STRATA Skin Sciences(US:SSKN)2021-05-13 16:31markdown PART I – Financial Information [ITEM 1. Financial Statements](index=4&type=section&id=ITEM%201.%20Financial%20Statements) This section presents STRATA Skin Sciences' unaudited condensed consolidated financial statements, including balance sheets, operations, equity, and cash flows, with detailed notes for Q1 2021 [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets decreased to $45,854 thousand, liabilities increased, and stockholders' equity declined to $24,136 thousand by March 31, 2021 Condensed Consolidated Balance Sheets (in thousands) | Metric (in thousands) | March 31, 2021 | December 31, 2020 | | :-------------------- | :------------- | :---------------- | | Total Assets | $45,854 | $46,778 | | Total Liabilities | $21,718 | $20,886 | | Total Stockholders' Equity | $24,136 | $25,892 | [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) The company reported a net loss of $2,418 thousand for Q1 2021, a significant increase from the prior year, driven by lower revenues and higher operating expenses Condensed Consolidated Statements of Operations (in thousands) | Metric (in thousands) | 3 Months Ended March 31, 2021 | 3 Months Ended March 31, 2020 | | :-------------------- | :---------------------------- | :---------------------------- | | Revenues, net | $5,827 | $6,730 | | Cost of revenues | $2,114 | $2,331 | | Gross profit | $3,713 | $4,399 | | Operating expenses | $6,105 | $5,347 | | Loss from operations | $(2,392) | $(948) | | Net loss | $(2,418) | $(1,035) | | Basic Loss per common share | $(0.07) | $(0.03) | [Condensed Consolidated Statements of Changes in Stockholders' Equity](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Changes%20in%20Stockholders'%20Equity) Stockholders' equity decreased to $24,136 thousand by March 31, 2021, primarily due to the net loss, partially offset by stock-based compensation Condensed Consolidated Statements of Changes in Stockholders' Equity (in thousands) | Metric (in thousands) | January 1, 2021 | March 31, 2021 | | :-------------------- | :-------------- | :------------- | | Total Stockholders' Equity | $25,892 | $24,136 | | Stock-based compensation | - | $662 | | Net loss | - | $(2,418) | [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash from operating activities significantly decreased to $153 thousand in Q1 2021, while cash used in investing activities increased to $740 thousand Condensed Consolidated Statements of Cash Flows (in thousands) | Metric (in thousands) | 3 Months Ended March 31, 2021 | 3 Months Ended March 31, 2020 | | :-------------------- | :---------------------------- | :---------------------------- | | Net cash provided by operating activities | $153 | $598 | | Net cash used in investing activities | $(740) | $(596) | | Net (decrease) increase in cash and restricted cash | $(587) | $2 | | Cash, cash equivalents and restricted cash, end of period | $17,525 | $15,631 | [Notes to Unaudited Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed disclosures for the unaudited financial statements, covering business, accounting policies, liquidity, revenue, and COVID-19 impacts [Note 1 The Company: Background and COVID-19 Impact](index=8&type=section&id=Note%201%20The%20Company%3A%20Background%20and%20COVID-19%20Impact) STRATA Skin Sciences, a medical technology company, develops XTRAC® and VTRAC® systems; COVID-19 negatively impacted operations, leading to mitigation strategies - **STRATA Skin Sciences** develops, commercializes, and markets innovative dermatologic products, primarily the **XTRAC® excimer laser** and **VTRAC® lamp systems** for psoriasis and vitiligo[19](index=19&type=chunk)[93](index=93&type=chunk) - As of March 31, 2021, there were **837 XTRAC systems** placed in US dermatologists' offices and 34 internationally under a **recurring revenue model**[20](index=20&type=chunk)[94](index=94&type=chunk) - The company expanded international distribution with agreements in Japan (September 2020) and China (February 2021) for direct capital sales and **recurring revenue**[21](index=21&type=chunk)[95](index=95&type=chunk)[97](index=97&type=chunk) - The **COVID-19 pandemic** negatively impacted the company's **recurring revenue model**, **financial position**, and **cash flow** due to the elective nature of procedures, physician office closures, and supply chain disruptions[23](index=23&type=chunk)[24](index=24&type=chunk)[99](index=99&type=chunk)[100](index=100&type=chunk) - Mitigation efforts included **business continuity plans**, **employee safety measures**, **direct-to-consumer advertising** to restart partner businesses, **employee furloughs**, **reduced discretionary spending**, and **delayed vendor payments** (approx. **$785 thousand** as of March 31, 2021)[24](index=24&type=chunk)[25](index=25&type=chunk)[101](index=101&type=chunk) [Note 1 Basis of Presentation & Significant Accounting Policies](index=9&type=section&id=Note%201%20Basis%20of%20Presentation%20%26%20Significant%20Accounting%20Policies) Unaudited financial statements are prepared under SEC rules, consolidating the Company and its inactive Indian subsidiary, with no material accounting policy changes in Q1 2021 - The financial statements are unaudited, prepared under **SEC interim reporting rules**, and consolidate the Company and its **inactive Indian subsidiary**[26](index=26&type=chunk)[27](index=27&type=chunk) - No material changes to **significant accounting policies** occurred in Q1 2021. **Management's estimates**, including those for **revenue recognition**, **goodwill impairment**, **asset useful lives**, **equity-based awards**, **deferred tax assets**, **inventory reserves**, and **sales/use tax accruals**, are subject to the unknown full impact of **COVID-19**[29](index=29&type=chunk)[30](index=30&type=chunk)[31](index=31&type=chunk) [Note 1 Fair Value Measurements](index=10&type=section&id=Note%201%20Fair%20Value%20Measurements) Fair value measurements adhere to ASC Topic 820, using a three-tier hierarchy, with most monetary assets/liabilities approximating fair value - **Fair value measurements** adhere to **ASC Topic 820**, utilizing a **three-tier hierarchy**: **Level 1** (quoted prices in active markets), **Level 2** (observable inputs other than quoted prices), and **Level 3** (unobservable inputs requiring significant judgment)[32](index=32&type=chunk)[33](index=33&type=chunk)[37](index=37&type=chunk) - The carrying values of **cash**, **cash equivalents**, **restricted cash**, **short-term monetary assets/liabilities**, **note payable**, and **long-term debt** are estimated to approximate their **fair values**[34](index=34&type=chunk) [Note 1 Earnings Per Share](index=10&type=section&id=Note%201%20Earnings%20Per%20Share) Basic and diluted loss per common share for Q1 2021 was $(0.07), with all potentially dilutive securities being anti-dilutive Note 1 Earnings Per Share (in thousands) | Metric | 3 Months Ended March 31, 2021 | 3 Months Ended March 31, 2020 | | :----- | :---------------------------- | :---------------------------- | | Basic and Diluted loss per common share | $(0.07) | $(0.03) | | Weighted average common shares outstanding | 33,802,129 | 33,164,321 | - **Potentially dilutive securities** (**warrants**, **restricted stock units**, **stock options**) were excluded from **diluted EPS calculations** as their inclusion would have been **anti-dilutive** for both periods[38](index=38&type=chunk)[39](index=39&type=chunk) [Note 1 Accounting Pronouncements](index=11&type=section&id=Note%201%20Accounting%20Pronouncements) ASU No. 2019-12 had no material effect; ASU 2020-04 and 2020-06 are not expected to materially impact current financial statements - Adoption of **ASU No. 2019-12 (Income Taxes)** on January 1, 2021, had no material effect[40](index=40&type=chunk) - **ASU 2020-04 (Reference Rate Reform)** is not expected to have a material effect as the company has no **hedging activities**[42](index=42&type=chunk) - **ASU 2020-06 (Accounting for Convertible Instruments and Contracts in an Entity's own Equity)** is not expected to have a material effect currently, but could in the future if the company engages in covered contracts[43](index=43&type=chunk) [Note 2 Liquidity](index=12&type=section&id=Note%202%20Liquidity) Despite recurring losses and COVID-19 impacts, management expects sufficient liquidity for 12 months, though future financing may be affected by the pandemic - The company has historically faced **recurring losses** and **negative impacts from COVID-19**[44](index=44&type=chunk) - Management anticipates **sufficient liquidity** for the next 12 months, supported by cash, **expected revenues**, and **PPP/EIDL loan proceeds**[44](index=44&type=chunk) - The ongoing **COVID-19 pandemic** could negatively impact the company's ability to **access financing on favorable terms**[44](index=44&type=chunk) [Note 3 Revenue Recognition](index=12&type=section&id=Note%203%20Revenue%20Recognition) Revenue from recurring procedures is recognized based on usage or ratably, while equipment sales are recognized upon control transfer, with $1,769 thousand in deferred revenues - **Dermatology Recurring Procedures** revenue is recognized on a **per-procedure basis** or as a **fixed fee over a period**, treated as **operating leases under ASC 842**[45](index=45&type=chunk)[46](index=46&type=chunk) - **Dermatology Procedures Equipment** revenue is recognized when **control transfers to the customer**, usually upon shipment (**FOB shipping point**)[49](index=49&type=chunk) - **Deferred revenues (contract liabilities)** were **$1,769 thousand** as of March 31, 2021, expected to be recognized over the **remaining usage period**[51](index=51&type=chunk)[114](index=114&type=chunk) Note 3 Revenue Recognition (in thousands) | Revenue Segment (in thousands) | 3 Months Ended March 31, 2021 | 3 Months Ended March 31, 2020 | | :----------------------------- | :---------------------------- | :---------------------------- | | Domestic Recurring Procedures | $4,426 | $5,597 | | Foreign Recurring Procedures | $253 | $104 | | Domestic Equipment Sales | $258 | $315 | | Foreign Equipment Sales | $890 | $714 | | Total Revenues | $5,827 | $6,730 | [Note 4 Inventories](index=14&type=section&id=Note%204%20Inventories) Total inventories decreased to $3,312 thousand by March 31, 2021, primarily due to reductions in raw materials and work-in-process Note 4 Inventories (in thousands) | Inventory Type (in thousands) | March 31, 2021 | December 31, 2020 | | :---------------------------- | :------------- | :---------------- | | Raw materials and work-in-process | $2,751 | $2,949 | | Finished goods | $561 | $495 | | Total inventories | $3,312 | $3,444 | [Note 5 Property and Equipment, net](index=15&type=section&id=Note%205.%20Property%20and%20Equipment%2C%20net) Net property and equipment increased to $5,788 thousand, mainly due to lasers placed-in-service, while depreciation expense decreased to $481 thousand in Q1 2021 Note 5 Property and Equipment, net (in thousands) | Asset Type (in thousands) | March 31, 2021 | December 31, 2020 | | :------------------------ | :------------- | :---------------- | | Lasers placed-in-service | $23,596 | $22,942 | | Total property and equipment, net | $5,788 | $5,529 | - **Depreciation and related amortization expense** decreased to **$481 thousand** for Q1 2021 from **$586 thousand** for Q1 2020[55](index=55&type=chunk) [Note 6 Intangible Assets, net](index=15&type=section&id=Note%206.%20Intangible%20Assets%2C%20net) Net definite-lived intangible assets decreased to $5,993 thousand, with amortization expense of $352 thousand in Q1 2021 and no impairment charges Note 6 Intangible Assets, net (in thousands) | Intangible Asset (in thousands) | Balance (Gross) | Accumulated Amortization | Net (March 31, 2021) | | :------------------------------ | :-------------- | :----------------------- | :------------------- | | Core technology | $5,700 | $(3,278) | $2,422 | | Product technology | $2,000 | $(2,000) | $0 | | Customer relationships | $6,900 | $(3,967) | $2,933 | | Tradenames | $1,500 | $(862) | $638 | | Total intangible assets, net | $16,100 | $(10,107) | $5,993 | - **Amortization expense** for **definite-lived intangible assets** was **$352 thousand** for Q1 2021, compared to **$452 thousand** for Q1 2020[56](index=56&type=chunk) - No **impairment charges** were recognized for **definite-lived intangible assets** during the three months ended March 31, 2021[57](index=57&type=chunk) [Note 7 Other Accrued Liabilities](index=16&type=section&id=Note%207.%20Other%20Accrued%20Liabilities) Total other accrued liabilities increased to $5,286 thousand, mainly due to accrued compensation, with ongoing appeals for state sales and use tax assessments Note 7 Other Accrued Liabilities (in thousands) | Accrued Liability (in thousands) | March 31, 2021 | December 31, 2020 | | :------------------------------- | :------------- | :---------------- | | Accrued compensation | $1,491 | $891 | | Accrued state sales, use and other taxes | $3,150 | $3,105 | | Total other accrued liabilities | $5,286 | $4,690 | - The company is appealing **state sales and use tax assessments** totaling **$1,484 thousand** (one state) and **$720 thousand** plus interest (another state), believing its **recurring revenue model is exempt** or has other defenses[60](index=60&type=chunk)[61](index=61&type=chunk)[62](index=62&type=chunk)[63](index=63&type=chunk) Note 7 Other Accrued Liabilities (in thousands) | Warranty Accrual (in thousands) | 3 Months Ended March 31, 2021 | 3 Months Ended March 31, 2020 | | :------------------------------ | :---------------------------- | :---------------------------- | | Accrual at beginning of period | $113 | $232 | | Additions charged to expense | $4 | $3 | | Expiring warranties/claims satisfied | $(32) | $(54) | | Total | $85 | $181 | [Note 8 Note Payable](index=17&type=section&id=Note%208.%20Note%20Payable) A $7,275 thousand note payable was renewed, secured by a time deposit, maturing December 30, 2021, with a 1.40% fixed interest rate - A **$7,275 thousand note payable** was renewed on December 30, 2020, maturing on December 30, 2021, with a fixed interest rate of **1.40%**[67](index=67&type=chunk) - The note is secured by a **pledged time deposit** of **$7,275 thousand**, recorded as **restricted cash**[67](index=67&type=chunk) [Note 9 Long-term Debt](index=17&type=section&id=Note%209.%20Long-term%20Debt) The company holds a $2.0 million PPP loan with a pending forgiveness application and a $500 thousand EIDL loan with deferred payments - The company has a **$2,028 thousand PPP loan** (1% interest, 5-year maturity), with a **100% forgiveness application** submitted in December 2020, pending **SBA approval**[68](index=68&type=chunk)[69](index=69&type=chunk)[106](index=106&type=chunk)[107](index=107&type=chunk)[132](index=132&type=chunk) - The company also has a **$500 thousand EIDL loan** (3.75% interest, 30-year repayment), for which **payments were deferred** by an additional 12 months in March 2021[70](index=70&type=chunk)[108](index=108&type=chunk)[133](index=133&type=chunk) [Note 10 Warrants](index=18&type=section&id=Note%2010.%20Warrants) All 19,812 common stock warrants expired on January 29, 2021, resulting in no outstanding warrants as of March 31, 2021 - All **19,812 common stock warrants** outstanding at December 31, 2020, expired on January 29, 2021[71](index=71&type=chunk) - There were **no outstanding common stock warrants** as of March 31, 2021[71](index=71&type=chunk) [Note 11 Stock-based Compensation](index=18&type=section&id=Note%2011.%20Stock-based%20Compensation) Stock-based compensation expense increased to $662 thousand in Q1 2021, with $2,999 thousand unrecognized, and options granted to the incoming CEO Note 11 Stock-based Compensation (in thousands) | Metric (in thousands) | 3 Months Ended March 31, 2021 | 3 Months Ended March 31, 2020 | | :-------------------- | :---------------------------- | :---------------------------- | | Stock-based compensation expense | $662 | $430 | - As of March 31, 2021, **$2,999 thousand** in **unrecognized compensation expense** remains, to be recognized over a **weighted average period** of **1.38 years**[73](index=73&type=chunk) - **Vesting of unvested options** for the **departing CEO** was **accelerated**, incurring an additional **$173 thousand** compensation expense[74](index=74&type=chunk) - An option to purchase **1,632,590 shares** was granted to the **incoming CEO** on March 1, 2021, with a **strike price** of **$1.73** and an **aggregate fair value** of **$2,103 thousand**[75](index=75&type=chunk) [Note 12 Income Taxes](index=18&type=section&id=Note%2012.%20Income%20Taxes) Income tax expense decreased to $4 thousand in Q1 2021, primarily due to deferred tax liability changes related to goodwill, with NOLs limited by Section 382 Note 12 Income Taxes (in thousands) | Metric (in thousands) | 3 Months Ended March 31, 2021 | 3 Months Ended March 31, 2020 | | :-------------------- | :---------------------------- | :---------------------------- | | Income tax expense | $4 | $88 | - **Income tax expense** was primarily driven by changes in **deferred tax liability related to goodwill**, an **amortizing asset for tax purposes**[77](index=77&type=chunk) - The **CARES Act** is not expected to significantly impact the company's **financial position**, results, or **cash flows**[78](index=78&type=chunk) - **Section 382 of the Internal Revenue Code** limits the annual utilization of **net operating losses** due to past **ownership changes**[79](index=79&type=chunk) [Note 13 Business Segments](index=19&type=section&id=Note%2013.%20Business%20Segments) The company operates in Dermatology Recurring Procedures and Equipment segments, with total revenues decreasing 13.4% and gross profit percentage declining to 63.7% in Q1 2021 - The company operates two segments: **Dermatology Recurring Procedures** (revenue from equipment usage) and **Dermatology Procedures Equipment** (revenue from equipment sales)[80](index=80&type=chunk) Note 13 Business Segments (in thousands) | Segment (in thousands) | Q1 2021 Revenue | Q1 2021 Gross Profit | Q1 2021 Gross Profit % | Q1 2020 Revenue | Q1 2020 Gross Profit | Q1 2020 Gross Profit % | | :--------------------- | :-------------- | :------------------- | :--------------------- | :-------------- | :------------------- | :--------------------- | | Dermatology Recurring Procedures | $4,679 | $3,178 | 67.9% | $5,701 | $3,899 | 68.4% | | Dermatology Procedures Equipment | $1,148 | $535 | 46.6% | $1,029 | $500 | 48.6% | | Total | $5,827 | $3,713 | 63.7% | $6,730 | $4,399 | 65.4% | - Overall **gross profit** decreased to **$3,713 thousand** (**63.7%** of revenue) in Q1 2021 from **$4,399 thousand** (**65.4%** of revenue) in Q1 2020, primarily due to **lower sales** and **unfavorable deferred revenue impact**[119](index=119&type=chunk)[121](index=121&type=chunk) [Note 14 Significant Customer Concentration](index=20&type=section&id=Note%2014.%20Significant%20Customer%20Concentration) One distributor accounted for 11.7% of Q1 2021 revenues, and one customer represented 22.3% of total accounts receivable - One **distributor** accounted for **11.7% of total revenues** for the three months ended March 31, 2021[85](index=85&type=chunk) - One customer represented **22.3% of total accounts receivable** as of March 31, 2021[85](index=85&type=chunk) [Note 15 Commitments: Leases](index=20&type=section&id=Note%2015.%20Commitments%3A%20Leases) The company leases facilities and equipment under non-cancellable operating leases, with $116 thousand in Q1 2021 costs and $1,148 thousand in total remaining payments - The company leases facilities and IT/office equipment under **non-cancellable operating leases** with **remaining terms** of **1 to 4 years**[86](index=86&type=chunk) Note 15 Commitments: Leases (in thousands) | Year Ending December 31, | Amount (in thousands) | | :----------------------- | :-------------------- | | Remaining 2021 | $349 | | 2022 | $371 | | 2023 | $242 | | 2024 | $186 | | Total remaining lease payments | $1,148 | | Less: imputed interest | $(160) | | Total lease liabilities | $988 | - **Operating lease costs** were **$116 thousand** for Q1 2021, compared to **$112 thousand** for Q1 2020[87](index=87&type=chunk) [Note 15 Commitments: Contingencies](index=21&type=section&id=Note%2015.%20Commitments%3A%20Contingencies) The company is routinely involved in legal actions and regulatory inquiries, including contract and employment matters, with potential for substantial monetary damages - The company is routinely involved in **legal actions and proceedings**, including **contract claims** and **employment-related matters**, with potential for **substantial monetary damages**[89](index=89&type=chunk) - The company is subject to **regulatory and governmental examinations**, **inquiries**, and **investigations**[89](index=89&type=chunk) [ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=22&type=section&id=ITEM%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q1 2021 financial condition and results, highlighting COVID-19 impacts, mitigation strategies, declining revenues, increased net loss, and liquidity position [Introduction, Outlook and Overview of Business Operations](index=22&type=section&id=Introduction%2C%20Outlook%20and%20Overview%20of%20Business%20Operations) STRATA Skin Sciences, a medical technology company, focuses on dermatological treatments with XTRAC® and VTRAC® systems, expanding internationally, and beta-testing "Home by XTRAC™" amid COVID-19 impacts - **STRATA Skin Sciences** is a medical technology company focused on dermatological treatments using **XTRAC® excimer laser** and **VTRAC® lamp systems**[93](index=93&type=chunk) - As of March 31, 2021, **837 XTRAC systems** were placed in US dermatologists' offices under a **recurring revenue model**, an increase from 832 at December 31, 2020[94](index=94&type=chunk) - The company introduced **"Home by XTRAC™"** for at-home, insurance-reimbursed treatments, currently in beta testing[96](index=96&type=chunk) - The **COVID-19 pandemic** has negatively impacted the company's Q1 2021 results and is expected to continue affecting revenue, earnings, and **cash flows** due to disruptions in **elective procedures**, **supply chains**, and physician practice operations[99](index=99&type=chunk)[100](index=100&type=chunk)[103](index=103&type=chunk) [Key Technology](index=24&type=section&id=Key%20Technology) Key technologies include the XTRAC® Excimer Laser (FDA-cleared 2000) and VTRAC® Lamp (FDA-cleared 2005), with recent XTRAC developments like MMD tip and S3® - **XTRAC® Excimer Laser** (FDA-cleared 2000) delivers targeted **308nm UVB light** for psoriasis and vitiligo, with coverage by most major insurance companies[109](index=109&type=chunk) - Recent **XTRAC** developments include the **Multi Micro Dose (MMD) tip** (2018), the **S3® next-generation XTRAC** (2018), and the **XTRAC Momentum Excimer Laser Platform** (2020)[109](index=109&type=chunk) - **VTRAC® Lamp** (FDA-cleared 2005) provides targeted therapeutic efficacy with a simpler design[109](index=109&type=chunk) [Recent Developments (PPP and EIDL Loans)](index=24&type=section&id=Recent%20Developments) The company secured a $2.0 million PPP loan with a pending forgiveness application and a $500 thousand EIDL loan with deferred payments - The company received a **$2.0 million PPP loan** in April 2020, with a **100% forgiveness application** submitted in December 2020, pending **SBA approval**; the loan's maturity was extended to five years[106](index=106&type=chunk)[107](index=107&type=chunk) - A **$500 thousand EIDL loan** was secured in May 2020, with **payments were deferred** by an additional 12 months in March 2021[108](index=108&type=chunk) [Critical Accounting Policies and Estimates](index=25&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) No changes to critical accounting policies occurred in Q1 2021; these policies are regularly reviewed with the Audit Committee and detailed in the 2020 Form 10-K - No changes to **critical accounting policies** occurred during the three months ended March 31, 2021[110](index=110&type=chunk) - **Critical accounting policies** and estimates are regularly discussed with the **Audit Committee** and detailed in the **2020 Form 10-K**[110](index=110&type=chunk) [Results of Operations](index=25&type=section&id=Results%20of%20Operations) Total revenues decreased 13.4% to $5,827 thousand in Q1 2021, with gross profit declining to $3,713 thousand and increased operating expenses leading to a higher net loss Results of Operations (in thousands) | Metric (in thousands) | 3 Months Ended March 31, 2021 | 3 Months Ended March 31, 2020 | | :-------------------- | :---------------------------- | :---------------------------- | | Total Revenues | $5,827 | $6,730 | | Total Cost of Revenues | $2,114 | $2,331 | | Gross Profit | $3,713 | $4,399 | | Gross Profit % | 63.7% | 65.4% | [Dermatology Recurring Procedures Revenue](index=25&type=section&id=Dermatology%20Recurring%20Procedures) Revenue from Dermatology Recurring Procedures decreased 17.9% to $4,679 thousand in Q1 2021 due to COVID-19 and lower deferred revenue, with plans for increased advertising Dermatology Recurring Procedures Revenue (in thousands) | Metric | 3 Months Ended March 31, 2021 | 3 Months Ended March 31, 2020 | | :----- | :---------------------------- | :---------------------------- | | Revenue (in thousands) | $4,679 | $5,701 | | Estimated Treatments | 67,000 | 82,000 | - The decrease in **recurring revenue** was attributed to the ongoing **COVID-19 pandemic** and the unfavorable impact of lower deferred revenue from Q4 2020[112](index=112&type=chunk)[114](index=114&type=chunk) - The company plans to increase **direct-to-patient advertising** and **marketing spend** in 2021 to drive **patient traffic** to partner clinics and increase **recurring revenue**, anticipating a **3-9 month lag** for results[113](index=113&type=chunk) [Dermatology Procedures Equipment Revenue](index=26&type=section&id=Dermatology%20Procedures%20Equipment) Dermatology Procedures Equipment revenue increased 11.6% to $1,148 thousand in Q1 2021, but future revenues may be negatively impacted by the international recurring revenue model transition Dermatology Procedures Equipment Revenue (in thousands) | Metric | 3 Months Ended March 31, 2021 | 3 Months Ended March 31, 2020 | | :----- | :---------------------------- | :---------------------------- | | Revenue (in thousands) | $1,148 | $1,029 | | International Systems Sold | 2 (XTRAC) | 3 (VTRAC) | | Domestic Systems Sold | 0 | 1 (XTRAC) | - The transition to a **recurring revenue model** with **international distributors** is expected to negatively impact **equipment revenues**[115](index=115&type=chunk)[117](index=117&type=chunk) [Operating Expenses](index=27&type=section&id=Operating%20Expenses) Total operating expenses increased to $6,105 thousand in Q1 2021, driven by higher engineering and significantly increased general and administrative costs due to CEO transition Operating Expenses (in thousands) | Expense (in thousands) | 3 Months Ended March 31, 2021 | 3 Months Ended March 31, 2020 | | :--------------------- | :---------------------------- | :---------------------------- | | Engineering and product development | $384 | $292 | | Selling and marketing | $2,932 | $2,953 | | General and administrative | $2,789 | $2,102 | | Total Operating Expenses | $6,105 | $5,347 | - **General and administrative expenses** increased significantly due to **CEO transition costs** (severance, recruiting, accelerated stock compensation)[126](index=126&type=chunk) [Interest (Expense) Income, Net](index=27&type=section&id=Interest%20(Expense)%20Income%2C%20Net) The company reported net interest expense of $22 thousand in Q1 2021, a shift from net interest income in Q1 2020, primarily due to lower interest rates Interest (Expense) Income, Net (in thousands) | Metric (in thousands) | 3 Months Ended March 31, 2021 | 3 Months Ended March 31, 2020 | | :-------------------- | :---------------------------- | :---------------------------- | | Interest (expense) income, net | $(22) | $1 | [Income Taxes](index=27&type=section&id=Income%20Taxes) Income tax expense decreased to $4 thousand in Q1 2021 from $88 thousand in Q1 2020, primarily due to changes in deferred tax liability related to goodwill Income Taxes (in thousands) | Metric (in thousands) | 3 Months Ended March 31, 2021 | 3 Months Ended March 31, 2020 | | :-------------------- | :---------------------------- | :---------------------------- | | Income tax expense | $4 | $88 | [Non-GAAP Adjusted EBITDA](index=27&type=section&id=Non-GAAP%20adjusted%20EBITDA) Non-GAAP adjusted EBITDA for Q1 2021 was a loss of $811 thousand, a significant decrease from a positive $599 thousand in Q1 2020, used to show core operating results Non-GAAP Adjusted EBITDA (in thousands) | Metric (in thousands) | 3 Months Ended March 31, 2021 | 3 Months Ended March 31, 2020 | | :-------------------- | :---------------------------- | :---------------------------- | | Net Loss | $(2,418) | $(1,035) | | Non-GAAP EBITDA | $(1,473) | $169 | | Non-GAAP adjusted EBITDA | $(811) | $599 | - **Non-GAAP adjusted EBITDA** is presented to isolate certain expenses, gains, and losses not indicative of **core operating results** and to enhance comparability[130](index=130&type=chunk) [Liquidity and Capital Resources](index=28&type=section&id=Liquidity%20and%20Capital%20Resources) Working capital decreased to $3,997 thousand by March 31, 2021; operating cash flow declined, while investing cash flow increased, with future financing risks due to COVID-19 Liquidity and Capital Resources (in thousands) | Metric (in thousands) | March 31, 2021 | December 31, 2020 | | :-------------------- | :------------- | :---------------- | | Working Capital | $3,997 | $5,993 | | Cash, cash equivalents and restricted cash | $17,525 | $18,112 | - Net cash provided by **operating activities** decreased to **$153 thousand** in Q1 2021 from **$598 thousand** in Q1 2020, mainly due to a higher net loss[135](index=135&type=chunk) - Net cash used in **investing activities** increased to **$740 thousand** in Q1 2021 from **$596 thousand** in Q1 2020, driven by **lasers placed-in-service** and **property/equipment purchases**[136](index=136&type=chunk) - Management believes current cash, anticipated revenues, and **PPP/EIDL loan proceeds** will be sufficient for the next 12 months, but **COVID-19** poses risks to future financing[134](index=134&type=chunk) [Commitments and Contingencies](index=29&type=section&id=Commitments%20and%20Contingencies) No new significant commitments or contingencies were reported beyond those detailed in the 2020 annual financial statements - No new significant commitments or contingencies were reported beyond those in the 2020 annual financial statements[138](index=138&type=chunk) [Off-Balance Sheet Arrangements](index=29&type=section&id=Off-Balance%20Sheet%20Arrangements) The company had no off-balance sheet arrangements as of March 31, 2021 - The company had no **off-balance sheet arrangements** as of March 31, 2021[139](index=139&type=chunk) [ITEM 3. Quantitative and Qualitative Disclosure about Market Risk](index=29&type=section&id=ITEM%203.%20Quantitative%20and%20Qualitative%20Disclosure%20about%20Market%20Risk) This section is marked as "Not applicable", indicating no material quantitative or qualitative disclosures regarding market risk are provided for the period - This section is marked as **"Not applicable"**[140](index=140&type=chunk) [ITEM 4. Controls and Procedures](index=29&type=section&id=ITEM%204.%20Controls%20and%20Procedures) Management, with the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of March 31, 2021, concluding they were effective at a reasonable assurance level, with no material changes in internal control over financial reporting [Evaluation of Disclosure Controls and Procedures](index=29&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) Management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2021 - Management, with CEO and CFO participation, concluded that **disclosure controls and procedures** were **effective at the reasonable assurance level** as of March 31, 2021[141](index=141&type=chunk) [Limitations on the Effectiveness of Controls](index=30&type=section&id=Limitations%20on%20the%20Effectiveness%20of%20Controls) Control systems provide reasonable, not absolute, assurance that objectives are met, acknowledging inherent limitations that prevent absolute detection of all control issues - **Control systems** provide **reasonable, not absolute, assurance** due to **inherent limitations**[142](index=142&type=chunk) [Changes in Internal Control over Financial Reporting](index=30&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) No material changes in internal control over financial reporting occurred during the most recent fiscal quarter - No **material changes in internal control over financial reporting** occurred during the most recent fiscal quarter[143](index=143&type=chunk) PART II - Other Information [ITEM 1. Legal Proceedings](index=30&type=section&id=ITEM%201.%20Legal%20Proceedings) The company is routinely involved in legal actions and proceedings, including contract claims and employment-related matters, some of which may be material - The company is routinely a party to **legal actions and proceedings**, including **contract claims** and **employment-related matters**, some of which may be material[145](index=145&type=chunk) [ITEM 1A. Risk Factors](index=30&type=section&id=ITEM%201A.%20Risk%20Factors) Risk factors are detailed in Item 1A of the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020 - **Risk factors** are detailed in Item 1A of the company's **Annual Report on Form 10-K** for the fiscal year ended December 31, 2020[146](index=146&type=chunk) [ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=30&type=section&id=ITEM%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) None to report - **None to report**[147](index=147&type=chunk) [ITEM 3. Defaults Upon Senior Securities](index=30&type=section&id=ITEM%203.%20Defaults%20Upon%20Senior%20Securities) None to report - **None to report**[147](index=147&type=chunk) [ITEM 4. Mine Safety Disclosures](index=30&type=section&id=ITEM%204.%20Mine%20Safety%20Disclosures) None to report - **None to report**[148](index=148&type=chunk) [ITEM 5. Other Information](index=30&type=section&id=ITEM%205.%20Other%20Information) None to report - **None to report**[149](index=149&type=chunk) [ITEM 6. Exhibits](index=31&type=section&id=ITEM%206.%20Exhibits) The section lists various exhibits, including corporate governance documents (e.g., Certificate of Incorporation, Bylaws), employment-related agreements (e.g., CEO separation and employment agreements, stock option agreement), and certifications (e.g., Rule 13a-14(a) Certificates, Section 1350 Certifications) - The section lists various exhibits, including **corporate governance documents** (e.g., Certificate of Incorporation, Bylaws), **employment-related agreements** (e.g., CEO separation and employment agreements, stock option agreement), and **certifications** (e.g., Rule 13a-14(a) Certificates, Section 1350 Certifications)[152](index=152&type=chunk) [Signatures](index=32&type=section&id=Signatures) The report is signed by Robert J. Moccia, President & Chief Executive Officer, and Matthew C. Hill, Chief Financial Officer - The report is signed by **Robert J. Moccia**, **President & Chief Executive Officer**, and **Matthew C. Hill**, **Chief Financial Officer**[156](index=156&type=chunk)