Revenue Performance - Total revenues for the three months ended March 31, 2022, were $7,041,000, an increase of 20.8% from $5,827,000 for the same period in 2021[125]. - Recognized recurring treatment revenue for the three months ended March 31, 2022, was $5,067,000, representing approximately 71,000 treatments, compared to $4,679,000 for approximately 67,000 treatments in the same period of 2021[126]. - Dermatology procedures equipment revenues for the three months ended March 31, 2022, were $1,974,000, up from $1,148,000 in the same period of 2021[129]. - Revenues from dermatology recurring procedures rose to $5,067 million in Q1 2022 from $4,679 million in Q1 2021, with a gross profit percentage decrease to 59.9% from 67.9%[133]. - Revenues from dermatology procedures equipment increased to $1,974 million in Q1 2022 from $1,148 million in Q1 2021, with a gross profit percentage increase to 55.4% from 46.6%[134]. Cost and Profitability - The cost of revenues for dermatology recurring procedures was $2,032,000 for the three months ended March 31, 2022, compared to $1,501,000 for the same period in 2021[131]. - Gross profit increased to $4,128 million for the three months ended March 31, 2022, compared to $3,713 million for the same period in 2021, with a gross profit percentage of 58.6% down from 63.7%[132]. - Non-GAAP adjusted EBITDA improved to $(508) million in Q1 2022 from $(811) million in Q1 2021, indicating a reduction in losses[140]. Expenses - Engineering and product development expenses decreased to $163 million in Q1 2022 from $384 million in Q1 2021, primarily due to reduced costs related to the development of XTRAC MomentumTM 1.0[135]. - Selling and marketing expenses increased to $3,616 million in Q1 2022 from $2,932 million in Q1 2021, driven by investments in sales and marketing and increased employee-related expenses[136]. - General and administrative expenses decreased to $2,652 million in Q1 2022 from $2,789 million in Q1 2021, mainly due to higher compensation and severance costs in the prior year[137]. - Interest expense rose significantly to $199 million in Q1 2022 from $30 million in Q1 2021, attributed to a higher interest rate on the Senior Term Facility[138]. Acquisitions and Business Expansion - The company acquired the Pharos U.S. dermatology business for $3.7 million in August 2021, expanding its customer base to 400 dermatology practices[118]. - In January 2022, the company acquired TheraClear Devices for an upfront cash payment of $0.5 million and potential future payments totaling up to $4.5 million based on performance milestones[119]. - As of March 31, 2022, there were 903 XTRAC systems placed in dermatologists' offices in the U.S., an increase from 890 at the end of 2021[111]. Market and Operational Impact - The company estimates that approximately 7.5 million people in the U.S. and up to 125 million people worldwide suffer from psoriasis, with 1% to 2% of the global population affected by vitiligo[111]. - Deferred net revenues as of March 31, 2022, were $1,971,000, compared to $1,769,000 for the same period in 2021, indicating a favorable impact on revenue recognition[128]. - The ongoing COVID-19 pandemic has negatively impacted operational performance, with staffing issues in physician offices affecting business[117]. Cash Flow and Working Capital - As of March 31, 2022, working capital was $4,627 million, down from $7,168 million as of December 31, 2021, primarily due to decreases in cash and accounts receivable[141]. - Net cash used in operating activities was $353 million for Q1 2022, compared to net cash provided of $153 million in Q1 2021, reflecting changes in asset and liability accounts[145].

| --- | --- | --- | --- | --- | |-------|-------|-------|-------|---------------------------------------| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Driving Value to Dermatology Partners | | | | | | Matching Patients with Clinics | | | | | | | | | | | | Investor Presentation April 2022 • | December 2020 Safe Harbor Statement 2 This presentation includes "forward-looking statements" within the meaning of the Securities Litigation Reform Act of 1995. These st ...

• December 2020 March 2022 Driving Value to Dermatology Partners Matching Patients with Clinics Investor Presentation Safe Harbor Statement 2 This presentation includes "forward-looking statements" within the meaning of the Securities Litigation Reform Act of 1995. These statements include but are not limited to the Company's plans, objectives, expectations and intentions and may contain words such as "will," "may," "seeks," and "expects," that suggest future events or trends. These statements, the Company' ...

Financial Data and Key Metrics Changes - STRATA reported Q4 2021 revenues of $9.1 million, a 35% increase compared to Q4 2020 and a 17% increase over Q3 2021 [11][36] - Full year 2021 revenues reached $30 million, a 30% increase over 2020 [45] - Recurring revenues for Q4 2021 were $6.7 million, a 32% increase year-over-year and a 17% increase sequentially [37] - The net loss for Q4 2021 was $849,000, compared to a loss of $443,000 in Q4 2020 [44] Business Line Data and Key Metrics Changes - Equipment revenues for Q4 2021 were $2.4 million, a 45% increase compared to Q4 2020 [38] - The number of recurring revenue XTRAC devices in the U.S. increased to 890, up from 832 at the end of 2020 [13] - High-volume customers contributed over $3 million in revenues, accounting for 54% of all revenues in Q4 [28] Market Data and Key Metrics Changes - International revenue for the full year grew 28% over 2020, highlighting strong traction through distribution partners [24] - STRATA expanded into Israel, targeting an additional 300,000 psoriasis and 160,000 vitiligo patients [25] Company Strategy and Development Direction - STRATA aims to expand into the $5.5 billion acne treatment market through the acquisition of the Theraclear acne system [18] - The company plans to launch Theraclear in Q3 2022, focusing on leveraging existing relationships with XTRAC partners [22][54] - STRATA is also focusing on enhancing its direct-to-dermatology marketing initiatives to drive XTRAC usage [32] Management's Comments on Operating Environment and Future Outlook - Management acknowledged challenges from the Omicron variant impacting early 2022 revenues but projected a strong year-over-year growth of 18% to 20% for Q1 2022 [15][50] - The company expects full year 2022 revenues to be between $33 million and $35 million, indicating continued growth despite headwinds [50] Other Important Information - STRATA's gross profit for Q4 2021 was $6 million, or 66% of revenues, with expectations for margins to remain stable in the 65% to 70% range [41][43] - The company has made significant improvements in reducing non-revenue-generating devices, ending 2021 with 15% of its installed base non-generating revenue [30] Q&A Session Summary Question: How is STRATA anticipating the rollout of Theraclear in 2022? - Management expects to roll out Theraclear around mid-year, targeting existing XTRAC partners for initial placements [54] Question: Can you provide details on the Momentum 1.0 conversions? - The focus will be on high-volume customers, with plans to refurbish and redeploy older units [58] Question: What is the expected mix of revenue sources for FY 2022? - Management indicated that recurring revenue from existing XTRAC partners and conversions from Ra will be key, with Theraclear contributing in the second half of the year [72] Question: How does geographic revenue concentration look? - The majority of revenue is generated from the East and West Coasts, with a significant presence in the Upper Midwest [78]

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, 2021 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 | 13-3986004 | | --- | --- | | (State or Other Jurisdiction of | (I.R.S. Employe ...

Business Overview - Strata is positioned for growth acceleration in the treatment of chronic skin conditions, addressing large markets with differentiated laser-based treatments[4,6] - The company operates with a recurring revenue model, driven by repeat and sustainable revenues, and has a customer base of approximately 1,000 partner practices[4] - Strata is expanding its international presence in key markets and recent product acquisitions are opening significant growth opportunities[4] Clinical and Treatment - Psoriasis treatments remain the primary use for XTRAC lasers domestically, accounting for 80% of treatments, with opportunities to expand use for vitiligo and atopic dermatitis[13,14] - A multicenter psoriasis study showed that 72% of patients achieved at least 75% clearing in an average of 62 treatments[21] - A vitiligo study showed that 506% of treated patches achieved 75% or more pigmentation, and 255% achieved 100% pigmentation[21] Financial Performance and Growth - Preliminary unaudited total revenue for the full year 2021 is expected to range from $297 million to $301 million, compared to $231 million for the full year 2020[51] - The company's installed base has grown by 25% over the last 3 years, driven by actively redeploying underutilized devices and strategic placements[29] - International partner XTRAC clinics increased to 54 in 2021, up from 28 in 2020 and 10 in 2019[51] Acquisitions and Market Expansion - Strata acquired the U S Dermatology Business of Ra Medical Systems, converting 30 of 73 Pharos users through 12/31/2021[41,43] - The acquisition of Theraclear broadens Strata's opportunity in the estimated $55 billion acne care market[45]

[Part I. Financial Information](index=4&type=section&id=Part%20I.%20Financial%20Information) [ITEM 1. Financial Statements](index=4&type=section&id=ITEM%201.%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements for the periods ended September 30, 2021 [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets and liabilities remained stable, with a notable shift in current and long-term debt obligations Condensed Consolidated Balance Sheets (in thousands) | Item | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | **ASSETS** | | | | Cash and cash equivalents | $13,047 | $10,604 | | Restricted cash | - | 7,508 | | Total current assets | 20,046 | 24,831 | | Property and equipment, net | 6,403 | 5,529 | | Intangible assets, net | 10,546 | 6,345 | | Goodwill | 8,803 | 8,803 | | Total assets | $46,758 | $46,778 | | **LIABILITIES AND STOCKHOLDERS' EQUITY** | | | | Note payable | - | 7,275 | | Current portion of long-term debt | - | 1,478 | | Total current liabilities | 12,154 | 18,838 | | Long-term debt, net | 7,282 | 1,050 | | Total liabilities | 20,575 | 20,886 | | Total stockholders' equity | 26,183 | 25,892 | | Total liabilities and stockholders' equity | $46,758 | $46,778 | [Condensed Consolidated Statements of Operations (Three Months Ended September 30, 2021 and 2020)](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20(Three%20Months)) The company reported a significant increase in net revenues and gross profit, leading to a reduced net loss for the quarter Condensed Consolidated Statements of Operations (Three Months Ended September 30, in thousands) | Item | 2021 | 2020 | | :--- | :--- | :--- | | Revenues, net | $7,711 | $5,613 | | Cost of revenues | 2,335 | 2,383 | | Gross profit | 5,376 | 3,230 | | Operating expenses | 5,841 | 4,391 | | Loss from operations | (465) | (1,161) | | Net loss | $(521) | $(1,254) | | Loss per common share - basic and diluted | $(0.02) | $(0.04) | [Condensed Consolidated Statements of Operations (Nine Months Ended September 30, 2021 and 2020)](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20(Nine%20Months)) Increased net revenues and a gain on debt forgiveness significantly reduced the net loss for the nine-month period Condensed Consolidated Statements of Operations (Nine Months Ended September 30, in thousands) | Item | 2021 | 2020 | | :--- | :--- | :--- | | Revenues, net | $20,920 | $16,373 | | Cost of revenues | 7,070 | 6,780 | | Gross profit | 13,850 | 9,593 | | Operating expenses | 17,630 | 13,317 | | Loss from operations | (3,780) | (3,724) | | Gain on forgiveness of debt | 2,028 | - | | Net loss | $(1,857) | $(3,969) | | Loss per common share – basic and diluted | $(0.05) | $(0.12) | [Condensed Consolidated Statement of Changes in Stockholders' Equity (Nine Months Ended September 30, 2020)](index=7&type=section&id=Condensed%20Consolidated%20Statement%20of%20Changes%20in%20Stockholders'%20Equity%20(2020)) Stockholders' equity decreased during the period, primarily reflecting the company's cumulative net loss Changes in Stockholders' Equity (Nine Months Ended Sep 30, 2020, in thousands) | Item | Jan 1, 2020 Balance | Sep 30, 2020 Balance | | :--- | :--- | :--- | | Common Stock Shares | 32,932,273 | 33,754,909 | | Common Stock Amount | $33 | $34 | | Additional Paid-In Capital | $243,180 | $244,423 | | Accumulated Deficit | $(214,561) | $(218,530) | | Total Stockholders' Equity | $28,653 | $25,927 | | Stock-based compensation | - | $1,243 (cumulative) | | Net loss | - | $(3,969) (cumulative) | [Condensed Consolidated Statement of Changes in Stockholders' Equity (Nine Months Ended September 30, 2021)](index=8&type=section&id=Condensed%20Consolidated%20Statement%20of%20Changes%20in%20Stockholders'%20Equity%20(2021)) Stockholders' equity increased slightly, influenced by stock-based compensation and warrant issuance despite a net loss Changes in Stockholders' Equity (Nine Months Ended Sep 30, 2021, in thousands) | Item | Jan 1, 2021 Balance | Sep 30, 2021 Balance | | :--- | :--- | :--- | | Common Stock Shares | 33,801,045 | 34,364,679 | | Common Stock Amount | $34 | $34 | | Additional Paid-In Capital | $244,831 | $246,979 | | Accumulated Deficit | $(218,973) | $(220,830) | | Total Stockholders' Equity | $25,892 | $26,183 | | Stock-based compensation | - | $1,563 (cumulative) | | Issuance of warrants | - | $585 | | Net loss (cumulative for 9 months) | - | $(1,857) | [Condensed Consolidated Statements of Cash Flows (Nine Months Ended September 30, 2021 and 2020)](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Operating cash flow decreased while investing cash outflow increased due to an asset acquisition and debt refinancing Condensed Consolidated Statements of Cash Flows (Nine Months Ended September 30, in thousands) | Item | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $839 | $1,750 | | Net cash used in investing activities | (5,996) | (1,447) | | Net cash provided by financing activities | 92 | 2,528 | | Net (decrease) increase in cash and restricted cash | (5,065) | 2,831 | | Cash, cash equivalents and restricted cash, end of period | $13,047 | $18,460 | - Cash paid for interest **decreased from $157 thousand in 2020 to $109 thousand** in 2021[24](index=24&type=chunk) - Fair value of warrants issued in connection with debt was **$585 thousand** in 2021[24](index=24&type=chunk) - Assumed deferred revenue in connection with the Ra Medical asset acquisition was **$1,841 thousand** in 2021[24](index=24&type=chunk) [Notes to Unaudited Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) These notes detail accounting policies, estimates, and recent events including acquisitions and debt refinancing [Note 1 The Company: Background](index=10&type=section&id=Note%201%20The%20Company%3A%20Background) The company specializes in dermatologic treatments, expanded internationally, and faced negative impacts from COVID-19 - STRATA Skin Sciences develops, commercializes, and markets innovative products for dermatologic conditions, including **XTRAC® and Pharos® excimer lasers** and VTRAC® lamp systems[25](index=25&type=chunk) - As of September 30, 2021, there were **880 XTRAC systems** placed in dermatologists' offices in the U.S. and **49 internationally** under a recurring revenue model[26](index=26&type=chunk) - The company signed direct distribution agreements for recurring revenue and capital sales in **Japan (September 2020)** and **China (February 2021)**[27](index=27&type=chunk) - A **'Home by XTRAC™' pilot program was discontinued** and is under evaluation[28](index=28&type=chunk) - The **COVID-19 pandemic has negatively impacted** the global economy, supply chains, workforce, and financial markets, leading to suspension of elective procedures and temporary closure of physician practices[29](index=29&type=chunk)[30](index=30&type=chunk) [Note 1 The Company: Basis of Presentation](index=11&type=section&id=Note%201%20The%20Company%3A%20Basis%20of%20Presentation) The unaudited interim financial statements are prepared according to SEC rules and should be read with the 2020 Form 10-K - Financial statements are **unaudited** and include normal recurring adjustments, prepared under SEC rules for interim financial reporting[33](index=33&type=chunk) - Operating results and cash flows for the nine months ended September 30, 2021, are **not necessarily indicative of future periods**[33](index=33&type=chunk) [Note 1 The Company: Significant Accounting Policies](index=11&type=section&id=Note%201%20The%20Company%3A%20Significant%20Accounting%20Policies) No changes were made to the company's significant accounting policies during the nine months ended September 30, 2021 - **No changes** to significant accounting policies during the nine months ended September 30, 2021[35](index=35&type=chunk) [Note 1 The Company: Use of Estimates](index=11&type=section&id=Note%201%20The%20Company%3A%20Use%20of%20Estimates) Financial statement preparation requires management estimates, with the full impact of COVID-19 remaining uncertain - Significant estimates include revenue recognition, goodwill impairment, useful lives of assets, equity-based awards, deferred tax assets, and inventory reserves[36](index=36&type=chunk) - The full impact of the ongoing **COVID-19 outbreak is unknown** and could result in material impacts to future financial statements[37](index=37&type=chunk) [Note 1 The Company: Fair Value Measurements](index=12&type=section&id=Note%201%20The%20Company%3A%20Fair%20Value%20Measurements) Fair value is measured using a three-tier hierarchy, and carrying values of most financial instruments approximate fair values - Fair value measurements follow ASC Topic 820, using a **three-tier hierarchy** (Level 1: quoted prices; Level 2: observable inputs; Level 3: unobservable inputs)[38](index=38&type=chunk)[43](index=43&type=chunk) - The carrying value of cash, restricted cash, short-term monetary assets/liabilities, and debt **approximate their fair values**[40](index=40&type=chunk) [Note 1 The Company: Earnings Per Share](index=12&type=section&id=Note%201%20The%20Company%3A%20Earnings%20Per%20Share) All potentially dilutive securities were anti-dilutive, resulting in diluted loss per share equaling basic loss per share - Basic and diluted loss per common share are calculated by dividing loss attributable to common shares by weighted-average common shares outstanding[41](index=41&type=chunk) - No Series C Convertible Preferred Stock was outstanding as of September 30, 2021 and 2020[42](index=42&type=chunk) - All potentially dilutive securities were **anti-dilutive** for the three and nine months ended September 30, 2021 and 2020[43](index=43&type=chunk)[44](index=44&type=chunk) Potentially Dilutive Securities Excluded from EPS Calculation (in thousands) | Item | Sep 30, 2021 | Sep 30, 2020 | | :--- | :--- | :--- | | Common stock purchase warrants | 373,626 | 149,901 | | Restricted stock units | 144,497 | 119,330 | | Common stock options | 3,963,889 | 4,908,038 | | Total | 4,482,012 | 5,177,269 | [Note 1 The Company: Accounting Pronouncements Recently Adopted](index=13&type=section&id=Note%201%20The%20Company%3A%20Accounting%20Pronouncements%20Recently%20Adopted) The adoption of ASU No 2019-12 regarding income taxes did not materially affect the company's financial statements - ASU No 2019-12, Income Taxes (Topic 740), adopted January 1, 2021, had **no material effect** on financial statements[45](index=45&type=chunk) [Note 1 The Company: Recent Accounting Pronouncements Not Yet Adopted](index=13&type=section&id=Note%201%20The%20Company%3A%20Recent%20Accounting%20Pronouncements%20Not%20Yet%20Adopted) The company is evaluating new accounting standards and does not anticipate a material effect on its financial statements - ASU 2020-04 (Reference Rate Reform) is **not expected to have a material effect** due to no hedging activities[46](index=46&type=chunk) - ASU 2020-06 (Accounting for Convertible Instruments) is **not expected to have a material effect** as the company does not currently engage in covered contracts[47](index=47&type=chunk) - ASU 2021-04 (Issuer's Accounting for Certain Modifications) is **not believed to have a material effect**[48](index=48&type=chunk) [Note 2 Liquidity](index=14&type=section&id=Note%202%20Liquidity) Management believes current cash and anticipated revenues are sufficient for the next 12 months despite market risks - The company has historically experienced **recurring losses** and depended on capital raises[49](index=49&type=chunk) - Received and had **PPP loan forgiven**; EIDL loan repaid[49](index=49&type=chunk) - Entered into a Senior Term Facility in September 2021 and an equity distribution agreement in October 2021 to sell up to **$11.0 million in common stock**[49](index=49&type=chunk) - Management believes current cash and anticipated revenues will be **sufficient for the next 12 months**[49](index=49&type=chunk) - Ongoing COVID-19 impact on financial markets and supply chain disruptions could interfere with access to financing[49](index=49&type=chunk) [Note 3 Revenue Recognition](index=14&type=section&id=Note%203%20Revenue%20Recognition) Revenue is recognized from two segments, with recurring procedures accounted for as operating leases - Dermatology Recurring Procedures revenue is generated from XTRAC laser placements, treated as **operating leases** under ASC 842[49](index=49&type=chunk)[50](index=50&type=chunk) - Dermatology Procedures Equipment revenue is recognized when control of products transfers to customers, typically **FOB shipping point**[52](index=52&type=chunk) - Remaining performance obligations related to ASC 606 were **$1,549 thousand** as of September 30, 2021, primarily from deferred revenue acquired in the RA Medical asset acquisition[54](index=54&type=chunk) - Co-pay reimbursements to patients are recorded as a reduction of revenue: **$199 thousand (Q3 2021)** vs $160 thousand (Q3 2020), and **$542 thousand (9M 2021)** vs $414 thousand (9M 2020)[56](index=56&type=chunk) Revenue Disaggregated by Geographical Region (Three Months Ended September 30, in thousands) | Segment | Domestic (2021) | Foreign (2021) | Total (2021) | Domestic (2020) | Foreign (2020) | Total (2020) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Dermatology Recurring Procedures | $5,370 | $340 | $5,710 | $3,690 | $145 | $3,835 | | Dermatology Procedures Equipment | $519 | $1,482 | $2,001 | $261 | $1,517 | $1,778 | | **Total** | **$5,889** | **$1,822** | **$7,711** | **$3,951** | **$1,662** | **$5,613** | Revenue Disaggregated by Geographical Region (Nine Months Ended September 30, in thousands) | Segment | Domestic (2021) | Foreign (2021) | Total (2021) | Domestic (2020) | Foreign (2020) | Total (2020) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Dermatology Recurring Procedures | $14,923 | $918 | $15,841 | $11,957 | $375 | $12,332 | | Dermatology Procedures Equipment | $1,113 | $3,966 | $5,079 | $701 | $3,340 | $4,041 | | **Total** | **$16,036** | **$4,884** | **$20,920** | **$12,658** | **$3,715** | **$16,373** | Expected Future Undiscounted Fixed Treatment Code Payments from International Recurring Revenue Customers (as of Sep 30, 2021, in thousands) | Year | Amount | | :--- | :--- | | Remaining 2021 | $390 | | 2022 | 1,556 | | 2023 | 1,479 | | 2024 | 1,076 | | 2025 | 362 | | **Total** | **$4,863** | [Note 4 Acquisition of Pharos Assets and Liabilities](index=18&type=section&id=Note%204%20Acquisition%20of%20Pharos%20Assets%20and%20Liabilities) The company acquired Pharos business assets from Ra Medical Systems for $3.7 million to expand its recurring revenue base - Acquired U.S dermatology Pharos business assets and liabilities from Ra Medical Systems, Inc in August 2021 for **$3,700 thousand cash**[60](index=60&type=chunk)[61](index=61&type=chunk) - The acquisition allows marketing to Ra Medical's **400 existing dermatology practices**, increasing recurring revenue and XTRAC placements[60](index=60&type=chunk) - Transaction accounted for as an asset acquisition, with consideration primarily allocated to **customer lists ($5,314 thousand)** and assumed deferred revenue ($1,841 thousand)[61](index=61&type=chunk) - Customer lists intangible asset is amortized on a **straight-line basis over twelve years**[61](index=61&type=chunk) [Note 5 Inventories](index=19&type=section&id=Note%205%20Inventories) Total inventories, primarily raw materials and work-in-process, decreased slightly as of September 30, 2021 Inventories (in thousands) | Item | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Raw materials and work-in-process | $3,024 | $2,949 | | Finished goods | 201 | 495 | | **Total inventories** | **$3,225** | **$3,444** | [Note 6 Property and Equipment, net](index=19&type=section&id=Note%206%20Property%20and%20Equipment%2C%20net) Net property and equipment increased due to a rise in lasers placed-in-service, offset by depreciation Property and Equipment, net (in thousands) | Item | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Lasers placed-in-service | $25,190 | $22,942 | | Total gross property and equipment | 25,693 | 23,374 | | Accumulated depreciation and amortization | (19,290) | (17,845) | | **Property and equipment, net** | **$6,403** | **$5,529** | - Depreciation and related amortization expense was **$575 thousand (Q3 2021)** vs $454 thousand (Q3 2020), and **$1,576 thousand (9M 2021)** vs $1,535 thousand (9M 2020)[63](index=63&type=chunk) - Recognized a **$73 thousand loss on disposal** of property and equipment during the nine months ended September 30, 2021[63](index=63&type=chunk) [Note 7 Intangible Assets, net](index=19&type=section&id=Note%207%20Intangible%20Assets%2C%20net) Net intangible assets increased significantly due to the acquisition of the Pharos customer list Definite-Lived Intangible Assets, net (in thousands) | Item | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Core technology | $2,138 | $2,565 | | Product technology | - | - | | Customer relationships | 2,587 | 3,105 | | Tradenames | 562 | 675 | | Pharos customer list | 5,259 | - | | **Total intangible assets, net** | **$10,546** | **$6,345** | - Amortization expense was **$408 thousand (Q3 2021)** vs $353 thousand (Q3 2020), and **$1,113 thousand (9M 2021)** vs $1,258 thousand (9M 2020)[66](index=66&type=chunk) - **No impairment charges** for the nine months ended September 30, 2021[67](index=67&type=chunk) Estimated Amortization Expense for Intangible Assets (in thousands) | Year | Amount | | :--- | :--- | | Remaining 2021 | $463 | | 2022 | 1,853 | | 2023 | 1,853 | | 2024 | 1,853 | | 2025 | 1,148 | | Thereafter | 3,376 | | **Total** | **$10,546** | [Note 8 Other Accrued Liabilities](index=20&type=section&id=Note%208%20Other%20Accrued%20Liabilities) Other accrued liabilities increased, driven by higher accrued compensation and ongoing state sales tax appeals Other Accrued Liabilities (in thousands) | Item | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Accrued warranty, current | $54 | $87 | | Accrued compensation, including commissions and vacation | 1,578 | 891 | | Accrued state sales, use and other taxes | 3,152 | 3,105 | | Accrued professional fees and other accrued liabilities | 764 | 607 | | **Total other accrued liabilities** | **$5,548** | **$4,690** | - The company is appealing state sales and use tax assessments totaling **$1,484 thousand** (for March 2014-February 2020) and **$720 thousand** (for June 2015-March 2018), plus interest[70](index=70&type=chunk)[71](index=71&type=chunk)[72](index=72&type=chunk) Warranty Accrual Activity (in thousands) | Item | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 | | :--- | :--- | :--- | :--- | :--- | | Accrual at beginning of period | $98 | $139 | $113 | $232 | | Additions charged to warranty expense | 11 | 37 | 52 | 46 | | Expiring warranties/claimed satisfied | (28) | (41) | (84) | (143) | | **Total** | **$81** | **$135** | **$81** | **$135** | | Less: current portion | (54) | (107) | (54) | (107) | | **Total long-term accrued warranty costs** | **$27** | **$28** | **$27** | **$28** | [Note 9 Note Payable](index=21&type=section&id=Note%209%20Note%20Payable) The company fully repaid its $7,275 thousand note payable on September 30, 2021 - The **$7,275 thousand note payable** was repaid on September 30, 2021, using proceeds from a secured time deposit[76](index=76&type=chunk) [Note 10 Long-term Debt](index=22&type=section&id=Note%2010%20Long-term%20Debt) The company entered into an $8.0 million Senior Term Facility, refinancing previous loans and issuing warrants - Entered into an **$8.0 million Senior Term Facility** on September 30, 2021, with MidCap Financial Trust, repaying the Note Payable and EIDL loan[77](index=77&type=chunk) - The Senior Term Facility bears interest at **LIBOR + 7.50%** and matures on September 1, 2026[77](index=77&type=chunk) - **Monthly interest-only payments** are required through September 30, 2024, followed by 24 equal monthly principal payments plus interest[77](index=77&type=chunk) - The company issued warrants to purchase **373,626 common shares at $1.82 per share** to an affiliate of the lender, valued at $0.6 million[81](index=81&type=chunk) - Subject to a quarterly financial covenant requiring **minimum net revenue** for the trailing 12-month period ($24.0 million as of Sep 30, 2021)[79](index=79&type=chunk) - The **$2,028 thousand PPP loan was forgiven** in the second quarter of 2021, resulting in a gain on forgiveness of debt[83](index=83&type=chunk) - The **$500 thousand EIDL loan**, obtained in May 2020, was repaid on September 30, 2021[84](index=84&type=chunk) Future Minimum Principal Payments (as of Sep 30, 2021, in thousands) | Year | Amount | | :--- | :--- | | 2024 | $1,000 | | 2025 | 4,000 | | 2026 | 3,000 | | **Total** | **$8,000** | [Note 11 Stock-based Compensation](index=23&type=section&id=Note%2011%20Stock-based%20Compensation) Stock-based compensation expense was $1,563 thousand for the nine-month period, with more shares authorized for grants - Stock-based compensation expense was **$320 thousand (Q3 2021)** vs $403 thousand (Q3 2020), and **$1,563 thousand (9M 2021)** vs $1,243 thousand (9M 2020)[86](index=86&type=chunk) - Shareholders approved an increase of **2,700,000 common shares** for issuance under the 2016 Omnibus Incentive Plan in July 2021[85](index=85&type=chunk) - Total unrecognized compensation expense for unvested stock options was **$2,720 thousand**, to be recognized over ~2.4 years[89](index=89&type=chunk) - Accelerated vesting of unvested options for the former CEO in February 2021 resulted in **$173 thousand additional compensation expense**[91](index=91&type=chunk) - Total unrecognized compensation expense for unvested restricted stock units was **$167 thousand**, to be recognized over ~0.8 years[92](index=92&type=chunk) Stock Option Activity (Nine Months Ended September 30, 2021) | Item | Number of shares | Weighted average exercise price per share | | :--- | :--- | :--- | | Outstanding at January 1, 2021 | 5,292,888 | $1.87 | | Granted | 2,043,714 | $1.67 | | Exercised | (1,557,628) | $1.12 | | Forfeited/expired | (1,815,085) | $1.84 | | **Outstanding at September 30, 2021** | **3,963,889** | **$2.05** | | Exercisable at September 30, 2021 | 1,236,841 | $2.77 | Restricted Stock Unit Activity (Nine Months Ended September 30, 2021) | Item | Number of shares | Weighted average grant date fair value | | :--- | :--- | :--- | | Unvested at January 1, 2021 | - | $- | | Granted | 290,861 | $1.44 | | Vested | (146,364) | $1.42 | | **Unvested at September 30, 2021** | **144,497** | **$1.45** | [Note 12 Income Taxes](index=25&type=section&id=Note%2012%20Income%20Taxes) Income tax expense was minimal, primarily due to changes in deferred tax liability related to goodwill - Income tax expense was **$12 thousand (9M 2021)** vs $207 thousand (9M 2020), primarily from changes in deferred tax liability related to goodwill[94](index=94&type=chunk) - The **CARES Act did not have a significant impact** on the company's financial position, results of operations, or cash flows[95](index=95&type=chunk) - Prior ownership changes (Section 382) may **limit the annual utilization of net operating losses**[96](index=96&type=chunk) [Note 13 Business Segments](index=25&type=section&id=Note%2013%20Business%20Segments) Both the Dermatology Recurring Procedures and Dermatology Procedures Equipment segments showed increased revenues and gross profits - Two operating segments: **Dermatology Recurring Procedures** (revenue from XTRAC usage) and **Dermatology Procedures Equipment** (revenue from equipment sales)[97](index=97&type=chunk) Segment Results of Operations (Three Months Ended September 30, 2021, in thousands) | Item | Dermatology Recurring Procedures | Dermatology Procedures Equipment | TOTAL | | :--- | :--- | :--- | :--- | | Revenues | $5,710 | $2,001 | $7,711 | | Costs of revenues | 1,512 | 823 | 2,335 | | Gross profit | 4,198 | 1,178 | 5,376 | | Gross profit % | 73.5% | 58.9% | 69.7% | | Income (loss) from operations | 771 | 939 | (465) | Segment Results of Operations (Nine Months Ended September 30, 2021, in thousands) | Item | Dermatology Recurring Procedures | Dermatology Procedures Equipment | TOTAL | | :--- | :--- | :--- | :--- | | Revenues | $15,841 | $5,079 | $20,920 | | Costs of revenues | 4,648 | 2,422 | 7,070 | | Gross profit | 11,193 | 2,657 | 13,850 | | Gross profit % | 70.7% | 52.3% | 66.2% | | Income (loss) from operations | 1,375 | 1,930 | (3,780) | | Gain on forgiveness of debt | - | - | 2,028 | Segment Results of Operations (Three Months Ended September 30, 2020, in thousands) | Item | Dermatology Recurring Procedures | Dermatology Procedures Equipment | TOTAL | | :--- | :--- | :--- | :--- | | Revenues | $3,835 | $1,778 | $5,613 | | Costs of revenues | 1,368 | 1,015 | 2,383 | | Gross profit | 2,467 | 763 | 3,230 | | Gross profit % | 64.3% | 42.9% | 57.5% | | Income (loss) from operations | 255 | 513 | (1,161) | Segment Results of Operations (Nine Months Ended September 30, 2020, in thousands) | Item | Dermatology Recurring Procedures | Dermatology Procedures Equipment | TOTAL | | :--- | :--- | :--- | :--- | | Revenues | $12,332 | $4,041 | $16,373 | | Costs of revenues | 4,534 | 2,246 | 6,780 | | Gross profit | 7,798 | 1,795 | 9,593 | | Gross profit % | 63.2% | 44.4% | 58.6% | | Income (loss) from operations | 949 | 1,248 | (3,724) | [Note 14 Significant Customer Concentration](index=27&type=section&id=Note%2014%20Significant%20Customer%20Concentration) The company had significant revenue and accounts receivable concentration with single customers in 2021 - For the nine months ended September 30, 2021, one customer's sales were $2,220 thousand, or **10.6% of total revenues**[105](index=105&type=chunk) - One customer represented **10.5% of accounts receivable** as of September 30, 2021[105](index=105&type=chunk) - For the three and nine months ended September 30, 2020, sales to the international master distributor were **15.1% and 13.1% of total revenues**, respectively[106](index=106&type=chunk) [Note 15 Commitments: Leases](index=28&type=section&id=Note%2015%20Commitments%3A%20Leases) The company holds non-cancellable operating leases for facilities and equipment with remaining terms of 1 to 4 years - Leases for facilities and IT/office equipment are classified as **operating leases** with remaining terms of 1 to 4 years[107](index=107&type=chunk) - Operating lease costs were **$108 thousand (Q3 2021)** vs $112 thousand (Q3 2020), and **$331 thousand (9M 2021)** vs $336 thousand (9M 2020)[108](index=108&type=chunk) Operating Lease Maturities (as of Sep 30, 2021, in thousands) | Year ending December 31, | Amount | | :--- | :--- | | Remaining 2021 | $122 | | 2022 | 371 | | 2023 | 242 | | 2024 | 186 | | **Total remaining lease payments** | **$921** | | Less: imputed interest | (117) | | **Total lease liabilities** | **$804** | [Note 15 Commitments: Contingencies](index=28&type=section&id=Note%2015%20Commitments%3A%20Contingencies) The company is involved in routine legal actions and regulatory inquiries as part of its ordinary course of business - The company is routinely subject to legal actions, proceedings, and governmental examinations, which may involve **substantial monetary damages**[109](index=109&type=chunk) [Note 16 Subsequent Events](index=28&type=section&id=Note%2016%20Subsequent%20Events) The company entered into an equity distribution agreement to potentially sell up to $11.0 million of common stock - In October 2021, the company entered an equity distribution agreement to sell up to **$11.0 million of common stock** via 'at-the-market' offerings[110](index=110&type=chunk) [ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=29&type=section&id=ITEM%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses financial performance, highlighting COVID-19 impacts, strategic acquisitions, and debt refinancing [Introduction, Outlook and Overview of Business Operations](index=29&type=section&id=Introduction%2C%20Outlook%20and%20Overview%20of%20Business%20Operations) The company focuses on dermatologic conditions, has expanded internationally, and continues to face negative impacts from COVID-19 - STRATA Skin Sciences is a medical technology company focused on innovative products for dermatologic conditions, including **XTRAC® and Pharos® excimer lasers**[113](index=113&type=chunk) - As of September 30, 2021, there were **880 XTRAC systems** in U.S dermatologists' offices, up from 832 at December 31, 2020[114](index=114&type=chunk) - The company signed direct distribution agreements for **Japan (September 2020)** and **China (February 2021)** for capital sales and recurring revenue[115](index=115&type=chunk) - The **COVID-19 pandemic has negatively impacted** the global economy, supply chains, and physician practices, affecting the company's financial performance[117](index=117&type=chunk)[118](index=118&type=chunk)[122](index=122&type=chunk) [Key Technology](index=31&type=section&id=Key%20Technology) The company's key technologies include the FDA-cleared XTRAC® Excimer Laser and VTRAC® Lamp systems - **XTRAC® Excimer Laser** (FDA cleared 2000) delivers targeted 308nm UVB light for psoriasis and vitiligo, covered by most major insurance companies[128](index=128&type=chunk) - **VTRAC® Lamp** (FDA cleared 2005) provides targeted therapeutic efficacy with a lamp system[128](index=128&type=chunk) - Introduced **Multi Micro Dose (MMD) tip** for XTRAC in 2018 and **XTRAC Momentum Excimer Laser Platform** in 2020[128](index=128&type=chunk) [Recent Developments](index=31&type=section&id=Recent%20Developments) Key developments include the Pharos asset acquisition, a new $8.0 million credit facility, and debt forgiveness and repayments - Acquired Pharos dermatology net assets from Ra Medical Systems for **$3,757 thousand** in August 2021, expanding customer base[125](index=125&type=chunk) - Entered into an **$8.0 million Senior Term Facility** with MidCap Financial Trust on September 30, 2021, with interest at LIBOR + 7.50%[126](index=126&type=chunk) - Issued warrants to purchase **373,626 common shares** to an affiliate of MidCap in connection with the credit facility[129](index=129&type=chunk) - The **$2.0 million PPP loan was forgiven** in Q2 2021, resulting in a $2,028 thousand gain[131](index=131&type=chunk) - The **$500 thousand EIDL loan** and the **$7,275 thousand commercial bank note** were repaid on September 30, 2021[132](index=132&type=chunk)[133](index=133&type=chunk) - Entered an equity distribution agreement in October 2021 to sell up to **$11.0 million of common stock** via 'at-the-market' offerings[134](index=134&type=chunk) [Critical Accounting Policies and Estimates](index=32&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) There have been no changes to the company's critical accounting policies during the nine months ended September 30, 2021 - **No changes** to critical accounting policies in the nine months ended September 30, 2021[135](index=135&type=chunk) [Results of Operations](index=33&type=section&id=Results%20of%20Operations) The company saw increased revenues and gross profits, alongside higher operating expenses and a gain from debt forgiveness [Revenues](index=33&type=section&id=Revenues) Total revenues increased significantly for both the three and nine-month periods, driven by growth in both business segments Revenues by Segment (in thousands) | Segment | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 | | :--- | :--- | :--- | :--- | :--- | | Dermatology Recurring Procedures | $5,710 | $3,835 | $15,841 | $12,332 | | Dermatology Procedures Equipment | 2,001 | 1,778 | 5,079 | 4,041 | | **Total Revenues** | **$7,711** | **$5,613** | **$20,920** | **$16,373** | [Dermatology Recurring Procedures](index=33&type=section&id=Dermatology%20Recurring%20Procedures) Recurring treatment revenue increased year-over-year, supported by investments in direct-to-patient advertising - Recurring treatment revenue for Q3 2021 was **$5,710 thousand** (approx 81,000 treatments), up from $3,835 thousand (approx 55,000 treatments) in Q3 2020[138](index=138&type=chunk) - Recurring treatment revenue for 9M 2021 was **$15,841 thousand** (approx 226,000 treatments), up from $12,332 thousand (approx 177,000 treatments) in 9M 2020[139](index=139&type=chunk) - Increased direct-to-patient advertising spend in 2021, expecting a **3-9 month lag** before revenue impact[140](index=140&type=chunk) - Deferred net revenues for domestic placements were **$2,107 thousand** (Sep 30, 2021) vs $1,391 thousand (Sep 30, 2020)[141](index=141&type=chunk) [Dermatology Procedures Equipment](index=34&type=section&id=Dermatology%20Procedures%20Equipment) Dermatology equipment revenues increased for both the three and nine-month periods, driven primarily by international sales - Dermatology equipment revenues for Q3 2021 were **$2,001 thousand** (11 international systems sold), up from $1,778 thousand (19 international, 1 domestic system sold) in Q3 2020[144](index=144&type=chunk)[145](index=145&type=chunk) - Dermatology equipment revenues for 9M 2021 were **$5,079 thousand** (27 international, 5 domestic systems sold), up from $4,041 thousand (29 international, 2 domestic systems sold) in 9M 2020[145](index=145&type=chunk)[146](index=146&type=chunk) [Cost of Revenues](index=34&type=section&id=Cost%20of%20Revenues) Total cost of revenues increased for the nine-month period, reflecting higher sales volumes Cost of Revenues by Segment (in thousands) | Segment | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 | | :--- | :--- | :--- | :--- | :--- | | Dermatology Recurring Procedures | $1,512 | $1,368 | $4,648 | $4,534 | | Dermatology Procedures Equipment | 823 | 1,015 | 2,422 | 2,246 | | **Total Cost of Revenues** | **$2,335** | **$2,383** | **$7,070** | **$6,780** | [Gross Profit Analysis](index=34&type=section&id=Gross%20Profit%20Analysis) Gross profit and margin increased significantly due to higher sales and recognition of deferred service contract revenue Company Gross Profit Analysis (in thousands) | Item | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $7,711 | $5,613 | $20,920 | $16,373 | | Cost of revenues | 2,335 | 2,383 | 7,070 | 6,780 | | **Gross profit** | **$5,376** | **$3,230** | **$13,850** | **$9,593** | | **Gross profit percentage** | **69.7%** | **57.5%** | **66.2%** | **58.6%** | - Increase in gross profit for 9M 2021 was primarily due to **higher sales** and recognition of deferred service contract revenue from the **RA Medical acquisition**[149](index=149&type=chunk) Dermatology Recurring Procedures Gross Profit (in thousands) | Item | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $5,710 | $3,835 | $15,841 | $12,332 | | Cost of revenues | 1,512 | 1,368 | 4,648 | 4,534 | | **Gross profit** | **$4,198** | **$2,467** | **$11,193** | **$7,798** | | **Gross profit percentage** | **73.5%** | **64.3%** | **70.7%** | **63.2%** | Dermatology Procedures Equipment Gross Profit (in thousands) | Item | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $2,001 | $1,778 | $5,079 | $4,041 | | Cost of revenues | 823 | 1,015 | 2,422 | 2,246 | | **Gross profit** | **$1,178** | **$763** | **$2,657** | **$1,795** | | **Gross profit percentage** | **58.9%** | **42.9%** | **52.3%** | **44.4%** | [Engineering and Product Development](index=35&type=section&id=Engineering%20and%20Product%20Development) Expenses increased for the nine-month period due to consulting costs for development projects - Engineering and product development expenses were **$371 thousand (Q3 2021)** vs $411 thousand (Q3 2020)[153](index=153&type=chunk) - Engineering and product development expenses for 9M 2021 were **$1,158 thousand**, up from $950 thousand in 9M 2020, mainly due to consulting costs[153](index=153&type=chunk) [Selling and Marketing Expenses](index=35&type=section&id=Selling%20and%20Marketing%20Expenses) Expenses increased significantly due to renewed investments in sales, marketing, and direct-to-consumer advertising - Selling and marketing expenses were **$3,295 thousand (Q3 2021)** vs $2,051 thousand (Q3 2020)[155](index=155&type=chunk) - Selling and marketing expenses for 9M 2021 were **$9,387 thousand**, up from $6,446 thousand in 9M 2020[155](index=155&type=chunk) - Increase driven by investments in **sales, marketing, and direct-to-consumer advertising**, contrasting with cost reductions in 2020[155](index=155&type=chunk) [General and Administrative Expenses](index=35&type=section&id=General%20and%20Administrative%20Expenses) Expenses increased due to higher compensation and severance costs related to the CEO transition - General and administrative expenses increased to **$2,175 thousand (Q3 2021)** from $1,929 thousand (Q3 2020)[156](index=156&type=chunk) - General and administrative expenses for 9M 2021 were **$7,085 thousand**, up from $5,921 thousand in 9M 2020[156](index=156&type=chunk) - Increase primarily due to higher compensation, severance, and stock option costs from the **CEO transition** in Q1 2021[156](index=156&type=chunk) [Gain on Forgiveness of Debt](index=36&type=section&id=Gain%20on%20Forgiveness%20of%20Debt) The company recorded a $2,028 thousand gain from the forgiveness of its PPP loan - Recorded a **$2,028 thousand gain** on forgiveness of debt during 9M 2021 due to the PPP loan forgiveness[158](index=158&type=chunk) [Interest Expense, net](index=36&type=section&id=Interest%20Expense%2C%20net) Net interest expense was not material for the reported periods - Interest expense, net of interest income, was **not material** during the three and nine months ended September 30, 2021 and 2020[159](index=159&type=chunk) [Income Taxes](index=36&type=section&id=Income%20Taxes) Income tax expense was minimal and primarily related to changes in deferred tax liability for goodwill - Income tax expense was **$12 thousand (9M 2021)** vs $207 thousand (9M 2020), primarily from changes in deferred tax liability related to goodwill[160](index=160&type=chunk) - There were **no federal and state taxes** on the PPP loan forgiveness[160](index=160&type=chunk) [Non-GAAP adjusted EBITDA](index=36&type=section&id=Non-GAAP%20adjusted%20EBITDA) Non-GAAP adjusted EBITDA improved significantly, reflecting better operational performance and debt forgiveness Non-GAAP Adjusted EBITDA (in thousands) | Item | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 | | :--- | :--- | :--- | :--- | :--- | | Net loss | $(521) | $(1,254) | $(1,857) | $(3,969) | | Depreciation and amortization | 983 | 807 | 2,689 | 2,793 | | Amortization of right-of-use-asset | 87 | 83 | 261 | 242 | | Loss (gain) on disposal of property and equipment | 10 | 4 | 73 | 23 | | Income taxes | 4 | 72 | 12 | 207 | | Gain on forgiveness of debt | - | - | (2,028) | - | | Interest expense, net | 52 | 21 | 93 | 38 | | Non-GAAP EBITDA | 615 | (267) | (757) | (666) | | Stock compensation | 320 | 403 | 1,563 | 1,243 | | **Non-GAAP adjusted EBITDA** | **$935** | **$136** | **$806** | **$577** | [Liquidity and Capital Resources](index=37&type=section&id=Liquidity%20and%20Capital%20Resources) Working capital increased, while cash from operations decreased and cash used in investing increased due to an acquisition - Working capital increased to **$7,892 thousand** as of September 30, 2021, from $5,993 thousand at December 31, 2020[162](index=162&type=chunk) - Cash, cash equivalents and restricted cash decreased to **$13,047 thousand** as of September 30, 2021, from $18,112 thousand at December 31, 2020[162](index=162&type=chunk) - Net cash provided by operating activities was **$839 thousand (9M 2021)**, down from $1,750 thousand (9M 2020)[171](index=171&type=chunk) - Net cash used in investing activities was **$5,996 thousand (9M 2021)**, up from $1,447 thousand (9M 2020), due to the Ra Medical asset acquisition[172](index=172&type=chunk) - Financing activities included **$7,867 thousand net proceeds** from the Senior Term Facility and **$7,775 thousand in debt repayments** in 9M 2021[173](index=173&type=chunk) - Management believes current cash, anticipated revenues, and the **$11.0 million equity distribution agreement** will provide sufficient liquidity for the next 12 months[170](index=170&type=chunk) [Commitments and Contingencies](index=38&type=section&id=Commitments%20and%20Contingencies) There were no significant new commitments or contingencies beyond those disclosed in the 2020 annual report - **No significant new commitments and contingencies** beyond those described in the 2020 annual financial statements[174](index=174&type=chunk) [Off-Balance Sheet Arrangements](index=38&type=section&id=Off-Balance%20Sheet%20Arrangements) The company had no off-balance sheet arrangements as of September 30, 2021 - **No off-balance sheet arrangements** as of September 30, 2021[175](index=175&type=chunk) [ITEM 3. Quantitative and Qualitative Disclosure about Market Risk](index=38&type=section&id=ITEM%203.%20Quantitative%20and%20Qualitative%20Disclosure%20about%20Market%20Risk) This section states that there are no applicable disclosures about market risk for the company - Not applicable[176](index=176&type=chunk) [ITEM 4. Controls and Procedures](index=38&type=section&id=ITEM%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective, with no material changes in internal control [Evaluation of Disclosure Controls and Procedures](index=38&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of September 30, 2021 - Management concluded that disclosure controls and procedures were **effective** as of September 30, 2021[177](index=177&type=chunk) [Limitations on the Effectiveness of Controls](index=38&type=section&id=Limitations%20on%20the%20Effectiveness%20of%20Controls) Control systems provide reasonable, not absolute, assurance that objectives are met due to inherent limitations - Control systems provide **reasonable, not absolute, assurance** due to inherent limitations[178](index=178&type=chunk) [Changes in Internal Control over Financial Reporting](index=38&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) There were no material changes in internal control over financial reporting during the most recent fiscal quarter - **No material changes** in internal control over financial reporting during the most recent fiscal quarter[179](index=179&type=chunk) [Part II. Other Information](index=39&type=section&id=Part%20II.%20Other%20Information) [ITEM 1. Legal Proceedings](index=39&type=section&id=ITEM%201.%20Legal%20Proceedings) The company is routinely involved in legal proceedings incidental to its normal business operations - The company is routinely a party to pending and threatened legal actions, some of which may be **material**[181](index=181&type=chunk) [ITEM 1A. Risk Factors](index=39&type=section&id=ITEM%201A.%20Risk%20Factors) A description of risks is provided in the company's Annual Report on Form 10-K for the year ended December 31, 2020 - Risk factors are detailed in Item 1A of the **Annual Report on Form 10-K** for the fiscal year ended December 31, 2020[182](index=182&type=chunk) [ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=39&type=section&id=ITEM%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) There were no unregistered sales of equity securities or use of proceeds to report - None[183](index=183&type=chunk) [ITEM 3. Defaults Upon Senior Securities](index=39&type=section&id=ITEM%203.%20Defaults%20Upon%20Senior%20Securities) There were no defaults upon senior securities to report - None[183](index=183&type=chunk) [ITEM 4. Mine Safety Disclosures](index=39&type=section&id=ITEM%204.%20Mine%20Safety%20Disclosures) There were no mine safety disclosures to report - None[184](index=184&type=chunk) [ITEM 5. Other Information](index=39&type=section&id=ITEM%205.%20Other%20Information) There was no other information to report in this section - None[185](index=185&type=chunk) [ITEM 6. Exhibits](index=40&type=section&id=ITEM%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including corporate, credit, and warrant agreements - Includes Certificate of Incorporation, Bylaws, Asset Purchase Agreement, Credit and Security Agreement, Warrant Agreement, and various certifications[188](index=188&type=chunk) [Signatures](index=41&type=section&id=Signatures) The report is duly signed by the company's President & Chief Executive Officer and Chief Financial Officer - Report signed by **Robert J Moccia (President & CEO)** and **Christopher Lesovitz (CFO)** on November 12, 2021[191](index=191&type=chunk)

Financial Data and Key Metrics Changes - Total revenues for Q3 2021 were $7.7 million, a 37% increase year-over-year and a 4% increase sequentially [23] - Recurring revenue increased to $5.7 million, representing a 49% increase over Q3 2020 and a 5% increase over Q2 2021 [24] - Gross profit was $5.4 million, or 70% of revenues, compared to $3.2 million (58% of revenues) in Q3 2020 [26] Business Line Data and Key Metrics Changes - The installed base of recurring revenue XTRAC devices grew to 929 units, including 880 in the U.S. and 49 internationally, up from 889 total units at the end of June [12] - High-volume accounts increased from 186 to 214, a 15.7% sequential increase, contributing approximately $3.4 million in revenues, accounting for 56% of all recurring revenues [16] Market Data and Key Metrics Changes - International placements of XTRAC devices reached 49, a 104% increase over 2020, with 8 units placed in Q3 2021 [20] - The company identified China, Japan, and South Korea as key markets for growth, with plans to expand into additional countries in Asia and the Middle East in 2022 [48] Company Strategy and Development Direction - The company is focused on transitioning Ra Medical's customers to the XTRAC system, expecting this acquisition to be accretive to EBITDA in Q1 2022 [14] - STRATA is investing in direct-to-consumer marketing and direct dermatology marketing initiatives to drive growth in 2022 [15][19] - The company aims to return to 2019 recurring revenue levels by the end of 2021 and anticipates double-digit growth in 2022 [22] Management's Comments on Operating Environment and Future Outlook - Management noted that patient visits to dermatology offices have increased for three consecutive quarters, although staffing shortages due to the Delta variant have posed challenges [12] - The company is optimistic about growth opportunities in the vitiligo treatment market and plans to enhance coverage with payers for both vitiligo and atopic dermatitis [47] Other Important Information - The company entered into a new credit agreement for an $8 million senior secured term loan facility with favorable terms [30] - Cash and cash equivalents were $13.1 million as of September 30, 2021, down from $17 million at the end of June [31] Q&A Session Summary Question: Contribution from Ra Medical in the quarter - The company recognized around $336,000 from Ra Medical's deferred revenue in Q3 and moved 13 of their comebacks into its business [35] Question: Active accounts and recurring revenues - Active accounts are primarily high-volume customers who have overcome staffing issues, contributing to increased recurring revenues [39] Question: Margins and sustainability - The company expects to achieve sequential growth similar to the increase from Q2 to Q3, aiming for 2019 recurring revenue levels by year-end [44][45] Question: Patient treatment distribution - Approximately 75-80% of treatments are for psoriasis, with 15% for vitiligo and a smaller portion for atopic dermatitis due to coverage issues [46] Question: International business growth - The majority of international business is in China, Japan, and South Korea, with plans to expand into Europe and Latin America [48]

Financial Data and Key Metrics Changes - Total revenue for Q2 2021 was $7.4 million, representing an 83.1% year-over-year increase and a 28% sequential increase from Q1 2021 [13][24] - Recurring revenue reached $5.5 million, a 95% increase year-over-year and a 17% increase sequentially [13][24] - Gross profit was $4.8 million, or 64% of revenues, compared to $2 million or 49% of revenues in Q2 2020 [28] Business Line Data and Key Metrics Changes - Equipment revenues were $1.9 million, a 56% increase compared to Q2 2020 and a 65% increase from Q1 2021 [25] - The installed base of recurring revenue XTRAC devices increased to 889 units, with 848 in the U.S. and 41 internationally [13] Market Data and Key Metrics Changes - Patient visits have returned to approximately 90% to 95% of pre-COVID levels, with most customer practices reinstating normal operations [14][22] - The acquisition of Ra Medical's dermatology business positions the company to address a $6 billion U.S. market for chronic disease treatments [9] Company Strategy and Development Direction - The company is focused on transitioning from capital equipment sales to a recurring revenue model, enhancing predictability in revenue streams [20] - The acquisition of Ra Medical is expected to be accretive to EBITDA in Q1 2022, enhancing the company's market position [11][33] - Continued investment in direct-to-consumer marketing and re-engagement with high-volume accounts is a priority [15][16] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about reaching 2019 revenue levels by the end of 2021 and achieving double-digit growth in 2022 [21] - The company is monitoring the impact of the Delta variant on operations but remains confident in its recovery trajectory [22][57] Other Important Information - The acquisition of Ra Medical includes an upfront payment of approximately $3.7 million and the assumption of service contract obligations [11] - The company has seen a significant increase in direct-to-consumer advertising, which has positively impacted patient engagement [15] Q&A Session Summary Question: Impact of Ra Medical acquisition on existing customers - Management indicated that they will honor existing service contracts and aim for a smooth transition to their technology, leveraging existing relationships with dermatologists [36][38] Question: Expectations for margins and future revenue - Management expects margins to improve as recurring revenue grows, with a target to reach pre-COVID levels in recurring revenue [41][42] Question: Timing of the Ra Medical acquisition closure - The acquisition has already closed as of the date of the call [43] Question: Regional performance and pandemic impact - Management noted that while most regions are recovering, areas like California and New York are slower to return to pre-pandemic levels [55][57]

[Part I. Financial Information](index=4&type=section&id=Part%20I.%20Financial%20Information) [Financial Statements](index=4&type=section&id=ITEM%201.%20Financial%20Statements) The company's Q2 2021 financials show significant revenue growth and a return to profitability aided by a one-time gain [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets were $44.9 million and stockholders' equity was $25.8 million as of June 30, 2021 Balance Sheet Summary (unaudited) | (In thousands) | June 30, 2021 (unaudited) | December 31, 2020 | | :--- | :--- | :--- | | **Total current assets** | $23,462 | $24,831 | | **Total assets** | **$44,899** | **$46,778** | | **Total current liabilities** | $17,779 | $18,838 | | **Total liabilities** | **$19,100** | **$20,886** | | **Total stockholders' equity** | **$25,799** | **$25,892** | [Condensed Consolidated Statements of Operations (Three Months)](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20(Three%20Months)) Q2 2021 revenue grew 83.2% to $7.4 million, resulting in a net income of $1.1 million due to a debt extinguishment gain Q2 2021 vs Q2 2020 Operations | (In thousands, except per share amounts) | For the Three Months Ended June 30, 2021 | For the Three Months Ended June 30, 2020 | | :--- | :--- | :--- | | **Revenues, net** | $7,382 | $4,030 | | **Gross profit** | $4,761 | $1,964 | | **Loss from operations** | $(923) | $(1,615) | | **Gain on extinguishment of debt** | $2,028 | - | | **Net income (loss)** | **$1,082** | **$(1,680)** | | **Diluted earnings (loss) per common share** | $0.03 | $(0.05) | [Condensed Consolidated Statements of Operations (Six Months)](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20(Six%20Months)) For the first six months of 2021, revenue grew 22.8% to $13.2 million, significantly narrowing the net loss to $1.3 million H1 2021 vs H1 2020 Operations | (In thousands, except per share amounts) | For the Six Months Ended June 30, 2021 | For the Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | **Revenues, net** | $13,209 | $10,760 | | **Gross profit** | $8,474 | $6,363 | | **Loss from operations** | $(3,315) | $(2,563) | | **Gain on extinguishment of debt** | $2,028 | - | | **Net loss** | **$(1,336)** | **$(2,715)** | | **Diluted loss per common share** | $(0.04) | $(0.08) | [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash from operations was $0.4 million for H1 2021, with total cash decreasing to $17.0 million by period end H1 2021 vs H1 2020 Cash Flows | (In thousands) | For the Six Months Ended June 30, 2021 | For the Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | **Net cash provided by operating activities** | $387 | $1,201 | | **Net cash used in investing activities** | $(1,466) | $(730) | | **Net cash provided by financing activities** | - | $2,528 | | **Net (decrease) increase in cash** | $(1,079) | $2,999 | | **Cash, cash equivalents and restricted cash, end of period** | $17,033 | $18,628 | [Notes to Unaudited Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) Notes detail the impact of COVID-19, the forgiveness of a $2.0 million PPP loan, and a subsequent $3.7 million acquisition - The company is a medical technology firm specializing in products like the **XTRAC® excimer laser** for treating dermatologic conditions, with **848 systems placed in the U.S.** under a recurring revenue model as of June 30, 2021[22](index=22&type=chunk)[23](index=23&type=chunk) - The **COVID-19 pandemic negatively impacted the business** by disrupting supply chains and causing temporary closures of physician practices[26](index=26&type=chunk)[27](index=27&type=chunk) - In Q2 2021, the company's **$2.028 million Paycheck Protection Program (PPP) loan was forgiven**, resulting in a gain on extinguishment of debt[72](index=72&type=chunk) - On August 16, 2021, the company **acquired the U.S. dermatology Pharos business** from Ra Medical Systems, Inc. for a cash payment of **$3.7 million**[101](index=101&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=25&type=section&id=ITEM%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the strong Q2 2021 recovery, improved margins, increased operating expenses, and sufficient liquidity [Results of Operations](index=28&type=section&id=Results%20of%20Operations) Q2 2021 revenue rose 83.2% driven by post-pandemic recovery, with higher operating expenses due to renewed investments Revenue by Segment | (In thousands) | For the Three Months Ended June 30, 2021 | For the Three Months Ended June 30, 2020 | | :--- | :--- | :--- | | **Dermatology Recurring Procedures Revenue** | $5,452 | $2,796 | | **Dermatology Procedures Equipment Revenue** | $1,930 | $1,234 | | **Total Revenues** | **$7,382** | **$4,030** | - The increase in gross profit to **$4.8 million (64.5% margin)** for Q2 2021 from $2.0 million (48.7% margin) in Q2 2020 was primarily due to higher sales as the impact of the COVID-19 pandemic lessened[132](index=132&type=chunk) - Selling and marketing expenses increased to **$3.2 million in Q2 2021** from $1.4 million in Q2 2020, as the company increased investments in direct-to-consumer advertising[138](index=138&type=chunk) - Other income for Q2 2021 was **$2.0 million**, primarily due to the forgiveness of the **$2.028 million PPP loan**[140](index=140&type=chunk) [Non-GAAP adjusted EBITDA](index=31&type=section&id=Non-GAAP%20adjusted%20EBITDA) Non-GAAP adjusted EBITDA turned positive at $682,000 for Q2 2021, a significant improvement from the prior-year quarter Non-GAAP Adjusted EBITDA Reconciliation | (In thousands) | For the Three Months Ended June 30, 2021 | For the Three Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net income (loss) | $1,082 | $(1,680) | | Gain on extinguishment of debt | $(2,028) | - | | Depreciation/amortization | $961 | $1,028 | | Stock compensation | $581 | $410 | | **Non-GAAP adjusted EBITDA** | **$682** | **$(158)** | [Liquidity and Capital Resources](index=32&type=section&id=Liquidity%20and%20Capital%20Resources) The company holds $17.0 million in cash and believes its liquidity is sufficient for the next 12 months - As of June 30, 2021, the company had **$17.0 million in cash, cash equivalents, and restricted cash**, compared to $18.1 million at December 31, 2020[143](index=143&type=chunk) - The company received a **$2.0 million PPP loan** in April 2020, which was **fully forgiven** in the second quarter of 2021[144](index=144&type=chunk)[145](index=145&type=chunk) - The company holds a **$500,000 EIDL loan** with a 3.75% interest rate, with payments deferred for an additional 12 months from March 2021[146](index=146&type=chunk) - Management believes that **current cash and anticipated revenues will be sufficient** to satisfy liquidity requirements for the next 12 months[147](index=147&type=chunk) [Quantitative and Qualitative Disclosure about Market Risk](index=33&type=section&id=ITEM%203.%20Quantitative%20and%20Qualitative%20Disclosure%20about%20Market%20Risk) The company states that this item is not applicable - Not applicable[153](index=153&type=chunk) [Controls and Procedures](index=33&type=section&id=ITEM%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective with no material changes in internal controls - Based on an evaluation as of June 30, 2021, management concluded that the company's **disclosure controls and procedures were effective** at the reasonable assurance level[154](index=154&type=chunk) - **No material changes** in internal control over financial reporting occurred during the most recent fiscal quarter[156](index=156&type=chunk) [Part II. Other Information](index=33&type=section&id=Part%20II.%20Other%20Information) [Legal Proceedings](index=33&type=section&id=ITEM%201.%20Legal%20Proceedings) The company may be party to legal proceedings incidental to its normal course of business - The company may be involved in legal proceedings in the **ordinary course of business**, including contract claims and employment matters[158](index=158&type=chunk) [Risk Factors](index=33&type=section&id=ITEM%201A.%20Risk%20Factors) This section refers to the risk factors detailed in the company's 2020 Annual Report on Form 10-K - A description of risks is set forth in **Item 1A of the Annual Report on Form 10-K** for the fiscal year ended December 31, 2020[159](index=159&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=33&type=section&id=ITEM%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) No unregistered sales of equity securities or use of proceeds were reported for the period - None[160](index=160&type=chunk) [Exhibits](index=34&type=section&id=ITEM%206.%20Exhibits) This section lists filed exhibits, including corporate governance documents and required CEO/CFO certifications - The report includes standard corporate governance documents and required certifications as exhibits, including **CEO and CFO certifications** under Rule 13a-14(a) and Section 906 of the Sarbanes-Oxley Act[164](index=164&type=chunk)