The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF
CHANGES IN EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017
(In thousands, except share and per share amounts
)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Preferred Stock – Series B
|
|
|
Convertible Preferred Stock – Series C
|
|
|
Common Stock
|
|
|
Additional Paid-In
|
|
|
Accumulated
|
|
|
Accumulated Other Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Loss
|
|
|
Total
|
|
BALANCE, JANUARY 1, 2017
|
|
|
6,000
|
|
|
$
|
1
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
2,166,898
|
|
|
$
|
2
|
|
|
$
|
225,289
|
|
|
$
|
(210,575
|
)
|
|
$
|
2
|
|
|
$
|
14,719
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
136
|
|
|
|
-
|
|
|
|
-
|
|
|
|
136
|
|
Conversion of senior secured convertible debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
70,000
|
|
|
|
-
|
|
|
|
262
|
|
|
|
-
|
|
|
|
-
|
|
|
|
262
|
|
Conversion of convertible preferred stock
|
|
|
(3,072
|
)
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
239,500
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issuance of common stock for fractional shares in reverse stock split
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,345
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issuance of convertible preferred stock in exchange for convertible debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
40,482
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,906
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,910
|
|
Net loss for the nine months ended September 30, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(17,111
|
)
|
|
|
-
|
|
|
|
(17,111
|
)
|
BALANCE, SEPTEMBER 30, 2017
|
|
|
2,928
|
|
|
$
|
-
|
|
|
|
40,482
|
|
|
$
|
4
|
|
|
|
2,477,743
|
|
|
$
|
3
|
|
|
$
|
251,594
|
|
|
$
|
(227,686
|
)
|
|
$
|
2
|
|
|
$
|
23,917
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(In thousands,
unaudited)
|
|
For the Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(17,111
|
)
|
|
$
|
(2,448
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,811
|
|
|
|
4,844
|
|
Provision for doubtful accounts
|
|
|
58
|
|
|
|
91
|
|
Loss on disposal of property, plant and equipment
|
|
|
-
|
|
|
|
124
|
|
Gain on cancelation of distributor rights agreement
|
|
|
(40
|
)
|
|
|
-
|
|
Intangible asset write-off
|
|
|
23
|
|
|
|
-
|
|
Stock-based compensation
|
|
|
136
|
|
|
|
401
|
|
Deferred tax provision
|
|
|
180
|
|
|
|
180
|
|
Amortization of debt discount
|
|
|
2,344
|
|
|
|
1,821
|
|
Amortization of deferred financing costs
|
|
|
171
|
|
|
|
145
|
|
Loss on extinguishment of debt
|
|
|
11,799
|
|
|
|
-
|
|
Change in fair value of warrant liability
|
|
|
(77
|
)
|
|
|
(5,316
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
130
|
|
|
|
1,041
|
|
Inventories
|
|
|
(716
|
)
|
|
|
899
|
|
Prepaid expenses and other assets
|
|
|
406
|
|
|
|
202
|
|
Accounts payable
|
|
|
71
|
|
|
|
(2,559
|
)
|
Other accrued liabilities
|
|
|
(162
|
)
|
|
|
(623
|
)
|
Other liabilities
|
|
|
108
|
|
|
|
(40
|
)
|
Deferred revenues
|
|
|
115
|
|
|
|
154
|
|
Net cash provided by (used in) operating activities
|
|
|
2,246
|
|
|
|
(1,084
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Lasers placed-in-service, net
|
|
|
(1,450
|
)
|
|
|
(607
|
)
|
Purchases of property and equipment, net
|
|
|
(321
|
)
|
|
|
-
|
|
Payments on distributor rights liability
|
|
|
(115
|
)
|
|
|
-
|
|
Acquisition costs, net of cash received
|
|
|
-
|
|
|
|
125
|
|
Restricted cash
|
|
|
-
|
|
|
|
15
|
|
Net cash used in investing activities
|
|
|
(1,886
|
)
|
|
|
(467
|
)
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements
STRATA SKIN SCIENCES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
(In thousands,
unaudited)
|
|
For the Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
Proceeds from long-term debt
|
|
|
-
|
|
|
|
1,500
|
|
Repayments of long-term debt
|
|
|
(857
|
)
|
|
|
-
|
|
Payments on notes payable
|
|
|
(304
|
)
|
|
|
(299
|
)
|
Net cash (used in ) provided by financing activities
|
|
|
(1,161
|
)
|
|
|
1,201
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
-
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(801
|
)
|
|
|
(346
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
3,928
|
|
|
|
3,303
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
3,127
|
|
|
$
|
2,957
|
|
|
|
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
1,934
|
|
|
$
|
1,517
|
|
|
|
|
|
|
|
|
|
|
Supplemental information of non-cash investing and financing activities:
|
|
|
|
|
|
Conversion of senior secured convertible debentures into common stock
|
|
$
|
262
|
|
|
$
|
248
|
|
Conversion of series A convertible preferred stock into common stock
|
|
|
|
|
|
$
|
309
|
|
Recognition of warrants issued as debt discount
|
|
$
|
-
|
|
|
$
|
47
|
|
Reclassification of warrant liabilities to equity
|
|
$
|
-
|
|
|
$
|
1,541
|
|
Acquisition of distributor rights asset and license liability
|
|
$
|
286
|
|
|
$
|
-
|
|
Issuance of convertible preferred stock in exchange for convertible debentures
|
|
$
|
25,910
|
|
|
$
|
-
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements
The Company:
Background
STRATA Skin Sciences, Inc. (and its subsidiary) ("STRATA" or "we" or the "Company") is a medical technology company focused on the therapeutic and aesthetic dermatology market. STRATA sales include the following products: XTRAC
®
laser and VTRAC
®
excimer lamp systems utilized in the treatment of psoriasis, vitiligo and various other skin conditions; the STRATAPEN™ MicroSystem, a micropigmentation device; and Nordlys, a multi-technology aesthetic laser device for treating vascular and pigmented lesions.
The XTRAC is an ultraviolet light excimer laser system utilized to treat psoriasis, vitiligo and other skin diseases. The XTRAC received FDA clearance in 2000 and has since become a recognized treatment among dermatologists. The system delivers targeted 308um ultraviolet light to affected areas of the skin, leading to psoriasis clearing and vitiligo repigmentation, following a series of treatments. As of September 30, 2017, there were 776 XTRAC systems placed in dermatologists' offices in the United States under the Company's recurring revenue business model. The XTRAC systems employed under the recurring revenue model generate revenue on a per procedure basis. The per-procedure charge is inclusive of the use of the system and the services provided by the Company to the customer which includes system maintenance, reimbursement support service and participation in the direct to patient marketing programs employed by the Company. The XTRAC system's use for psoriasis is covered by nearly all major insurance companies, including Medicare. The VTRAC Excimer Lamp system, offered in addition to the XTRAC system internationally, provides targeted therapeutic efficacy demonstrated by excimer technology with the simplicity of design and reliability of a lamp system.
Effective March 1, 2017, the Company entered into an agreement to license the exclusive US distribution rights for the Ellipse family of products, Nordlys, from Ellipse USA ("Ellipse") through December 31, 2019. The agreement was to be renewed if certain minimum purchase requirements were achieved and an approximate $33 monthly license fee was paid, for a contractual total license fee of $1.1 million over the Initial Term.
On October 26, 2017, by mutual agreement of the three parties involved in the transaction, the Company, Ellipse USA and the manufacturer Ellipse A/S, cancelled the agreement with Ellipse USA retroactively effective to August 9, 2017, and the Company entered into two new agreements. Under the new agreements the Company will have
the exclusive US distribution rights for the Ellipse family of products, Nordlys, from Ellipse A/S, the Danish manufacturer, through August 9, 2020. If certain sales targets are met, the new agreement will automatically be extended for two additional years. Under the terms of the new agreements, the Company will be the exclusive US distributor of Ellipse lasers and will pay to Ellipse USA a monthly license fee of $10 through August 9, 2020, in addition to commissions for each system sold.
The license fee amounts to approximately $355 over the Initial Term with a present value as of the effective date of the agreement of $286. As a result of the termination of the old agreement and the signing of the new agreements the Company reversed the intangible asset and corresponding liability recorded on March 1, 2017 (which resulted in a $40 gain) and recorded the distribution rights at the present value of the payments under the new agreements. See
Note 4
,
Intangibles, net
, for additional information.
Effective February 1, 2017, the Company entered into an exclusive OEM distribution agreement with Esthetic Education, LLC to be the exclusive marketer and seller of private label versions of the SkinStylus MicroSystem and associated parts under the name of STRATAPen. This three-year agreement allows for two one year extensions.
Effective April 6, 2017, the Company completed a reverse stock split of its common stock at a ratio of 1-for-5 shares, and all data on common stock and equivalents are shown herein as reflective of this reverse stock split.
As of September 30, 2017, the Company had an accumulated deficit of $227,686 and had been incurring losses since inception as well as negative cash flows from operations until 2016. To date, the Company has dedicated most of its financial resources to research and development, sales and marketing, and general and administrative expenses.
Management believes that its cash and cash equivalents as of September 30, 2017 combined with the anticipated revenues from the sale of the Company's products will be sufficient to
satisfy its working capital needs, capital asset purchases, outstanding commitments, payments of the long-term debt as they become due and other liquidity requirements associated with its existing operations through the next twelve months following the filing of this Form 10-Q.
Basis of Presentation
:
Accounting Principles
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP").
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.
Unaudited interim consolidated financial statements
The accompanying interim consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission ("SEC") for interim financial reporting. These consolidated statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to state fairly the consolidated balance sheets, consolidated statements of operations, consolidated statements of cash flows and consolidated statements of stockholders' equity, for the periods presented in accordance with GAAP. The consolidated balance sheet at December 31, 2016, has been derived from the audited consolidated financial statements at that date. Operating results and cash flows for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017, or any other future period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with US GAAP have been omitted in accordance with the rules and regulations for interim reporting of the SEC. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016 ("2016 Form 10-K"), and other forms filed with the SEC from time to time.
Reclassification
Certain reclassifications from the prior year presentation have been made to conform to the current year presentation. These reclassifications did not have a material impact on the Company's financial statements.
Significant Accounting Policies
The significant accounting policies used in preparation of these condensed consolidated financial statements are disclosed in our 2016 Form 10-K, and there have been no changes to the Company's significant accounting policies during the three and nine months ended September 30, 2017.
Use of Estimates
The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect amounts reported of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates and be based on events different from those assumptions. As of September 30, 2017, the more significant estimates include (1) revenue recognition, in regards to deferred revenues and valuation allowances of accounts receivable, (2) the estimated useful lives of intangible assets and property and equipment, (3) the inputs used in determining the fair value of equity-based awards, (4) the valuation allowance related to deferred tax assets and (5) the fair value of financial instruments, including derivative instruments.
Fair Value Measurements
The Company measures and discloses fair value in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification 820,
Fair Value Measurements and Disclosures
("ASC Topic 820"). ASC Topic 820 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions there exists a three-tier fair-value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
|
•
|
Level 1 – unadjusted quoted prices are available in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date.
|
|
•
|
Level 2 – pricing inputs are other than quoted prices in active markets that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.
|
|
•
|
Level 3 – pricing inputs are unobservable for the non-financial asset or liability and only used when there is little, if any, market activity for the asset or liability at the measurement date. The inputs into the determination of fair value require significant management judgment or estimation. Fair value is determined using comparable market transactions and other valuation methodologies, adjusted as appropriate for liquidity, credit, market and/or other risk factors
|
This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.
The Company's recurring fair value measurements at September 30, 2017 and December 31, 2016 are as follows:
|
|
Fair Value as of
September 30, 2017
|
|
|
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
|
|
|
Significant
other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability (Note 8)
|
|
$
|
28
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of
December 31, 2016
|
|
|
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
|
|
|
Significant
other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability (Note 8)
|
|
$
|
105
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
105
|
|
The fair value of cash and cash equivalents are based on their respective demand value, which are equal to the carrying value. The fair value of derivative warrant liabilities is estimated using option pricing models that are based on the fair value of the Company's common stock as well as assumptions for volatility, remaining expected life, risk-free interest rate and, in some cases, credit spread. The derivative warrant liabilities are the only recurring Level 3 fair value measures. The carrying value of all other short-term monetary assets and liabilities is estimated to approximate their fair value due to the short-term nature of these instruments. The Company assessed its long-term debt (including the current portion) and determined that the fair value of total debt was $10,778 as of September 30, 2017. As of December 31, 2016 the fair value of long-term debt and convertible debentures was $20,082.
Several of the warrants outstanding as of September 30, 2017 and 2016 have non-standard terms as they relate to a fundamental transaction and require a net-cash settlement upon change in control of the Company and other warrants as of September 30, 2016 contained full ratchet provisions that reduce the exercise price of the warrants in the event of a transaction resulting in the issuance of equity below the current price of the warrants. Therefore these warrants are, or were, classified as derivatives. These warrants have been recorded at their fair value using a binomial option pricing model and will be recorded at their respective fair value at each subsequent balance sheet date. See
Note 8,
Warrants
, for additional discussion.
Earnings Per Share
The Company calculates net income (loss) per share in accordance with ASC 260, Earnings per Share. Under ASC 260, basic net income (loss) per common share is calculated by dividing net income by the weighted-average number of common shares outstanding during the reporting period and excludes dilution for potentially dilutive securities. Diluted earnings per share ("EPS") gives effect to dilutive options, warrants and other potential common shares outstanding during the period.
The Company's Series C Preferred Shares are subordinate to all other securities at the same subordination level as common stock and they participate in all dividends and distributions declared or paid with respect to common stock of the Company, on an as-converted basis. Therefore, the Series C Preferred Shares meet the definition of common stock under ASC 260. Earnings per share is presented for each class of security meeting the definition of common stock. The net loss is allocated to each class of security meeting the definition of common stock based on their contractual terms.
The following table presents the calculation of basic and diluted net loss per share by each class of security for the three and nine months ended September 30, 2017:
|
|
For the Three Months
ended September 30, 2017
|
|
|
For the Three Months
ended September 30, 2017
|
|
|
|
Common stock
|
|
|
Series C Preferred stock
|
|
|
Common stock
|
|
|
Series C Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,235
|
)
|
|
$
|
(5,436
|
)
|
|
$
|
(13,835
|
)
|
|
$
|
(3,276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding during the period
|
|
|
2,477,743
|
|
|
|
4,400
|
|
|
|
2,328,274
|
|
|
|
1,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted net loss per share
|
|
$
|
(3.32
|
)
|
|
$
|
(1,235.43
|
)
|
|
$
|
(5.94
|
)
|
|
$
|
(2,208.96
|
)
|
For the three and nine months ended September 30, 2017 and the three months ended September 30, 2016, diluted net loss per common share is equal to the basic net loss per common share since all potentially dilutive securities are anti-dilutive. The gain on the change in fair value of the warrant liability was considered when calculating the diluted earnings per share and was deemed to be antidilutive.
For the nine months ended September 30, 2016 diluted earnings per common share is computed by the numerator effected by the gain on the change in fair value of the warrant liability and the denominator is increased to include the number of additional potential common shares from the warrants underlying the warrant liability.
Diluted earnings per common share were calculated using the following net loss and weighted average shares outstanding for the nine months ended September 30, 2016:
|
|
Nine Months Ended
September 30, 2016
|
|
|
|
|
|
Net loss
|
|
$
|
(2,448
|
)
|
Gain on the change in fair value of the warrant liability
|
|
|
(5,316
|
)
|
Diluted earnings
|
|
$
|
(7,764
|
)
|
|
|
|
|
|
Weighted average number of common and common equivalent shares outstanding:
|
|
|
|
|
Basic number of common shares outstanding
|
|
|
2,107,365
|
|
Effect of warrants
|
|
|
82,178
|
|
Diluted number of common and common stock equivalent shares outstanding
|
|
|
2,189,543
|
|
The weighted average of potential common stock equivalents outstanding during the three and nine months ended September 30, 2017 and 2016 consist of common stock equivalents of common stock purchase warrants, senior secured convertible debentures, convertible preferred stock and common stock options, which are summarized as follows:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Common stock equivalents of convertible debentures
|
|
7,546,299
|
|
8,541,577
|
|
8,191,777
|
|
8,561,343
|
Common stock purchase warrants
|
|
2,406,625
|
|
2,656,816
|
|
2,406,625
|
|
2,724,584
|
Common stock equivalents of convertible Preferred B stock
|
|
228,336
|
|
493,782
|
|
343,261
|
|
502,661
|
Common stock options
|
|
855,389
|
|
600,914
|
|
873,554
|
|
563,155
|
Total
|
|
11,036,649
|
|
12,293,089
|
|
11,815,217
|
|
12,351,743
|
Adoption of New Accounting Standards
In January 2017, the
Financial Accounting Standards Board ("FASB")
issued
Accounting Standards Update ("ASU")
No. 2017-01, Business Combinations (Topic 805):
Clarifying the Definition of a Business
, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current guidance, there are three elements of business: inputs, processes, and outputs. While an integrated set of assets and activities (collectively, a "set") that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs, for example, by integrating the acquired set with their own inputs and processes. The new guidance provides a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. For public business entities, the guidance is effective prospectively for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, but can be adopted early. The Company has adopted this ASU effective January 1, 2017 and has applied the rules with its sub-distribution license with Ellipse and concluded that this transaction did not meet the definition of a business. As such, it has been accounted for as an asset acquisition. See
Note 4
,
Intangibles, net
.
In March 2016, the FASB issued ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting
(Topic 718), to simplify various aspects of the accounting and presentation of share-based payments, including the income tax effects of awards and forfeiture assumptions. Under the new guidance, all excess tax benefits and tax deficiencies are recorded to income tax expense in the income statement. The new guidance also changes the classification of excess tax benefits in the cash flow statement and impacts the diluted earnings per share calculation. Additionally, the new guidance permits to elect to account for forfeitures as they occur. The Company has made this election upon the adoption of this standard. The guidance became effective for interim and annual periods beginning after December 15, 2016, and early adoption was permitted.
The adoption of this ASU did not have a significant impact on the condensed consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17,
Income Taxes, Balance Sheet Classification of Deferred Taxes
topic of the Codification. This standard requires all deferred tax assets and liabilities to be classified as non-current on the balance sheet instead of separating deferred taxes into current and non-current amounts. In addition, valuation allowance allocations between current and non-current deferred tax assets are no longer required because those allowances also will be classified as non-current. This standard is effective for public companies for annual periods beginning after December 15, 2016. The Company's deferred tax assets are provided with a full valuation allowance as of December 31, 2016 and 2015, except the deferred tax liability related to goodwill amortization. As such,
the adoption of this ASU did not have a significant impact on the condensed consolidated financial statements.
In July 2015, The FASB issued ASU 2015-11
, Simplifying the Measurement of Inventory (Topic 330)
("ASU 2015-11"). ASU 2015-11 outlines that inventory within the scope of its guidance be measured at the lower of cost and net realizable value. Prior to the issuance of ASU 2015-11, inventory was measured at the lower of cost or market (where market was defined as replacement cost, with a ceiling of net realizable value and floor of net realizable value less a normal profit margin). For a public entity, the amendments in ASU 2015-11 are effective, in a prospective manner, for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period (the first quarter of fiscal year 2017 for the Company).
The adoption of this ASU did not have a significant impact on the Company's consolidated financial statements.
Recently Issued Accounting Standards
In July 2017, the FASB issued a two-part ASU 2017-11, "(Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception." For public business entities, the amendments in Part 1 of ASU 2017-11 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in Part 2 of ASU 2017-11 do not require any transition guidance because those amendments do not have an accounting effect.
The Company is currently evaluating the impact of this guidance on the Company's condensed consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new guidance eliminated Step 2 from the goodwill impairment test which was required in computing the implied fair value of goodwill. Instead, under the new amendments, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. If applicable, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss. The amendments in this guidance are effective for public business entities for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019 with early adoption permitted after January 1, 2017. The Company is currently evaluating the impact of this guidance on the Company's condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, This statement requires lessees to present right-of-use assets and lease liabilities on the balance sheet. The standard is effective for public companies for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the effect the guidance will have on its financial condition and results of operations.
In May 2014, The FASB issued ASU 2014-09
, Revenue from Contracts with Customers (Topic 606)
.
ASU 2014-09 outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 also requires entities to disclose sufficient information, both quantitative and qualitative, to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. An entity should apply the amendments in this ASU using one of the following two methods: 1. retrospectively to each prior reporting period presented with a possibility to elect certain practical expedients, or, 2. using the modified retrospective method with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. If an entity elects the latter transition method, it also should provide certain additional disclosures. The new guidance will be effective for annual and interim periods beginning on or after December 15, 2017. The ASU may change our accounting for the revenues from recurring procedures based upon the determination of when the Company has transferred control of the services. The potential impact of that change could increase or decrease our revenues in any given period and will depend, among others, on the estimated unused treatments as of the end of any reporting period.
We are still evaluating the ASU for its potential impact on our consolidated financial statements. We currently plan to adopt the ASU using the "modified retrospective" approach, which requires the cumulative effect of initially applying the guidance to be recognized as an adjustment to our accumulated deficit as of the January 1, 2018 adoption date.
Note 2
Inventories:
|
|
September 30
,
2017
|
|
|
December 31, 2016
|
|
|
|
(unaudited)
|
|
|
|
|
Raw materials and work in progress
|
|
$
|
2,448
|
|
|
$
|
2,440
|
|
Finished goods
|
|
|
1,085
|
|
|
|
377
|
|
Total inventories
|
|
$
|
3,533
|
|
|
$
|
2,817
|
|
Work-in-process is immaterial, given the Company's typically short manufacturing cycle, and therefore is disclosed in conjunction with raw materials.
Note 3
Property and Equipment, net:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
(unaudited)
|
|
|
|
|
Lasers placed-in-service
|
|
$
|
18,018
|
|
|
$
|
16,712
|
|
Equipment, computer hardware and software
|
|
|
468
|
|
|
|
160
|
|
Furniture and fixtures
|
|
|
118
|
|
|
|
111
|
|
Leasehold improvements
|
|
|
31
|
|
|
|
25
|
|
|
|
|
18,635
|
|
|
|
17,008
|
|
Accumulated depreciation and amortization
|
|
|
(9,977
|
)
|
|
|
(6,828
|
)
|
Property and equipment, net
|
|
$
|
8,658
|
|
|
$
|
10,180
|
|
Depreciation and related amortization expense was $3,292 and $3,482 for the nine months ended September 30, 2017 and 2016, respectively.
Note 4
Intangibles, net:
Set forth below is a detailed listing of definite-lived intangible assets:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
(unaudited)
|
|
|
|
|
Core technology
|
|
$
|
5,700
|
|
|
$
|
5,974
|
|
Product technology
|
|
|
2,000
|
|
|
|
2,000
|
|
Customer relationships
|
|
|
6,900
|
|
|
|
6,900
|
|
Tradenames
|
|
|
1,500
|
|
|
|
1,500
|
|
Distribution rights
|
|
|
286
|
|
|
|
-
|
|
|
|
|
16,386
|
|
|
|
16,374
|
|
Accumulated amortization
|
|
|
(4,084
|
)
|
|
|
(2,962
|
)
|
Patents and licensed technologies, net
|
|
$
|
12,302
|
|
|
$
|
13,412
|
|
Related amortization expense was $1,519 and $1,362 for the nine months ended September 30, 2017 and 2016, respectively. During the three and nine months ended September 30, 2017, the Company wrote off core technology of $274 and accumulated amortization of $251 related to the discontinuance of the MELAfind product. The value written off of $23 was recorded in cost of revenues.
Estimated amortization expense for amortizable patents and licensed technologies assets for the future periods is as follows:
Remaining 2017
|
|
$
|
476
|
|
2018
|
|
|
1,905
|
|
2019
|
|
|
1,905
|
|
2020
|
|
|
1,670
|
|
2021
|
|
|
1,410
|
|
Thereafter
|
|
|
4,936
|
|
Total
|
|
$
|
12,302
|
|
As discussed in
Note 1
, effective January 1, 2017 the Company follows the guidance in ASU 2017-01, which provides a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the new guidance, companies are required to utilize an initial screening test to determine whether substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set is not a business. The Company has determined that its transaction with Ellipse in the first quarter of 2017 is considered to be an acquisition of a single asset, therefore, the acquisition is not considered to be an acquisition of a business. The distribution rights asset had been assigned a value of $900 which was comprised of the present value of the license fee payments. Effective August 2017 the transaction was terminated and a new agreement was negotiated among the parties. See Note 1 for further details regarding these agreements. As a result of the termination of the old agreement and the signing of the new agreements the Company reversed the intangible asset and corresponding liability recorded on March 1, 2017 and recorded the distribution rights at the present value of the payments under the new agreements, amounting to $286. The reversal of the aforementioned intangible asset and corresponding liability resulted in a $40 gain, recognized in sales and marketing expense.
Note 5
Other Accrued Liabilities:
|
|
September 3
0
, 2017
|
|
|
December 31, 2016
|
|
|
|
(unaudited)
|
|
|
|
|
Accrued warranty, current
|
|
$
|
98
|
|
|
$
|
102
|
|
Accrued compensation, including commissions and vacation
|
|
|
861
|
|
|
|
1,177
|
|
Accrued sales and other taxes
|
|
|
520
|
|
|
|
439
|
|
Distributor rights liability, current
|
|
|
82
|
|
|
|
-
|
|
Accrued professional fees and other accrued liabilities
|
|
|
338
|
|
|
|
274
|
|
Total other accrued liabilities
|
|
$
|
1,899
|
|
|
$
|
1,992
|
|
Note 6
Convertible Debentures:
In the following table is a summary of the Company's convertible debentures.
|
|
December 31, 2016
|
|
|
|
|
|
Senior secured 2.25% convertible debentures, net of unamortized debt discount of $24,314; and deferred financing costs of $524
|
|
$
|
7,174
|
|
Senior secured 4% convertible debentures, net of unamortized debt discount of $3,469; and deferred financing costs of $392
|
|
|
4,854
|
|
Total convertible debt
|
|
$
|
12,028
|
|
The total outstanding convertible debentures was exchanged for convertible Preferred C stock on September 20, 2017, thus there was no remaining outstanding balance as of September 30, 2017.
The Company issued $32,500 aggregate principal amount of Debentures (the "June 2015 Debentures") that, subject to certain ownership limitations and stockholder approval conditions, was convertible into 8,666,668 shares of Company common stock at an initial conversion price of $3.75 per share. The Debentures were bearing interest at the rate of 2.25% per year, and, unless previously converted, were to mature on the five-year anniversary of the date of issuance, June 22, 2020.
The June 2015 Debentures included a beneficial conversion feature valued at $27,300 that was recorded as a discount to the debentures.
On the date of issuance the beneficial conversion feature value was calculated as the difference resulting from subtracting the conversion price of $3.75 from $6.90, the opening market value of the Company's common stock following the announcement of the transaction, multiplied by the number of common shares into which the June 2015 Debentures were convertible.
This discount was being amortized over the five year life of the June 2015 Debentures using the effective interest method. The embedded conversion feature contained an anti-dilution provision that allowed for downward exercise price adjustments in certain situations. The embedded conversion feature was not bifurcated as it did not meet all of the elements of a derivative.
On July 21, 2014, the Company entered into a definitive Securities Purchase Agreement (the "Purchase Agreement") with institutional investors (the "Investors") providing for the issuance of Senior Secured Convertible Debentures in the aggregate principal amount of $15,000, due, subject to the terms therein, in July 2019 (the "July 2014 Debentures"), and warrants (the "July 2014 Series A Warrants") to purchase up to an aggregate of 1,239,769 shares of common stock, $0.001 par value per share, at an exercise price of $12.25 per share expiring in July 2019. The July 2014 Debentures were bearing interest at an annual rate of 4%, payable quarterly or upon conversion into shares of common stock. The Debentures were convertible at any time into an aggregate of 1,169,595 shares of common stock at an initial conversion price of $12.825 per share. The Company's obligations under the July 2014 Debentures was secured by a first priority lien on all of the Company's intellectual property pursuant to the terms of a security agreement ("Security Agreement") dated July 21, 2014 among the Company and the Investors. In connection with the Purchase Agreement, the Company entered into a Registration Rights Agreement with the Investors pursuant to which the Company was obligated to file a registration statement to register for resale the shares of Common Stock issuable upon conversion of the Series B Preferred Stock (See
Note
8,
Warrants
) and Debentures and upon exercise of the Warrants. Under the terms of the Registration Rights Agreement, the Company filed a registration statement on August 19, 2014, which was declared effective by the SEC on October 20, 2014 (File No. 333-198249).
For financial reporting purposes, out of the $15,000 funded by the Investors on July 21, 2014 $5,296 was allocated first to the Warrants issued, then $4,565 to the intrinsic value of the beneficial conversion feature on the July 2014 Debentures. The balance was further reduced by the fair value of warrants issued to the placement agent for services rendered of $491, resulting in an initial carrying value of the Debentures of $4,647. The initial debt discount on the July 2014 Debentures totaled $10,353 and was being amortized using the effective interest method over the five year life of the July 2014 Debentures.
During the nine months ended September 30, 2017, the investors converted debentures amounting to $262 into 70,000 shares of common stock for the June 2015 note. The debt discount and deferred financing cost adjustment resulting from the conversions increased interest expense by $197 for the nine months ended September 30, 2017.
As a condition of the new note facility (See
Note 7
,
Long-term Debt
) the Debentures from both the 2014 and 2015 financings were amended. The Debentures holders' first priority lien was subordinated to the new term note facility. Additionally, as a condition of the term note facility, the maturity date of both Debentures was extended to June 30, 2021 and treated as a modification.
On June 6, 2017, the Company entered into a Securities Exchange Agreement (the "Agreement") with the holders of its 2.25% Senior Series A Secured Convertible Debentures due June 30, 2021 and 4% Senior Secured Convertible Debentures due July 30, 2021, pursuant to which the holders have agreed to exchange all of such outstanding debentures into shares of newly created Series C Convertible Preferred Stock. The elimination of the senior secured debt will also eliminate the Company's obligation to pay approximately $4,000 of interest payments over the next four years. The stockholders approved the exchange at the stockholders' meeting held on September 14, 2017. The closing of the exchange was effective on September 20, 2017 and $40,465 of principle was exchanged for 40,482 shares of Series C Preferred Stock. In accordance with ASC Topic 470, Debt, the aforementioned exchange was treated as an extinguishment of debt. As there was no intrinsic value for the conversion feature on the date of extinguishment, none of the proceeds were allocated to the extinguishment of the beneficial conversion feature. As such, the difference between the
fair value of the convertible preferred stock issued (determined based on the market value of the underlying common stock) and the
net carrying value of the convertible debentures (adjusted for unamortized premium discount), of $11,799 was recognized as a loss on extinguishment of debentures.
Other than the limitations on conversions to keep each such holders beneficial ownership below 9.99%, the terms of the Series C Convertible Preferred Stock generally bestow the same rights to each holder as such holder would receive if they are common stock shareholder and are not redeemable by the holders, except the Series C Convertible Preferred Stock shares do not have voting rights. The Series C Convertible Preferred Stock have the same level of subordination as common stock. Each share of Series C Convertible Preferred Stock has a stated value of $1,000 and is convertible into 372 shares of common stock (at a conversion price equal to $2.69) for a total of approximately 15,049,000 shares of common stock.
Note 7
Long-term Debt:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
(unaudited)
|
|
|
|
|
Term note, net of debt discount of $177 and $258, respectively; and deferred financing cost of $188 and $276, respectively
|
|
$
|
10,778
|
|
|
$
|
11,466
|
|
Less: current portion
|
|
|
(1,936
|
)
|
|
|
(1,714
|
)
|
Total long-term debt
|
|
$
|
8,842
|
|
|
$
|
9,752
|
|
Term-Note Credit Facility
On December 30, 2015, the Company entered into a $12,000 credit facility pursuant to a Credit and Security Agreement (the "Agreement") and related financing documents with MidCap Financial Trust ("MidCap") and the lenders listed therein. Under the Agreement, the credit facility may be drawn down in two tranches, the first of which was drawn for $10,500 on December 30, 2015. The proceeds of this first tranche were used to repay $10,000 principal amount of short-term senior secured promissory notes, plus associated interest, loan fees and expenses. The second tranche was drawn for $1,500 on January 29, 2016. The Company's obligations under the credit facility are secured by a first priority lien on all of the Company's assets. This credit facility includes both financial and non-financial covenants, including a minimum net revenue covenant, beginning in January 2016. The Company is in compliance with these covenants as of September 30, 2017. On November 10, 2017, the minimum net revenue covenant was amended prospectively. Additionally on November 10, 2017, the Company entered into an amendment to modify the principal payments including a period of six months where there is no principal payments due. Interest rate on the credit facility is one month LIBOR plus 8.25%, subject to a LIBOR floor of 0.5% (9.49% as of September 30, 2017). As of September 30, 2017 the net balance of long-term debt is $8,842.
The following table summarizes the future payments that the Company expects to make for the long-term debt for the future periods:
Remaining in 2017
|
|
$
|
572
|
|
2018
|
|
|
2,387
|
|
2019
|
|
|
4,092
|
|
2020
|
|
|
4,092
|
|
|
|
$
|
11,143
|
|
|
|
|
|
|
Note 8
Warrants:
The Company accounts for warrants that require net cash settlement upon change of control of the Company and warrants that have provisions that protect holders from a decline in the issue price of its common stock (or "down-round" provisions) as liabilities instead of equity. Warrants with "downround" provisions did not exist as of or during the nine months ended September 30, 2017 or as of December 31, 2016.
The Company recognizes these liabilities at the fair value on each reporting date. The Company computed the value of the warrants using the binomial method. A summary of quantitative information with respect to the valuation methodology and significant unobservable inputs used for the Company's warrant liabilities that are categorized within Level 3 of the fair value hierarchy as of September 30, 2017 and December 31, 2016 is as follows:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Number of shares underlying the warrants
|
|
|
403,090
|
|
|
|
403,090
|
|
Stock price
|
|
$
|
1.77
|
|
|
$
|
2.20
|
|
Volatility
|
|
|
48.00
|
%
|
|
|
47.00
|
%
|
Risk-free interest rate
|
|
|
1.31 – 1.45
|
%
|
|
|
1.22
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected warrant life
|
|
1.37 – 1.60 years
|
|
|
2.12 – 2.35 years
|
|
Recurring Level 3 Activity and Reconciliation
The tables below provide a reconciliation of the beginning and ending balances for the liability measured at fair value using significant unobservable inputs (Level 3). The table reflects gains and losses for the nine month periods ended September 30, 2017 and 2016, for all financial liabilities categorized as Level 3 as of September 30, 2017 and September 30, 2016, respectively.
Fair Value Measurements Using Significant Unobservable Inputs (Level 3):
Issuance Date
|
|
December 31, 2016
|
|
|
Decrease in Fair Value
|
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
10/31/2013
|
|
$
|
39
|
|
|
$
|
(28
|
)
|
|
$
|
11
|
|
2/5/2014
|
|
|
66
|
|
|
|
( 49
|
)
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
105
|
|
|
$
|
(77
|
)
|
|
$
|
28
|
|
Issuance Date
|
|
December 31, 2015
|
|
|
Decrease in Fair Value
|
|
|
Reclassification to Equity
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/31/2013
|
|
$
|
379
|
|
|
$
|
(312
|
)
|
|
$
|
-
|
|
|
$
|
67
|
|
2/5/2014
|
|
|
715
|
|
|
|
(597
|
)
|
|
|
-
|
|
|
|
118
|
|
7/24/2014 Series A
|
|
|
2,415
|
|
|
|
(1,573
|
)
|
|
|
(842
|
)
|
|
|
-
|
|
7/24/2014 Series B
|
|
|
1,726
|
|
|
|
(1,713
|
)
|
|
|
(13
|
)
|
|
|
-
|
|
6/22/2015
|
|
|
1,807
|
|
|
|
(1,121
|
)
|
|
|
(686
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,042
|
|
|
$
|
(5,316
|
)
|
|
$
|
(1,541
|
)
|
|
$
|
185
|
|
Number of Warrants Subject to Remeasurement:
|
Issuance Date
|
September 30, 2017
|
|
|
|
|
|
|
10/31/2013
|
137,143
|
|
|
2/5/2014
|
265,947
|
|
|
|
|
|
|
Total
|
403,090
|
|
Note 9
Stockholders' Equity:
Common Stock and Warrants
Outstanding common stock warrants consist at September 30, 2017 of the following:
Issue Date
|
Expiration Date
|
|
Total Warrants
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
4/26/2013
|
4/26/2018
|
|
|
13,865
|
|
|
$
|
55.90
|
|
10/31/2013
|
4/30/2019
|
|
|
137,143
|
|
|
$
|
3.75
|
|
2/5/2014
|
2/5/2019
|
|
|
265,947
|
|
|
$
|
3.75
|
|
7/24/2014
|
7/24/2019
|
|
|
1,239,769
|
|
|
$
|
3.75 - $ 12.25
|
|
6/22/2015
|
6/22/2020
|
|
|
600,000
|
|
|
$
|
3.75
|
|
12/30/2015
|
12/30/2020
|
|
|
130,089
|
|
|
$
|
5.65
|
|
1/29/2016
|
1/29/2021
|
|
|
19,812
|
|
|
$
|
5.30
|
|
|
|
|
|
2,406,625
|
|
|
|
|
|
Note 10
Stock-based compensation:
At September 30, 2017, the Company had 855,389 options outstanding with a weighted-average exercise price of $4.93 and a weighted average remaining contractual life of 8.5 years. 401,077 options are vested and exercisable.
Stock-based compensation expense, primarily included in general and administration, for the three and nine months ended September 30, 2017 was $63 and $136, respectively. For the three and nine months ended September 30, 2016 stock-based compensation was $116 and $401, respectively. As of September 30, 2017 there was $211 in unrecognized compensation expense, which will be recognized over a weighted average period of 2.75 years.
Note 11
Income taxes:
The Company accounts for income taxes using the asset and liability method for deferred income taxes. The provision for income taxes includes deferred taxes resulting from temporary differences between the financial statement and tax bases of assets and liabilities. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.
Income tax expense of $38 and $181 for the three and nine months ended September 30, 2017 and $64 and $191 for the three and nine months ended September 30, 2016, was comprised primarily of the change in deferred tax liability related to goodwill. Goodwill is an amortizing asset according to tax regulations. This generates a deferred tax liability that is not used to offset deferred tax assets for valuation allowance considerations.
Note 12
Business Segments and Geographic Data:
The Company organized its business into three operating segments to better align its organization based upon the Company's management structure, products and services offered, markets served and types of customers, as follows: The Dermatology Recurring Procedures segment derives its revenues from the XTRAC procedures performed by dermatologists. The Dermatology Procedures Equipment segment generates revenues from the sale of equipment, such as lasers and lamp products. The Dermatology Imaging segment generated revenues from the sale and usage of imaging devices. The Company has announced that it will no longer support the imaging devices effective September 30, 2017 thus there will be minimal continuing revenues for this segment. Management reviews financial information presented on an operating segment basis for the purposes of making certain operating decisions and assessing financial performance.
Unallocated operating expenses include costs that are not specific to a particular segment but are general to the group; included are expenses incurred for administrative and accounting staff, general liability and other insurance, professional fees and other similar corporate expenses. Interest and other financing income (expense), net is also not allocated to the operating segments.
The following tables reflect results of operations from our business segments for the periods indicated below:
Three Months Ended September 30, 2017 (unaudited)
|
|
Dermatology
Recurring
Procedures
|
|
|
Dermatology
Procedures
Equipment
|
|
|
Dermatology
Imaging
|
|
|
TOTAL
|
|
Revenues
|
|
$
|
5,720
|
|
|
$
|
1,751
|
|
|
$
|
9
|
|
|
$
|
7,480
|
|
Costs of revenues
|
|
|
2,084
|
|
|
|
967
|
|
|
|
225
|
|
|
|
3,276
|
|
Gross profit
|
|
|
3,636
|
|
|
|
784
|
|
|
|
(216
|
)
|
|
|
4,204
|
|
Gross profit %
|
|
|
63.6
|
%
|
|
|
44.8
|
%
|
|
|
(2400.0
|
%)
|
|
|
56.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering and product development
|
|
|
348
|
|
|
|
63
|
|
|
|
-
|
|
|
|
411
|
|
Selling and marketing expenses
|
|
|
2,238
|
|
|
|
449
|
|
|
|
-
|
|
|
|
2,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated operating expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,678
|
|
|
|
|
2,586
|
|
|
|
512
|
|
|
|
-
|
|
|
|
4,776
|
|
Income (loss) from operations
|
|
|
1,050
|
|
|
|
272
|
|
|
|
(216
|
)
|
|
|
(572
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,343
|
)
|
Change in fair value of warrant liability
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
81
|
|
Loss on extinguishment of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(11,799
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
1,050
|
|
|
$
|
272
|
|
|
$
|
(216
|
)
|
|
$
|
(13,633
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016 (unaudited)
|
|
Dermatology
Recurring
Procedures
|
|
|
Dermatology
Procedures
Equipment
|
|
|
Dermatology
Imaging
|
|
|
TOTAL
|
|
Revenues
|
|
$
|
6,205
|
|
|
$
|
1,550
|
|
|
$
|
12
|
|
|
$
|
7,767
|
|
Costs of revenues
|
|
|
2,162
|
|
|
|
877
|
|
|
|
31
|
|
|
|
3,070
|
|
Gross profit
|
|
|
4,043
|
|
|
|
673
|
|
|
|
( 19
|
)
|
|
|
4,697
|
|
Gross profit %
|
|
|
65.2
|
%
|
|
|
43.4
|
%
|
|
|
(158.3
|
%)
|
|
|
60.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering and product development
|
|
|
343
|
|
|
|
31
|
|
|
|
8
|
|
|
|
382
|
|
Selling and marketing expenses
|
|
|
2,767
|
|
|
|
57
|
|
|
|
16
|
|
|
|
2,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated operating expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,880
|
|
|
|
|
3,110
|
|
|
|
88
|
|
|
|
24
|
|
|
|
5,102
|
|
Income (loss) from operations
|
|
|
933
|
|
|
|
585
|
|
|
|
(43
|
)
|
|
|
(405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,175
|
)
|
Change in fair value of warrant liability
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
132
|
|
Other income (expense), net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
933
|
|
|
$
|
585
|
|
|
$
|
(43
|
)
|
|
$
|
(1,445
|
)
|
Nine Months Ended September 30, 2017 (unaudited)
|
|
Dermatology
Recurring
Procedures
|
|
|
Dermatology
Procedures
Equipment
|
|
|
Dermatology
Imaging
|
|
|
TOTAL
|
|
Revenues
|
|
$
|
17,653
|
|
|
$
|
5,784
|
|
|
$
|
17
|
|
|
$
|
23,454
|
|
Costs of revenues
|
|
|
5,969
|
|
|
|
2,988
|
|
|
|
225
|
|
|
|
9,182
|
|
Gross profit
|
|
|
11,684
|
|
|
|
2,796
|
|
|
|
( 208
|
)
|
|
|
14,272
|
|
Gross profit %
|
|
|
66.2
|
%
|
|
|
48.3
|
%
|
|
|
(1223.5
|
%)
|
|
|
60.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering and product development
|
|
|
1,104
|
|
|
|
204
|
|
|
|
1
|
|
|
|
1,309
|
|
Selling and marketing expenses
|
|
|
7,747
|
|
|
|
1,167
|
|
|
|
-
|
|
|
|
8,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated operating expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,999
|
|
|
|
|
8,851
|
|
|
|
1,371
|
|
|
|
1
|
|
|
|
15,222
|
|
Income (loss) from operations
|
|
|
2,833
|
|
|
|
1,425
|
|
|
|
(209
|
)
|
|
|
(950
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,264
|
)
|
Change in fair value of warrant liability
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
77
|
|
Extinguishment of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(11,799
|
)
|
Other income (expense), net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
2,833
|
|
|
$
|
1,425
|
|
|
$
|
(209
|
)
|
|
$
|
(16,930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016 (unaudited)
|
|
Dermatology
Recurring
Procedures
|
|
|
Dermatology
Procedures
Equipment
|
|
|
Dermatology
Imaging
|
|
|
TOTAL
|
|
Revenues
|
|
$
|
17,826
|
|
|
$
|
5,174
|
|
|
$
|
126
|
|
|
$
|
23,126
|
|
Costs of revenues
|
|
|
6,723
|
|
|
|
2,641
|
|
|
|
267
|
|
|
|
9,631
|
|
Gross profit
|
|
|
11,103
|
|
|
|
2,533
|
|
|
|
( 141
|
)
|
|
|
13,495
|
|
Gross profit %
|
|
|
62.3
|
%
|
|
|
49.0
|
%
|
|
|
(111.9
|
%)
|
|
|
58.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering and product development
|
|
|
977
|
|
|
|
147
|
|
|
|
417
|
|
|
|
1,541
|
|
Selling and marketing expenses
|
|
|
9,626
|
|
|
|
261
|
|
|
|
186
|
|
|
|
10,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated operating expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,882
|
|
|
|
|
10,603
|
|
|
|
408
|
|
|
|
603
|
|
|
|
17,496
|
|
Income (loss) from operations
|
|
|
500
|
|
|
|
2,125
|
|
|
|
(744
|
)
|
|
|
(4,001
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,571
|
)
|
Change in fair value of warrant liability
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,316
|
|
Other income (expense), net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
500
|
|
|
$
|
2,125
|
|
|
$
|
(744
|
)
|
|
$
|
(2,257
|
)
|
For the three and nine months ended September 30, 2017 and 2016 there were no material net revenues attributable to any individual foreign country. Net revenues by geographic area were, as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Domestic
|
|
$
|
6,337
|
|
|
$
|
6,287
|
|
|
$
|
19,612
|
|
|
$
|
18,444
|
|
Foreign
|
|
|
1,143
|
|
|
|
1,480
|
|
|
|
3,842
|
|
|
|
4,682
|
|
|
|
$
|
7,480
|
|
|
$
|
7,767
|
|
|
$
|
23,454
|
|
|
$
|
23,126
|
|
Long-lived assets were 100% located in domestic markets as of September 30, 2017 and December 31, 2016.
Note 13
Significant Customer Concentration:
For the three months ended September 30, 2017, revenues from sales to the Company's international master distributor (GlobalMed Technologies) were $1,148, or 15.3%, of total revenues for such period. For the nine months ended September 30, 2017, revenues from sales to the Company's international master distributor were $3,861, or 16.5%, of total revenues for such period. At September 30, 2017, the accounts receivable balance from GlobalMed Technologies was $418, or 13.1%, of total net accounts receivable. For the three months ended September 30, 2016, revenues from sales to the Company's international master distributor were $1,457, or 18.8%, of total revenues for such period. For the nine months ended September 30, 2016, revenues from sales to the Company's international master distributor were $4,604, or 19.9%, of total revenues for such period. No other customer represented more than 10% of total company revenues for the three and nine months ended September 30, 2017 and 2016. No other customer represented more than 10% of total accounts receivable as of September 30, 2017.
Note 14
Related Parties:
On June 22, 2015, the Company entered into a securities purchase agreement with the Purchasers, including certain funds managed by Sabby Management, LLC and Broadfin Capital LLC (existing Company shareholders), in connection with a private placement. The Purchasers were issued Warrants to purchase an aggregate of 0.6 million shares of common stock, having an exercise price of $3.75 per share. We also issued $32.5 million aggregate principal amount of Debentures that, subject to certain ownership limitations and stockholder approval conditions, were convertible into 8,666,668 shares of common stock at an initial conversion price of $3.75 per share. The Debentures were bearing interest at the rate of 2.25% per year, and, unless previously converted, were to mature on the five-year anniversary of the date of issuance. Refer to
Note 6
for additional information on the terms of the Debentures. On September 30, 2015, the Company repriced outstanding Warrants held by certain investors to reduce the exercise price to $3.75 per share.
On June 6, 2017, the Company entered into a Securities Exchange Agreement (the "Agreement") with the holders of its 2.25% Senior Series A Secured Convertible Debentures due June 30, 2021 and 4% Senior Secured Convertible Debentures due July 30, 2021, pursuant to which the holders have agreed to exchange all of such outstanding debentures into shares of newly created Series C Convertible Preferred Stock. The elimination of the senior secured debt will also eliminate the Company's obligation to pay approximately $4,000 of interest payments over the next four years. The stockholders approved the exchange at the stockholders' meeting held on September 14, 2017. The closing of the exchange was effective on September 20, 2017 and $40,465 of principle was exchanged for 40,482 shares of Series C Preferred Stock. In accordance with ASC Topic 470, Debt, the aforementioned exchange was treated as an extinguishment of debt. As there was no intrinsic value for the conversion feature on the date of extinguishment, none of the proceeds were allocated to the extinguishment of the beneficial conversion feature. As such, the difference between the fair value of the convertible preferred stock issued (determined based on the market value of the underlying common stock) and the net carrying value of the convertible debentures (adjusted for unamortized premium discount), of $11,799 was recognized as a loss on extinguishment of debentures.
Other than the limitations on conversions to keep each such holders beneficial ownership below 9.99%, the terms of the Series C Convertible Preferred Stock generally bestow the same rights to each holder as such holder would receive if they are common stock shareholder and are not redeemable by the holders, except that the Series C Convertible Preferred Stock shares do not have voting rights. The Series C Convertible Preferred Stock have the same level of subordination as common stock. Each share of Series C Convertible Preferred Stock has a stated value of $1,000 and is convertible into shares of common stock at a conversion price equal to $2.69 for a total of approximately 15,049,000 common stock.