STRATA Skin Sciences(SSKN) - 2024 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for the three months ended March 31, 2024 and 2023 Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | March 31, 2024 | December 31, 2023 | Change (vs. Dec 31, 2023) | | :-------------------------------- | :------------- | :---------------- | :------------------------ | | Cash and cash equivalents | $5,237 | $6,784 | -$1,547 | | Accounts receivable, net | $3,630 | $4,440 | -$810 | | Total current assets | $13,239 | $15,543 | -$2,304 | | Total assets | $40,048 | $42,016 | -$1,968 | | Accounts payable | $3,592 | $3,343 | +$249 | | Total current liabilities | $12,588 | $12,174 | +$414 | | Long-term debt, net | $15,075 | $15,044 | +$31 | | Total liabilities | $30,616 | $29,328 | +$1,288 | | Total stockholders' equity | $9,432 | $12,688 | -$3,256 | Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change (YoY) | | :---------------------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Revenues, net | $6,754 | $7,567 | -$813 | | Cost of revenues | $3,674 | $3,179 | +$495 | | Gross profit | $3,080 | $4,388 | -$1,308 | | Loss from operations | $(2,889) | $(2,586) | -$303 | | Net loss | $(3,368) | $(2,835) | -$533 | | Net loss per share, basic and diluted | $(0.10) | $(0.08) | -$0.02 | Condensed Consolidated Statements of Changes in Stockholders' Equity Changes in Stockholders' Equity (in thousands) | Metric | Balance at Jan 1, 2024 | Stock-based Compensation Expense | Net Loss | Balance at Mar 31, 2024 | | :------------------------ | :--------------------- | :------------------------------- | :------- | :---------------------- | | Total Stockholders' Equity | $12,688 | $112 | $(3,368) | $9,432 | - Stockholders' equity decreased by $3,256 thousand from January 1, 2024, to March 31, 2024, primarily due to a net loss of $3,368 thousand[17] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change (YoY) | | :------------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Net cash used in operating activities | $(804) | $(817) | +$13 | | Net cash used in investing activities | $(725) | $(1,792) | +$1,067 | | Net cash used in financing activities | $(18) | $0 | -$18 | | Net decrease in cash, cash equivalents and restricted cash | $(1,547) | $(2,609) | +$1,062 | | Cash, cash equivalents and restricted cash at end of period | $6,571 | $4,186 | +$2,385 | - The decrease in cash used in investing activities was primarily due to a reduction in capital expenditures after the launch of TheraClear in Q1 2023[153] Notes to Condensed Consolidated Financial Statements Note 1: The Company – Background and Operations - STRATA Skin Sciences, Inc is a medical technology company specializing in dermatology, offering products like XTRAC® and Pharos® excimer lasers, VTRAC® lamp systems, and the TheraClear® X Acne Therapy System[22][24][115] - As of March 31, 2024, there were 907 XTRAC systems placed in dermatologists' offices in the United States and 45 internationally under a recurring revenue model[23][117] - The company is transitioning its international distribution to a direct model, having signed distributor contracts in various countries since 2019[25] - The COVID-19 pandemic, Russia-Ukraine War, and Israel-Hamas conflict are noted as potential ongoing negative impacts on operations and financial performance[26][27][29][120][121][122] Note 1: Basis of Presentation and Accounting Policies - The condensed consolidated financial statements are unaudited and prepared in accordance with SEC rules for interim financial reporting[31] - No changes to significant accounting policies occurred during the three months ended March 31, 2024[33] - The company uses estimates and assumptions for revenue recognition, valuation allowances, goodwill impairment, and other financial metrics[34] - The fair values of cash, cash equivalents, restricted cash, and long-term debt approximate their carrying values[36] Warranty Accrual Activity (in thousands) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Balance, beginning of period | $303 | $207 | | Additions | $39 | $27 | | Expirations and claims satisfied | $(64) | $(5) | | Total | $278 | $229 | Note 1: Net Loss Per Share - Diluted net loss per share is the same as basic net loss per share because potential dilutive securities are anti-dilutive when a net loss exists[39] Potentially Dilutive Securities Excluded from Diluted EPS (in thousands) | Security Type | March 31, 2024 | March 31, 2023 | | :-------------- | :------------- | :------------- | | Stock options | 5,391,069 | 4,464,714 | | Warrants | 800,000 | 373,626 | | RSUs | 22,654 | 119,597 | | Total | 6,213,723 | 4,957,937 | Note 1: Recent Accounting Pronouncements - The adoption of ASU 2020-06 (Accounting for Convertible Instruments) on January 1, 2024, had no impact on the financial statements[42] - The company is evaluating the effect of ASU 2023-07 (Segment Reporting) and ASU 2023-09 (Income Tax Disclosures)[43][44] Note 2: Liquidity - The company believes current cash and anticipated revenues will be sufficient for the next 12 months despite a history of recurring losses[45][151] - Market conditions, including geopolitical conflicts and supply chain disruptions, could interfere with the company's ability to access financing[45][151] - In June 2023, the company amended its credit facility, refinancing an $8 million loan and borrowing an additional $7 million[45][146] - As of March 31, 2024, working capital was $651 thousand, down from $3,369 thousand at December 31, 2023[145] Note 3: Revenue Recognition - Revenues from dermatology recurring procedures are recognized over the estimated usage period[46] - Revenues from equipment sales are recognized when control is transferred to customers, typically upon shipment[49] - As of March 31, 2024, remaining performance obligations totaled $628 thousand, with $251 thousand expected to be recognized within one year[52] - The company recognized $76 thousand as revenue from deferred revenues for the three months ended March 31, 2024[53] Expected Future Undiscounted Fixed Treatment Code Payments (International) (in thousands) | Year | Amount | | :------------- | :----- | | Remaining 2024 | $1,064 | | 2025 | $934 | | 2026 | $716 | | 2027 | $445 | | 2028 | $19 | | Total | $3,178 | Note 4: Inventories - The company wrote off $141 thousand of inventories during Q1 2024 due to the expiration of extended warranty service contracts[56] Inventories Breakdown (in thousands) | Category | March 31, 2024 | December 31, 2023 | | :------------------------ | :------------- | :---------------- | | Raw materials and work-in-process | $2,421 | $2,192 | | Finished goods | $274 | $481 | | Total | $2,695 | $2,673 | Note 5: Property and Equipment, net - Depreciation and amortization expense was $755 thousand for Q1 2024, up from $677 thousand in Q1 2023[58] Property and Equipment, net (in thousands) | Category | March 31, 2024 | December 31, 2023 | | :------------------------ | :------------- | :---------------- | | Lasers placed-in-service | $32,940 | $32,095 | | Lasers-in-process | $3,121 | $3,231 | | Total | $36,743 | $36,062 | | Less: accumulated depreciation and amortization | $(25,017) | $(24,284) | | Net | $11,726 | $11,778 | Note 6: Intangible Assets, net - Amortization expense for intangible assets was $494 thousand for Q1 2024, a decrease from $720 thousand in Q1 2023[59] - No impairment charges were recognized for intangible assets during Q1 2024 or Q1 2023[60] Intangible Assets, net (in thousands) | Category | March 31, 2024 Net Book Value | December 31, 2023 Net Book Value | | :------------------------ | :---------------------------- | :------------------------------- | | Core technology | $712 | $855 | | Product technology | $912 | $942 | | Customer relationships | $862 | $1,035 | | Tradenames | $187 | $225 | | Pharos customer lists | $4,152 | $4,262 | | Total | $6,825 | $7,319 | Estimated Future Amortization Expense for Intangible Assets (in thousands) | Year | Amount | | :------------- | :----- | | Remaining 2024 | $1,477 | | 2025 | $1,266 | | 2026 | $561 | | 2027 | $561 | | 2028 | $561 | Note 7: Accrued Expenses and Other Current Liabilities Accrued Expenses and Other Current Liabilities (in thousands) | Category | March 31, 2024 | December 31, 2023 | | :------------------------ | :------------- | :---------------- | | Warranty obligations | $175 | $180 | | Compensation and related benefits | $1,667 | $1,679 | | State sales, use and other taxes | $4,290 | $4,316 | | Professional fees and other | $137 | $131 | | Total | $6,269 | $6,306 | Note 8: Long-Term Debt - The company's Senior Term Facility provides for a $20 million senior secured term loan, with $15 million drawn as of March 31, 2024[68] - The facility bears interest at a variable rate, resulting in an effective interest rate of 13.94% as of March 31, 2024[69] - The company is required to make interest-only payments through June 1, 2026, with a final maturity date of June 1, 2028[69] - The company was in compliance with its financial covenants as of March 31, 2024[71][147] - Interest expense increased to $524 thousand in Q1 2024 from $286 thousand in Q1 2023[75][142] Future Minimum Principal Payments at March 31, 2024 (in thousands) | Year | Amount | | :------------- | :----- | | 2026 | $3,750 | | 2027 | $7,500 | | 2028 | $3,750 | | Total | $15,000 | | Exit fee | $600 | | Less: unamortized debt discount | $(525) | | Long-term debt, net | $15,075 | Note 9: Stock-Based Compensation - Stock-based compensation expense for Q1 2024 was $112 thousand, a decrease from $325 thousand in Q1 2023[79] - Selling and marketing expense for stock-based compensation was negative in Q1 2024 due to award forfeitures[79] - Unrecognized compensation expense for stock options was $1,687 thousand, expected to be recognized over approximately 2.9 years[80] Stock Option Activity for Three Months Ended March 31, 2024 | Metric | Number of Shares Under Option Plan | Weighted Average Exercise Price per Option | | :------------------------ | :------------------------------- | :--------------------------------------- | | Outstanding at Jan 1, 2024 | 7,728,721 | $1.11 | | Granted | 100,000 | $0.54 | | Forfeited and expired | (2,437,652) | $1.55 | | Outstanding at Mar 31, 2024 | 5,391,069 | $0.89 | | Exercisable at Mar 31, 2024 | 1,231,465 | $1.70 | Restricted Stock Unit Activity for Three Months Ended March 31, 2024 | Metric | Number of Units | Weighted Average Grant Date Fair Value | | :------------------------ | :-------------- | :------------------------------------- | | Unvested at Jan 1, 2024 | 22,654 | $1.03 | | Vested | (5,663) | $1.03 | | Unvested at Mar 31, 2024 | 16,991 | $1.03 | Note 10: Income Taxes - No income tax expense was incurred for the three months ended March 31, 2024 and 2023[85] Note 11: Business and Geographical Reporting Segments - The company operates in two segments: Dermatology Recurring Procedures and Dermatology Procedures Equipment[86] - Dermatology Recurring Procedures revenue decreased by 9.9% YoY, and gross profit percentage declined[88][137] - Dermatology Procedures Equipment revenue decreased by 12.7% YoY, and gross profit percentage declined significantly[88][133][138] Segment Revenues and Gross Profit (in thousands) | Segment | Q1 2024 Revenue | Q1 2023 Revenue | Q1 2024 Gross Profit | Q1 2023 Gross Profit | Q1 2024 Gross Profit % | Q1 2023 Gross Profit % | | :-------------------------------- | :-------------- | :-------------- | :------------------- | :------------------- | :--------------------- | :--------------------- | | Dermatology Recurring Procedures | $4,696 | $5,209 | $2,501 | $3,189 | 53.3% | 61.2% | | Dermatology Procedures Equipment | $2,058 | $2,358 | $579 | $1,199 | 28.1% | 50.8% | | Total | $6,754 | $7,567 | $3,080 | $4,388 | 45.6% | 58.0% | Geographical Revenue Breakdown (in thousands) | Region | Q1 2024 Recurring | Q1 2024 Equipment | Q1 2024 Total | Q1 2023 Recurring | Q1 2023 Equipment | Q1 2023 Total | | :------- | :---------------- | :---------------- | :------------ | :---------------- | :---------------- | :------------ | | Domestic | $4,320 | $141 | $4,461 | $4,847 | $496 | $5,343 | | Foreign | $376 | $1,917 | $2,293 | $362 | $1,862 | $2,224 | | Total | $4,696 | $2,058 | $6,754 | $5,209 | $2,358 | $7,567 | Note 12: Significant Customer Concentrations - For Q1 2024, one international distributor accounted for 16.3% of total revenues[94] - One customer represented 12.5% of net accounts receivable as of March 31, 2024[95] Note 13: Commitments and Contingencies - The company executed new five-year leases in March 2024, increasing ROU assets and operating lease liabilities by $977 thousand[97] - The company is appealing a New York State ruling that its XTRAC treatment codes are subject to sales tax, covering $1.484 million of a total $3.943 million in assessments[102][103][164][165] - The company faces potential future earnout and royalty payments related to the 2022 acquisition of TheraClear devices[106][148] - A PAGA class action lawsuit in California was settled for $106 thousand, with final approval granted on April 5, 2024[110][163] Operating Lease Maturities as of March 31, 2024 (in thousands) | Year | Amount | | :------------- | :----- | | Remaining 2024 | $341 | | 2025 | $463 | | 2026 | $334 | | 2027 | $290 | | 2028 | $301 | | Thereafter | $231 | | Total remaining lease payments | $1,960 | | Less: imputed interest | $(494) | | Total lease liabilities | $1,466 | Note 14: Subsequent Events - On April 26, 2024, the company announced a 1-for-10 reverse stock split of its common stock, effective June 6, 2024[111][125] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations for Q1 2024 Introduction, Outlook, Overview of Business Operations and Recent Developments - STRATA Skin Sciences is a medical technology company focused on dermatology, offering systems for various skin conditions[115] - The company's XTRAC system is widely recognized for treating psoriasis and vitiligo, with 907 systems in the U.S. as of March 31, 2024[117][123] - The TheraClear® X Acne Therapy System combines intense pulse light with vacuum for acne treatment, though insurance reimbursement is limited[118][123] - Global events like COVID-19 and geopolitical conflicts continue to pose risks to business conditions and supply chains[120][121][122] - A 1-for-10 reverse stock split was announced, effective June 6, 2024, to meet Nasdaq's minimum bid price requirement[125] Results of Operations - Dermatology Recurring Procedures revenue decreased due to a reduction in direct-to-patient advertising and lower deferred revenue recognition[129][130] - Dermatology Procedures Equipment revenue decreased primarily due to a reduction in Pharos service billings and discounts on international sales[133] - The decrease in overall gross profit percentage was driven by lower deferred revenue recognition, a $141 thousand inventory write-off, and higher depreciation costs[136][137][138] - Selling and marketing expenses decreased primarily due to a reduction in sales force size and lower commissions[140] - General and administrative expenses decreased due to lower stock-based compensation, legal fees, and board fees[141] Revenue by Segment (in thousands) | Segment | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change (YoY) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Dermatology recurring procedures | $4,696 | $5,209 | -$513 | | Dermatology procedures equipment | $2,058 | $2,358 | -$300 | | Total revenues, net | $6,754 | $7,567 | -$813 | Gross Profit Analysis (in thousands) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change (YoY) | | :------------------------ | :-------------------------------- | :-------------------------------- | :----------- | | Gross profit | $3,080 | $4,388 | -$1,308 | | Gross profit percentage | 45.6% | 58.0% | -12.4 pp | Operating Expenses (in thousands) | Expense Category | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change (YoY) | | :------------------------ | :-------------------------------- | :-------------------------------- | :----------- | | Engineering and product development | $241 | $315 | -$74 | | Selling and marketing | $3,018 | $3,742 | -$724 | | General and administrative | $2,710 | $2,917 | -$207 | | Interest expense | $524 | $286 | +$238 | Non-GAAP Adjusted EBITDA - Non-GAAP adjusted EBITDA worsened to $(1,279) thousand in Q1 2024 from $(759) thousand in Q1 2023[144] Non-GAAP Adjusted EBITDA Reconciliation (in thousands) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net loss | $(3,368) | $(2,835) | | Depreciation and amortization | $1,249 | $1,397 | | Amortization of operating lease ROU assets | $95 | $105 | | Loss on disposal of property and equipment | $13 | $0 | | Interest expense, net | $479 | $249 | | Non-GAAP EBITDA | $(1,532) | $(1,084) | | Stock-based compensation expense | $112 | $325 | | Inventory write-off | $141 | $0 | | Non-GAAP adjusted EBITDA | $(1,279) | $(759) | Liquidity and Capital Resources - Working capital decreased to $651 thousand as of March 31, 2024, from $3,369 thousand at December 31, 2023[145] - Cash, cash equivalents, and restricted cash totaled $6,571 thousand as of March 31, 2024[145] - The company's credit facility was amended in June 2023, with an effective interest rate of 13.94% as of March 31, 2024[69][146] - The company believes its current cash and anticipated revenues will be sufficient to meet liquidity requirements for at least the next 12 months[151] - Net cash used in operating activities remained consistent at $(804) thousand in Q1 2024[152] - Net cash used in investing activities decreased to $(725) thousand in Q1 2024 from $(1,792) thousand in Q1 2023[153] Commitments and Contingencies - No significant impacts on commitments and contingencies were noted beyond those discussed in the 2023 annual financial statements[155] ITEM 3. Quantitative and Qualitative Disclosure about Market Risk This section states that there are no applicable quantitative and qualitative disclosures about market risk for the company - This item is not applicable to the company[156] ITEM 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2024 - Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2024[157] - Control systems provide reasonable, not absolute, assurance that objectives are met due to inherent limitations[159] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[160] PART II. OTHER INFORMATION ITEM 1. Legal Proceedings This section updates on legal matters, including a class action settlement and ongoing state sales tax appeals - A proposed representative class action under California's PAGA was settled for $0.1 million, with final approval granted on April 5, 2024[163] - The company is appealing a New York State Appellate Division ruling that its XTRAC treatment codes are subject to sales tax[164][165] - New York and California have assessed the company an aggregate of $3.9 million for sales and use tax[164][166] - The company filed a motion for leave to appeal the New York State Appellate Division's decision on April 11, 2024[165] ITEM 1A. Risk Factors This section refers to the comprehensive business risks detailed in the company's 2023 Annual Report on Form 10-K - A description of business risks is set forth in Item 1A of the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023[168] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds This section states that there were no unregistered sales of equity securities or use of proceeds during the reporting period - None[169] ITEM 3. Defaults Upon Senior Securities This section indicates that there were no defaults upon senior securities during the reporting period - None[170] ITEM 4. Mine Safety Disclosures This section states that there are no mine safety disclosures applicable to the company - None[171] ITEM 5. Other Information This section confirms no directors or officers adopted or terminated Rule 10b5-1 trading arrangements during the quarter - No directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter ended March 31, 2024[172] ITEM 6. Exhibits This section lists exhibits filed with the report, including credit agreement amendments and officer certifications - Exhibits include amendments to the Credit and Security Agreement, a letter agreement, and Rule 13a-14(a) Certificates of the CEO and CFO[174] - Certifications pursuant to 18 U.S.C. Section 1350 are attached as Exhibit 32.1[174] Signatures This section contains the required signatures of the registrant's authorized officers for the quarterly report - The report is signed by Dolev Rafaeli, President & Chief Executive Officer, and Christopher Lesovitz, Chief Financial Officer, on May 15, 2024[177]