COMPANY ANALYSIS—updated October 2019

STRATA SKIN SCIENCES INC SSKN:NASDAQ

THE RECESSION-PROOF CASH COW

Strata Skin is what I call a Recession Proof Cash Cow. They have a non-invasive product that sells to both vanity and health. Strata Skin has a couple different dermatology machines that treat skin conditions like psoriasis (70% of the business). They place them in doctor’s offices or dermatology clinics around the USA for FREE and do a revenue share with the office. It costs the doctors NOTHING, and SSKN does the marketing and provides the clinician to run the machine. The competition is creams (topicals) and drugs. Despite that this is an $8 billion business for Big Pharma, the sell-side research I read on this (and they would be super-accurate and unbiased, right?) claims that NONE of the drugs being marketed actually have any efficacy in treating psoriasis. And I also understand that ALL the insurance companies in the US have codes for psoriasis; patient reimbursement is NOT an issue at all. So there is a huge market here, and history shows that SSKN knows how to market these products, and when they move into a neighbourhood and start advertising--they get business. With digital advertising, customer acquisition costs are lowering. And with the SSKN machines already installed, each new customer is pure profit; HUGE operating leverage and growth is now kicking into a higher gear. The opportunity here is that the founder/previous CEO— Dr. Dolev Rafaeli—has returned after a sojourn away. While he was away, that management team quickly ran it into the ground by saving money by cutting back on advertising. They stopped the life blood of the company,

choosing to save a penny and loose a pound. Dr. D is now back at the helm, and his first couple quarters have been impressive. This is a proven team back at the helm of a proven business with massive operating leverage, all tucked into 30 million shares. I like it and I’m long. I think this one has A LOT of potential. I had Dr. D on one of our CONVERSATIONS calls a couple weeks ago. He is one committed CEO! He's a bulldog and he will make this a huge success. He's here for the equity, not the salary. I have bought 72,000 shares of Strata Skin Sciences at $3.01 I like the business—the product, the marketing, the recurring revenue. Most of all I like the operating leverage here. (There’s structural leverage here as well with just 30 M basic shares out.) I think the growth here is insulated from the economy. HOWEVER---DO NOT BUY THIS STOCK UNTIL….The company has had a small but thorny accounting issue that has prevented them from filing financials for the last couple quarters. Until this is resolved, stay away from the stock. I am in regular contact with CEO Dolev Rafaeli. I am convinced this is a small issue, but until it is resolved investors should be sitting on the sidelines. QUICK FACTS Share Price: $2.90 Basic Shares Outstanding: 29.9 million Fully Diluted: 38 million (incl prefs & options) Basic Market Cap: $97.15 million Net Cash (Sep ’18): $8.5 million Enterprise Value (EV): $88.65 million 2017 EBITDA: $4 million 2018 EBITDA (Estimate): $4 million 2019 EBITDA (Estimate): $12 million Ent Val / 2019 EBITDA: 7.4x

POSITIVES - Incremental sales volume will come with huge margins - Recurring revenue business model - Cashed up balance sheet - Returning CEO has grown revenue for this product rapidly in first go-round - Ability to ramp-up marketing should create growth fairly easily - Their 2 products WORK better than creams or drugs NEGATIVES - One of Dr. D’s prior companies went belly up so he’s not perfect - Just stopped burning cash on a quarterly basis (calling for break-even in 2019) BACKGROUND – A RETURN TO GROWTH In May of 2018 a reunion took place. Dr. Dolev Rafaeli became CEO of STRATA Skin Sciences and was reunited with a product that he had been in charge of before—and he did a good job there. As CEO of a company called PhotoMedex, Dr. D drove revenue growth for a product called XTRAC by 335% over a three year period before selling it for $42 million to MELA Sciences.

It wasn’t just revenue that grew during his watch over XTRAC. Dr. D also grew XTRAC’s margins from 39 percent to 68 percent over that time. Mela rebranded itself as STRATA Skin Sciences. After SSKN acquired XTRAC in June 2015 the revenue growth that the product enjoyed under Dr. D stalled. See the chart above, where the red line--# of treatments per quarter—went down even as the green bars--# of installs—went up. The reunion with Dr. D has been arranged (at the same time as a cash infusion) to kick growth back into gear. THE SPECIFICS – THE STRATA SKIN SCIENCES BUSINESS STRATA Skin Sciences (SSKN) is a medical technology company focused on treating skin disorders like psoriasis and vitiligo. The company is built on the XTRAC laser and VTRAC excimer lamp systems which are used in the treatment of psoriasis, vitiligo and various other skin conditions. SSKN also has a product called STRATAPEN MicroSystems which is a micro-pigmentation device. It’s a small part of the business at this point.

As discussed SSKN acquired the XTRAC Excimer Laser and the VTRAC excimer lamp businesses from the Dr. D-run-PhotoMedex in June 2015 for $42.5 million. PhotoMedex was financially troubled at the time of the sale and not negotiating from a position of strength. XTRAC Systems and VTRAC Systems

The XTRAC excimer laser technology emits a highly concentrated UltraViolet (UV) light in order to treat dermatological skin disorders. The product received approval by the US Food and Drug Administration (FDA) in 2000 and has since

become a widely recognized method for treating psoriasis, vitiligo and other skin diseases.

Combined…..psoriasis, vitiligo, atopic dermatitis, leukoderma and other skin diseases affect up to 35 million people in the US and over 190 million people worldwide. VTRAC meanwhile is a UV light lamp system that works in much the same way as the XTRAC. It was cleared by the FDA in August 2005 and in Europe in January 2006. The VTRAC has been marketed exclusively in international markets. So how does the product work? Ultraviolet B (UVB) light is present in natural sunlight. It is an accepted treatment for psoriasis and works by penetrating the skin to slow the growth of damaged skin cells. The treatment places the disease into remission for a period of time. Studies have shown that the remission time can last 3 to 6 months or longer. Again, I would emphasize the product works.

XTRAC is a targeted therapy approach that delivers the ideal amount of UVB light directly to the skin lesions while sparing the healthy tissue. Many peer reviewed studies have proven that the XTRAC can clear psoriasis faster and produce longer remissions than other UVB treatments. That means XTRAC allows for fewer sessions to produce the desired result (which would make it the most cost effective solution). SSKN sells two different XTRAC models. The XTRAC Velocity is the company’s most advanced technology and allows clinicians to treat greater surface areas of psoriatic disease in a shorter period of time than other technologies. The XTRAC Ultra Plus is also a highly effective model marketed primarily in certain international markets. Both the Velocity and the Ultra plus are capable of treating mild, moderate and severe psoriasis, vitiligo, atopic dermatitis and leukoderma. STRATA Skin Sciences Revenue/Business Model The XTRAC is sold in the United States mainly using a recurring revenue

model. This involves the system being placed in the clinician’s office with no up-front charge. The system then generates revenue on a per-use basis. Obviously with no up-front cost it takes the risk out of the picture for the clinician and makes it far more likely that they will give the product a try. Further to that SSKN provides all required clinical training, patient advocacy resources to assist with healthcare plan reimbursement and a commitment to provide direct to consumer (DTC) advertising in each specific geography where lasers are placed. History says this advertising WORKS, and works well. In summary, SSKN provides the product, training, customer service assistance, and drives patients to the clinics – all they do is apply the procedure to their patients. SSKN estimates that there are roughly 1,000 XTRAC lasers in use in the US and that 750 of them have been placed using the recurring revenue model. Market studies suggest that only 3% of the estimated 40,000 dermatological professionals in the US are currently prescribing the procedures available through SSKN’s products. A move to 10-12% penetration would result in 3,500+ additional active clinicians—a 500% increase. In the last conference call Dr. D said that 75% of revenue comes from the recurring revenue business. The other 25% relates to international sales where the product is actually sold…..clinician buys the product and SSKN records a profit. The operating leverage here is very strong. The overall mix of revenue--as sales growth accelerates--will be skewed to the recurring revenue side with the higher gross margins but for conservatism I keep the overall sales revenue mix at 75/25. Average revenue per device in the quarter was $7500 which is 30% less than the $11,000 numbers seen for the same business back in

2015. Dolev indicated on the Q3 18 conference call that he expects the run rate of procedures in Q4 to approach that of this businesses past peak. This suggests continued material increases in average revenue per device. Simple math suggests that if there is NO INCREASE in the installed base of devices for 2019 and the average revenue per device increases…say to $10,000… due to the advertising spend increase etc then 750 x 10,000 = $7.5M/qtr x 4 quarters = $30 million / 75% of overall business = $40M. I think we will see a material increase in the installed base from the present level of 750. Every 25 additional lasers placed at $10,000 average revenue per quarter equals an additional $1million annual revenue to SSKN with gross margins near 75%.... I’ll quote you from the Northland Securities initiation report where they worded this, and this really is the heart of the whole operating leverage story: “…average treatment revenues/laser/qtr have gone from ~$6,000 when new management stepped in. It currently stands at ~$7,500, a 25% increase in just 3 qtrs. The point being… even if the cumulative installed base remains steady, simply by moving utilization back to 2015 levels would yield an approximate doubling of average treatment revenues/laser/qtr.” The math here suggest to me that they could easily get to a quarterly revenue run rate that approaches $10 million before Q4 this year putting estimates of 2020 revenue of $40 million conservative. There are currently distributors in 25 other countries. A Closer Look At The Skin Diseases Treated Psoriasis Studies have concluded that XTRAC treatment leads to significant improvement in psoriasis area and severity scores in as few as 6 to 10 treatments. Treatment protocols recommend that patients receive two treatments per

week with a minimum of 48 hours between treatments. Data shows that XTRAC has an 89% efficacy (success) rate and produces only minimal side effects. In support of its clinical effect, the XTRAC Excimer Lasers have been cited in over 45 clinical studies and research programs, with findings published in peer-reviewed medical journals around the world. The products have also been endorsed by the National Psoriasis Foundation, and their use for psoriasis is covered by nearly all major insurance companies, including Medicare. In total there are essentially three main types of psoriasis treatments: 1.Topical therapies - These can include corticosteroids, vitamin D3 derivatives, coal tar, anthralin and retinoids, among others, that are sold as a cream, gel, liquid, spray, or ointment. There are drawbacks to topical therapy treatment. The success from using topical agents varies from person to person and these products are commonly associated with a loss of potency over time as people develop resistance. 2. Phototherapy –This is the area in which SSKN’s products operate. Their XTRAC Excimer Systems are FDA cleared, reimbursed by insurance, and exhibit none of the significant side-effects associated with some alternative therapies

3. Systemic medications - There are a number of prescription medications available for psoriasis, which are given either by mouth or as an injection. The popularity and use of these medications is growing significantly, notwithstanding their potentially severe side-effects. Vitiligo and Other Skin Diseases UV light therapy is considered to be an effective and safe treatment for many skin disorders beyond psoriasis. To this effect, the XTRAC technology is FDA cleared for the treatment of not only psoriasis but also vitiligo (a skin pigment deficiency), atopicdermatitis (eczema) and leukoderma, which is a localized loss of skin pigmentation. XTRAC technology for vitiligo patients typically requires more therapy sessions than for psoriasis, but this is dependent on the severity of the disease. In the treatment of vitiligo, the XTRAC functions to reactivate the skin's melanocytes (the cells that produce melanin), which causes pigment to return. To date, there is not sufficient data to confirm how long patients can expect their vitiligo to be in remission after XTRAC therapy.

Based on anecdotal reports, the Company believes that re-pigmentation may last for several years. Historically, vitiligo treatments had been considered cosmetic procedures by insurance companies, and as such were not reimbursed. However, over the past several years there has been a significant increase in insurance coverage for these procedures, and it is estimated that currently approximately 50% of insurers consider XTRAC treatments to be medically necessary for the treatment of vitiligo and therefore provide coverage. It’s worth repeating here that the lasers have BY FAR the most proven method to reduce the impact of psoriasis. They have the best product/method. But they are up against the marketing machine of Big Pharma. The Plan To Return To Growth While Dr. D’s time at PhotoMedex did not end well, his track record managing XTRAC looks much better. He rapidly grew the business.

What happened after previous SSKN management took control of XTRAC is that they quit spending on marketing. The business was owned by private equity and they focused on what private equity focuses on…….cutting costs, not growth. The graphic below shows with the red line how media spending went from $1.2 million per quarter at the end of Dr. D’s ownership of the product down to nothing after he sold it.

The blue lines show how revenue growth for the product ceased within two quarters of the media spending being cut. With Dr. D back in charge, targeted advertising spending is coming back. SSKN will be using Direct to Consumer (DTC) advertising to generate awareness and sales of its products. The idea is to exponentially increase awareness of the positive effects of XTRAC treatments in the minds of both sufferers and providers. By targeting those suffering from the disease SSKN will motivate psoriasis and vitiligo patients to seek out XTRAC treatments from clinician customers.

That was the recipe for success before for Dr. D with XTRAC, and he believes it will be again. Specific advertisements encourage prospective patients to contact the company’s patient advocacy center through telephone or web site. There they can receive information on treatment options and insurance coverage. Ultimately an appointment can be scheduled for the prospective patient to be evaluated by a clinician in the customer network, convenient to their location, to determine if they would benefit from XTRAC treatments. In the last conference call Dr. D said that he thinks the marketing blitz will be more cost-effective now as it’s online and digital. Advertising efforts back in 2015 were almost entirely offline. That should bring down cost per lead. With a big database of past patients SSKN knows what to look for in terms of who to target online. The acquisition cost per appointment is expected to be less than $200 versus $500 back in 2015…..so the XTRAC business should be more profitable going forward.

SSKN also just reached an agreement with a large private equity backed group of dermatology clinics to use XTRAC systems. The first 10 clinics were expected to launch before YE 2018. SSKN has identified 40 other private equity groups that own dermatology clinics that it believes it can also target. These entities are management’s top priority for driving growth. Collectively these 40 private equity groups run 1200 clinics. Current XTRAC penetration of these clinics is estimated at a mere 7% so there is plenty of potential for growth. What you need to understand here is that the return on investment for this advertising spending is enormous…..there is huge leverage. You see, the XTRAC lasers are already in place with clinicians. The money to place the lasers is already spent. If the ramp up in advertising can drive more visits to clinicians that already have XTRAC devices each additional dollar of revenue comes with incredibly fat margins….again, because the devices are already with the clinicians. We don’t have to imagine that the leverage works this way….we can see it

in the results that have taken place since Dr. D has returned and ramped up the marketing. Despite this advertising campaign just launching, Q3 saw patient appointments more than double year over year from 870 to 1800. Management has telegraphed that it expects Q4 to show a further 10%+ sequential growth rate to a 2000 per quarter run rate. Further, all of this was achieved despite the lag effect of SSKN’s initial restart under Dolev of its highly efficient geographically targeted, online advertising program in late Spring, early Summer. Interestingly this run rate would match that of the previous high in 2015. Within two quarters the new business plan is already approaching record levels of growth in recurring revenue – that’s an impressive feat. More importantly the increase in revenue is also driving margin improvements. This isn’t a case of spending a dollar on advertising to bring in a dollar of revenue. Dr. D’s business plan is also looking to further expand leverage by adjusting their current installed base. Underperforming XTRAC units can be redeployed to more productive geographies. Plus zip code specific targeted geographic DTC advertising spend can be continually optimized to drive utilization based on capacity and productivity. Supercharging this leverage are “comebacks.” Comebacks are lasers already deployed within the clinician network – but not operating under SSKN’s revenue sharing model. These clinics are converted to partners and the lasers are converted to SSKN’s value-add, per-use revenue share model. Why would a clinician agree to convert to the revenue sharing model when they already own the XTRAC outright? These clinics see the added benefit of the services and additional patient flow offered by SSKN. SSKN essentially does a much better job of marketing than the individual

centers/clinicians. These comebacks result in highly efficient growth for SSKN as the initial training periods are replaced by a device providing a positive net contribution from day one. This is a key strategy for the company as over 25% of the current US installed base of XTRAC lasers is estimated as available for conversion. Eight comebacks were recorded in 1H 2018, 4 in Q3 and 5 more expected before year end. In the last cycle between 2012 and 2015, 250 comebacks were booked.

KOREAN EXPANSION I’m not sure how impactful this will be for SSKN, but the company is now going to market the machines that it uses to doctors in South Korea, and develop the same kind of recurring revenue that it gets from its US operations. That just started in Q3 19, and I would expect it to take a full year of business before it warrants mention in financials.

Research And Development – Desired Improvements SSKN is currently working to reduce the number of treatments needed to make the XTRAC work for patients. The desire to do this is to make this solution less time intensive and a more desirable option for busy people. Strata Skin is in the process of a research and development effort to develop products to assist in the reduction of the number of treatments in the XTRAC treatment protocol, in order to make XTRAC treatments gain a wider appeal for those patients who cannot fit the current treatment regimen into their schedules. In August, the Food and Drug Administration granted SSKN clearance for use of a multi-micro dose tip for the 308 nanometer excimer laser. Studies by the company have shown that high doses of the XTRAC treatment using

this approach reduced the time for meaningful improvement to as little as two to four weekly treatments as compared to an average of 6.2 by weekly treatment in previous studies utilizing lower doses.

First commercial application of the MMD rolled out late last year, and the company expects the full study results to be published in early 2019.

FINANCIALS / VALUATION Total revenues for the second quarter of 2019 were $8.2 million, compared to $7.5 million in the second quarter of 2018, representing an increase of 9% year-over-year. Recurring XTRAC revenues totaled $6.0 million, an increase of 16% versus the second quarter of 2018 and representing 73% of total revenue for the second quarter of 2019. Average quarterly revenue per device was $7,823, representing an increase of 13% versus the second quarter of 2018.

Gross margin for the second quarter of 2019 was 64%, an increase of 11 percentage points versus the second quarter of 2018, driven primarily by the growth in recurring revenue and margins from procedure equipment revenue.

Total revenues for the six months ended June 30, 2019 were $15.6 million, compared to $14.0 million in the six months ending June 30, 2018, representing an increase of 12% year-over-year. Recurring XTRAC revenues totaled $11.2 million, an increase of 17% versus the six months ended June 30, 2018 and representing 72% of total revenue for the six months ended June 30, 2019.

Gross margin for the six months ended June 30, 2019 was 63%, an increase of 12 percentage points versus the six months ended June 30, 2018, driven primarily by the growth in recurring revenue and margins from procedure equipment revenue.

STRATA ended the second quarter of 2019 with a domestic installed base of 764 XTRAC recurring revenue devices, an increase of eighteen devices from the end of 2018.

The Company ended the quarter with cash and cash equivalents of $15.9 million, as compared to $16.5 million as of the end of the fourth quarter of 2018.

Analysts point to four companies as being good comparisons for SSKN. Those are Biofrontera (BFRA), Sonoma Pharmaceuticals

(SNOA) Sensus Healthcare (SRTS), and NovaBay (NBY). Using those companies and some other past acquisitions the analysts point to a fair valuation being 5 times revenue. SSKN currently trades at about half that—and likely will until a couple quarters after they file updated financials. But they are at the cusp of profitability so EBITDA should soar now. Earlier this year management said that in 2019 $5 million in revenue growth is expected to result in an $8 million increase in EBITDA. This is the operating leverage that I have been talking about. The DTC marketing efforts will drive revenue growth for clinicians that are already have an XTRAC device. In other words, recurring revenue is going to increase and there is no additional spending on XTRAC devices is going to be needed to drive it. And that is the story here……there is huge leverage from driving revenue increases from already placed devices. More revenue, with little spending. That means big, fat margins. Mr. Market has yet to grasp the magnitude of the revenue ramp and margin expansion that will be forthcoming over the next few quarters. Glimpses of this were seen in the most recently reported quarter where a 10% increase in revenue per installed device resulted in a gross margin expansion of a whopping 780 bps or 7.8 percent. That drove EBITDA higher by more than 43% to over 20%. HOWEVER—until management updates financials this won’t mean much.

STOCK CHART

WHAT THE ANALYSTS SAY

FIRM TARGET PRICE Dawson James $5.00 Northland Securities $7.00

CONCLUSION

If you don’t have psoriasis, it’s hard to appreciate the mental anguish it can give sufferers. It’s a marked discoloration of the skin, sometimes quite large, and it can be very socially difficult for people with the disease. There is no cure, only treatment. And it can be managed, with creams, drugs or lasers. SSKN’s lasers appear to be the most effective/powerful in managing it. The market loves an easy to understand story, a proven business model, and a proven management team. If this management team can stay focussed and continue to build on its early successes: 1) reach operating break even 2) materially increase margins by driving revenue per device 3) see an increased pace of comebacks to its partner model 4) sign new larger clinician groups and build a bigger funnel for expansion of the installed base, then the multiple expansion will surely follow. At 4X EV/S and 10X EV/EBITDA (still a discount to peer multiples) would suggest a share price between $4.25-$5.00. The smart money is here… well respected, perennial small cap fund manager outperformers, Broadfin Capital, owns 20% (combined equity and prefs)

-Keith