cash equivalents			(98	)			(652	)
Cash and cash equivalents, beginning of period			16,487				4,069
Cash and cash equivalents, end of period		$	16,389			$	3,417
Supplemental information of cash and non-cash transactions:
Cash paid for interest		$	201			$	276
Lease liabilities arising from obtaining right-of-use assets		$	848			$	-

	•	Level 1 – unadjusted quoted prices are available in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date.
	•	Level 2 – pricing inputs are other than quoted prices in active markets that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.
	•	Level 3 – pricing inputs are unobservable for the non-financial asset or liability and only used when there is little, if any, market activity for the non-financial asset or liability at the measurement date. The inputs into the determination of fair value require significant management judgment or estimation. Fair value is determined using comparable market transactions and other valuation methodologies, adjusted as appropriate for liquidity, credit, market and/or other risk factors.

Issuance Date

December 31, 2018

Increase in Fair Value

March 31, 2019

October 31, 2013

$

-

$

-

$

-

$

-

$

-

$

-

Issuance Date		January 1, 2018				Decrease in Fair Value				March 31, 2018
October 31, 2013		$	2			$	(1	)		$	1
February 5, 2014			1				-				1
		$	3			$	(1	)		$	2

		Three Months Ended March 31, 2019								Three Months Ended March 31, 2018
		Common Stock				Series C Convertible Preferred Stock				Common Stock				Series C Convertible Preferred Stock
Loss attributable to each class		$	(1,216	)		$	(117	)		$	(512	)		$	(1,569	)
Weighted average number of shares outstanding during the period			30,703,501				7,944				4,371,369				36,002
Basic and Diluted loss per share		$	(0.04	)		$	(14.72	)		$	(0.12	)		$	(43.57	)

		Three Months Ended March 31,
		2019		2018
Common stock purchase warrants		2,233,192		2,406,625
Restricted stock units		129,576		-
Common stock options		4,321,932		876,127
Total		6,684,700		3,282,752

		For the Three Months Ended March 31, 2018
		Balances prior to Adoption of ASU 2017-11				Balances after the Adoption of ASU 2017-11				Effect of Adoption Higher/(Lower)
Statement of Operations
Change in fair value of warrant liability gain (loss)		$	40			$	1			$	(39	)
Balance Sheet
Fair value of warrant liability		$	24			$	2			$	(22	)

		Three Months Ended March 31, 2019
		Dermatology Recurring Procedures				Dermatology Procedures Equipment				TOTAL
Domestic		$	5,312			$	324			$	5,636
Foreign			-				1,847				1,847
Total		$	5,312			$	2,171			$	7,483

		Three Months Ended March 31, 2018
		Dermatology Recurring Procedures				Dermatology Procedures Equipment				TOTAL
Domestic		$	4,770			$	657			$	5,427
Foreign			-				1,311				1,311
Total		$	4,770			$	1,968			$	6,738

		March 31, 2019				December 31, 2018
Raw materials and work in progress		$	2,872			$	2,442
Finished goods			249				352
Total inventories		$	3,121			$	2,794

		March 31, 2019				December 31, 2018
Lasers placed-in-service		$	18,822			$	18,515
Equipment, computer hardware and software			141				168
Furniture and fixtures			124				124
Leasehold improvements			26				26
			19,113				18,833
Accumulated depreciation and amortization			(14,151	)			(13,532	)
Property and equipment, net		$	4,962			$	5,301

		Balance				Accumulated Amortization				Intangible assets, net
Core technology		$	5,700			$	(2,138	)		$	3,562
Product technology			2,000				(1,500	)			500
Customer relationships			6,900				(2,587	)			4,313
Tradenames			1,500				(563	)			937
		$	16,100			$	(6,788	)		$	9,312

Remaining 2019		$	1,357
2020			1,610
2021			1,410
2022			1,410
2023			1,410
Thereafter			2,115
Total		$	9,312

		March 31, 2019				December 31, 2018
Accrued warranty, current		$	183			$	156
Accrued compensation, including commissions and vacation			1,017				1,275
Accrued state sales, use and other taxes			2,840				2,719
Accrued professional fees and other accrued liabilities			684				350
Total other accrued liabilities		$	4,724			$	4,500

		March 31,
		2019				2018
Accrual at beginning of year		$	238			$	178
Additions charged to warranty expense			68				63
Expiring warranties/claimed satisfied			(34	)			(46	)
Total			272				195
Less: current portion			(183	)			(120	)
Total long-term accrued warranty costs		$	89			$	75

		March 31, 2019				December 31, 2018
Term note, net of debt discount of $103 and $110 respectively; and deferred financing cost of $37 and $64, respectively		$	7,431			$	7,397
Less: current portion			(1,010	)			(252	)
Total long-term debt		$	6,421			$	7,145

		For the Year ending December 31,
Remaining in 2019		$	252
2020			3,028
2021			3,028
2022			1,263
		$	7,571

Issue Date		Expiration Date		Total Warrants				Exercise Price
October 31, 2013*		4/30/2019			137,143			$	3.75
July 24, 2014		7/24/2019			1,239,769			$	3.75 - $ 12.25
June 22, 2015		6/22/2020			600,000			$	3.75
December 30, 2015		12/30/2020			130,089			$	5.65
January 29, 2016		1/29/2021			19,812			$	5.30
					2,126,813

		Dermatology Recurring Procedures				Dermatology Procedures Equipment				TOTAL
Revenues		$	5,312			$	2,171			$	7,483
Costs of revenues			1,793				1,081				2,874
Gross profit			3,519				1,090				4,609
Gross profit %			66.2	%			50.2	%			61.6	%
Allocated operating expenses:
Engineering and product development			242				62				304
Selling and marketing expenses			2,768				298				3,066
Unallocated operating expenses			-				-				2,480
			3,010				360				5,850
Income (loss) from operations			509				730				(1,241	)
Interest expense, net			-				-				(135	)
Income (loss) before income taxes		$	509			$	730			$	(1,376	)

		Dermatology Recurring Procedures				Dermatology Procedures Equipment				TOTAL
Revenues		$	4,770			$	1,968			$	6,738
Costs of revenues			1,989				1,356				3,345
Gross profit			2,781				612				3,393
Gross profit %			58.3	%			31.1	%			50.4	%
Allocated operating expenses:
Engineering and product development			274				64				338
Selling and marketing expenses			2,216				655				2,871
Unallocated operating expenses			-				-				1,884
			2,490				719				5,093
Income (loss) from operations			291				(107	)			(1,700	)
Interest expense, net			-				-				(363	)
Change in fair value of warrants			-				-				1
Other income, net			-				-				21
Income (loss) before income taxes		$	291			$	(107	)		$	(2,041	)

For the year ending December 31,		Amount
Remaining in 2019		$	293
2020			234
2021			229
2022			134
Total remaining lease payments			890
Less: imputed interest			(118	)
Total lease liabilities		$	772

	•	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 the third quarter of 2018, we announced the launch of our S3®, the next generation XTRAC. The S3 is smaller, faster and has a smart user interface.
	•	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.
	•	STRATAPEN®. STRATAPEN uses the patent-pending Biolock cartridge. The Biolock needle depth can be adjusted during the course of the procedure to accommodate different treatment areas and can easily maneuver around facial contours and delicate features, such as the eyes, nose and mouth.

		For the Three Months Ended March 31,
		2019				2018
Dermatology Recurring Procedures		$	5,312			$	4,770
Dermatology Procedures Equipment			2,171				1,968
Total Revenues		$	7,483			$	6,738

		For the Three Months Ended March 31,
		2019				2018
Dermatology Recurring Procedures		$	1,793			$	1,989
Dermatology Procedures Equipment			1,081				1,356
Total Cost of Revenues		$	2,874			$	3,345

Company Profit Analysis		For the Three Months Ended March 31,
		2019				2018
Revenues		$	7,483			$	6,738
Percent increase			11.1	%
Cost of revenues			2,874				3,345
Percent decrease			(14.1	%)
Gross profit		$	4,609			$	3,393
Gross profit  percentage			61.6	%			50.4	%

Dermatology Recurring Procedures		For the Three Months Ended March 31,
		2019				2018
Revenues		$	5,312			$	4,770
Percent increase			11.4	%
Cost of revenues			1,793				1,989
Percent decrease			(10.0	%)
Gross profit		$	3,519			$	2,781
Gross profit  percentage			66.2	%			58.3	%

Dermatology Procedures Equipment		For the Three Months Ended March 31,
		2019				2018
Revenues		$	2,171			$	1,968
Percent increase			10.3	%
Cost of revenues			1,081				1,356
Percent decrease			(20.3	%)
Gross profit		$	1,090			$	612
Gross profit  percentage			50.2	%			31.1	%

		For the Three Months Ended March 31,
		2019				2018
Net Loss		$	(1,333	)		$	(2,081	)
Adjustments:
Depreciation/amortization*			1,297				1,463
Income taxes			(43	)			40
Interest expense, net			135				363
Non-GAAP EBITDA			56				(215	)
Stock compensation			323				19
Change in fair value of warrants			-				(1	)
Impairment of distributors rights agreement			-				226
Non-GAAP adjusted EBITDA		$	379			$	29

•	forecasts of future business performance, consumer trends and macro-economic conditions;
•	descriptions of market and/or competitive conditions;
•	descriptions of plans or objectives of management for future operations, products or services;
•	our estimates regarding the sufficiency of our cash resources, expenses, capital requirements and needs for additional financing and our ability to obtain additional financing;
•	our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;
•	our ability to obtain and maintain regulatory approvals of our products;
•	anticipated results of existing or future litigation; and
•	descriptions or assumptions underlying or related to any of the above items.

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. 333-167113), as filed on May 26, 2010).
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).
3.3		Certificate of Amendment to Fifth Amended and Restated Certificate of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 contained in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013 filed on August 7, 2013).
3.4		Certificate of Amendment to Fifth Amended and Restated Certificate of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 contained in our Current Report on Form 8-K, filed on July 10, 2014).
3.5		Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (Incorporated by reference to Exhibit 3.1 contained in our Current Report on Form 8-K, filed on February 3, 2014).
3.6		Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock (Incorporated by reference to Exhibit 3.1 contained in our Current Report on Form 8-K, filed on July 23, 2014).
3.7		Certificate of Amendment to Fifth Amended and Restated Certificate of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 contained in our Current Report on Form 8-K, as filed on September 30, 2015).
3.8		Certificate of Amendment to Fifth Amended and Restated Certificate of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 contained in our Current Report on Form 8-K, as filed on January 8, 2016).
3.9		Certificate of Designations of Series C Convertible Preferred Stock (Incorporated by reference to Exhibit 3.1 contained in our Current Report on Form 8-K, as filed on September 25, 2017).

10.1		Fifth Amendment to Standard Industrial/Commercial Multi-Tenant Lease between FR National Life, LLC and Strata Skin Sciences, Inc. for office and manufacturing space at 2375 and 2365 Camino Vida Roble Carlsbad, California 92011 (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on May 6, 2019).
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
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Schema
101.CAL		XBRL Taxonomy Calculation Linkbase
101.DEF		XBRL Taxonomy Definition Linkbase
101.LAB		XBRL Taxonomy Label Linkbase
101.PRE		XBRL Taxonomy Presentation Linkbase

*

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

 

SIGNATURES

 

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

 

 

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