STRATA Skin Sciences(SSKN) - 2021 Q3 - Quarterly Report

Part I. Financial Information ITEM 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for the periods ended September 30, 2021 Condensed Consolidated Balance Sheets 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) 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) 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) 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) 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) 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] - Fair value of warrants issued in connection with debt was $585 thousand in 2021[24] - Assumed deferred revenue in connection with the Ra Medical asset acquisition was $1,841 thousand in 2021[24] Notes to Unaudited Condensed Consolidated Financial Statements These notes detail accounting policies, estimates, and recent events including acquisitions and debt refinancing Note 1 The Company: Background 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] - 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] - The company signed direct distribution agreements for recurring revenue and capital sales in Japan (September 2020) and China (February 2021)[27] - A 'Home by XTRAC™' pilot program was discontinued and is under evaluation[28] - 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][30] Note 1 The Company: Basis of Presentation 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] - Operating results and cash flows for the nine months ended September 30, 2021, are not necessarily indicative of future periods[33] Note 1 The Company: Significant Accounting Policies 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] Note 1 The Company: Use of Estimates 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] - The full impact of the ongoing COVID-19 outbreak is unknown and could result in material impacts to future financial statements[37] Note 1 The Company: Fair Value Measurements 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][43] - The carrying value of cash, restricted cash, short-term monetary assets/liabilities, and debt approximate their fair values[40] Note 1 The Company: Earnings Per Share 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] - No Series C Convertible Preferred Stock was outstanding as of September 30, 2021 and 2020[42] - All potentially dilutive securities were anti-dilutive for the three and nine months ended September 30, 2021 and 2020[43][44] 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 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] Note 1 The Company: Recent Accounting Pronouncements Not Yet Adopted 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] - 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] - ASU 2021-04 (Issuer's Accounting for Certain Modifications) is not believed to have a material effect[48] Note 2 Liquidity 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] - Received and had PPP loan forgiven; EIDL loan repaid[49] - 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] - Management believes current cash and anticipated revenues will be sufficient for the next 12 months[49] - Ongoing COVID-19 impact on financial markets and supply chain disruptions could interfere with access to financing[49] Note 3 Revenue Recognition 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][50] - Dermatology Procedures Equipment revenue is recognized when control of products transfers to customers, typically FOB shipping point[52] - 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] - 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] 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 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][61] - The acquisition allows marketing to Ra Medical's 400 existing dermatology practices, increasing recurring revenue and XTRAC placements[60] - 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] - Customer lists intangible asset is amortized on a straight-line basis over twelve years[61] Note 5 Inventories 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 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] - Recognized a $73 thousand loss on disposal of property and equipment during the nine months ended September 30, 2021[63] Note 7 Intangible Assets, net 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] - No impairment charges for the nine months ended September 30, 2021[67] 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 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][71][72] 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 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] Note 10 Long-term Debt 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] - The Senior Term Facility bears interest at LIBOR + 7.50% and matures on September 1, 2026[77] - Monthly interest-only payments are required through September 30, 2024, followed by 24 equal monthly principal payments plus interest[77] - 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] - 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] - The $2,028 thousand PPP loan was forgiven in the second quarter of 2021, resulting in a gain on forgiveness of debt[83] - The $500 thousand EIDL loan, obtained in May 2020, was repaid on September 30, 2021[84] 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 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] - Shareholders approved an increase of 2,700,000 common shares for issuance under the 2016 Omnibus Incentive Plan in July 2021[85] - Total unrecognized compensation expense for unvested stock options was $2,720 thousand, to be recognized over ~2.4 years[89] - Accelerated vesting of unvested options for the former CEO in February 2021 resulted in $173 thousand additional compensation expense[91] - Total unrecognized compensation expense for unvested restricted stock units was $167 thousand, to be recognized over ~0.8 years[92] 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 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] - The CARES Act did not have a significant impact on the company's financial position, results of operations, or cash flows[95] - Prior ownership changes (Section 382) may limit the annual utilization of net operating losses[96] Note 13 Business Segments 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] 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 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] - One customer represented 10.5% of accounts receivable as of September 30, 2021[105] - 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] Note 15 Commitments: Leases 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] - Operating lease costs were $108 thousand (Q3 2021) vs $112 thousand (Q3 2020), and $331 thousand (9M 2021) vs $336 thousand (9M 2020)[108] 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 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] Note 16 Subsequent Events 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] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, highlighting COVID-19 impacts, strategic acquisitions, and debt refinancing Introduction, Outlook and Overview of Business Operations 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] - As of September 30, 2021, there were 880 XTRAC systems in U.S dermatologists' offices, up from 832 at December 31, 2020[114] - The company signed direct distribution agreements for Japan (September 2020) and China (February 2021) for capital sales and recurring revenue[115] - The COVID-19 pandemic has negatively impacted the global economy, supply chains, and physician practices, affecting the company's financial performance[117][118][122] Key Technology 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] - VTRAC® Lamp (FDA cleared 2005) provides targeted therapeutic efficacy with a lamp system[128] - Introduced Multi Micro Dose (MMD) tip for XTRAC in 2018 and XTRAC Momentum Excimer Laser Platform in 2020[128] Recent Developments 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] - Entered into an $8.0 million Senior Term Facility with MidCap Financial Trust on September 30, 2021, with interest at LIBOR + 7.50%[126] - Issued warrants to purchase 373,626 common shares to an affiliate of MidCap in connection with the credit facility[129] - The $2.0 million PPP loan was forgiven in Q2 2021, resulting in a $2,028 thousand gain[131] - The $500 thousand EIDL loan and the $7,275 thousand commercial bank note were repaid on September 30, 2021[132][133] - Entered an equity distribution agreement in October 2021 to sell up to $11.0 million of common stock via 'at-the-market' offerings[134] Critical Accounting Policies and Estimates 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] Results of Operations The company saw increased revenues and gross profits, alongside higher operating expenses and a gain from debt forgiveness 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 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] - 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] - Increased direct-to-patient advertising spend in 2021, expecting a 3-9 month lag before revenue impact[140] - Deferred net revenues for domestic placements were $2,107 thousand (Sep 30, 2021) vs $1,391 thousand (Sep 30, 2020)[141] Dermatology Procedures Equipment 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][145] - 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][146] Cost of Revenues 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 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] 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 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] - 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] Selling and Marketing Expenses 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] - Selling and marketing expenses for 9M 2021 were $9,387 thousand, up from $6,446 thousand in 9M 2020[155] - Increase driven by investments in sales, marketing, and direct-to-consumer advertising, contrasting with cost reductions in 2020[155] General and Administrative Expenses 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] - General and administrative expenses for 9M 2021 were $7,085 thousand, up from $5,921 thousand in 9M 2020[156] - Increase primarily due to higher compensation, severance, and stock option costs from the CEO transition in Q1 2021[156] Gain on Forgiveness of Debt 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] Interest Expense, net 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] Income Taxes 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] - There were no federal and state taxes on the PPP loan forgiveness[160] Non-GAAP adjusted EBITDA 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 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] - 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] - Net cash provided by operating activities was $839 thousand (9M 2021), down from $1,750 thousand (9M 2020)[171] - 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] - Financing activities included $7,867 thousand net proceeds from the Senior Term Facility and $7,775 thousand in debt repayments in 9M 2021[173] - Management believes current cash, anticipated revenues, and the $11.0 million equity distribution agreement will provide sufficient liquidity for the next 12 months[170] Commitments and Contingencies 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] Off-Balance Sheet Arrangements The company had no off-balance sheet arrangements as of September 30, 2021 - No off-balance sheet arrangements as of September 30, 2021[175] ITEM 3. Quantitative and Qualitative Disclosure about Market Risk This section states that there are no applicable disclosures about market risk for the company - Not applicable[176] ITEM 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes in internal control Evaluation of Disclosure Controls and Procedures 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] Limitations on the Effectiveness of Controls 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] Changes in Internal Control over Financial Reporting 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] Part II. Other Information ITEM 1. Legal Proceedings 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] ITEM 1A. Risk Factors 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] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report - None[183] ITEM 3. Defaults Upon Senior Securities There were no defaults upon senior securities to report - None[183] ITEM 4. Mine Safety Disclosures There were no mine safety disclosures to report - None[184] ITEM 5. Other Information There was no other information to report in this section - None[185] ITEM 6. Exhibits 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] 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]